There is often confusion around GST/HST. Many small business owners don’t know when they should register for it, what method they should use or when to file. In this blog post I will attempt to provide some clarity on this topic.
Let’s start with some basics. GST/HST or Harmonized Sales Tax is the harmonization of Provincial Sales Tax (PST) and Goods and Services Tax (GST). In Ontario the harmonized rate is 13%. This is the tax that is applied to most goods and services that you purchase in Ontario. The exception to this is zero-rated and exempt supplies. In addition to paying HST on goods and services, you are also required to collect HST once your revenue exceeds $30,000.
WHEN TO REGISTER FOR GST/HST?
While it is mandatory to register and collect HST once you exceed $30,000 in revenue, it is often advantageous to register as soon as you set up your business. If you register for HST you will charge and collect an additional 13% from your customers. No matter which method of HST you are registered for, you will keep some portion of the HST you are collecting. So it makes sense to do this as soon as you start your business. The only time this could be negative is if your industry is extremely cost sensitive and charging a higher rate could decrease your total sales.
There are three ways you can register:
- by telephone
- by mail or fax
You can register for a business number (BN) and one or more Canada Revenue Agency (CRA) program accounts at the same time.
When to File Your GST/HST?
Now that we have covered the basics, lets discuss filing deadlines and reporting periods. By default you will have a December 31 HST year end and you will be on quarterly filing. This means that you have to file your returns within three months following each quarter. For example, March 31 would be due June 30 and June 30 would be due September 31 etc.
I suggest start with changing your filing frequency to annual filing then change the year end to match that of your corporation year end. explain why you have two recommendations Your deadline will still fall three months after your HST year end, but now you will have only one deadline to contend with instead of four. This should simplify your bookkeeping and make your life just a little easier.
This intro to GST/HST and the quick vs. Long Method explains GST/HST in its most simple terms. I encourage every small business owner to spend a few minutes discussing this topic with their accountant. If you don’t have an accountant please book a free no obligation consultation with one of our team members
WHICH METHOD OF GST/HST TO USE?
Once you have registered with CRA and have begun to collect HST, you need to decide whether to use the Quick Method of HST or the Regular Method for submitting your return. If your revenue (including HST) is more than $400,000 than you must use the Regular Method. If you are under $400,000 you may elect to use the Quick Method. However, by default you are registered on the Regular Method and must file an election with CRA if you wish to change this.
The Regular Method is simply subtraction. You take what you collect and you subtract what you have paid on all your various expenses. The remainder is what you owe the government. The Quick Method is primarily multiplication. You simply multiply the first $30,000 of revenue by 7.8% and any revenue (including the HST) over $30,000 by 8.8%.
The advantage of the Quick Method of HST is that it is fast and easy to calculate and you don’t need to have all of your bookkeeping done to figure it out. In addition, if your expenses are low as a percentage of your income, this method will result in you paying less HST than the Regular Method.
Let’s look at a very basic example above. Imagine you had $100,000 of revenue and $20,000 of deductible HST eligible expenses (keep in mind there is no HST on salary). Using the Regular Method, you would owe the government $10,400.
However, using the Quick Method, you would only owe the government $9,644. In addition to this basic calculation, the Quick Method also allows you to subtract the HST you paid on fixed assets such as computer equipment or office furniture.
HST on first $30,000 = $30,000 x 7.8% = $2,340 (A)
HST on Balance = $113,000 – $30,000 x 8.8% = $7,304(B)
Balance Owing =$9,644 (A+B)
HST on Revenue = $100,000 x 13% =$13,000 (A)
HST On Expenses = $20,000 x 13% = $2,600 (B)
Balance owing = $11,400 (A-B)
Based on the above, it might seem like the Quick Method is better for most businesses. However, if you are in the start-up phase of your business and have little to no revenue, or if you are selling products or services to U.S. clients and don’t collect HST, the Long Method may actually be best.
The simplest way to under stand this is by recognizing that zero multiplied by any number is still zero. In contrast, when you subtract a number from zero you get a negative– which in tax terms means a refund. Since there are scenarios where both options make sense, it is important that you or your accountant calculate both methods to determine which is best for your personal situation.
HST on first $30,000 = $10,000 x 7.8% = $780 (A)
HST on Balance = $0 (B)
Balance Owing =$780 (A+B)
HST on Revenue = $10,000 x 13% =$1,300 (A)
HST On Expenses = $20,000 x 13% = $2,600 (B)
Refund Due = $1,300 (A-B)
We recognize that choosing which method of GST/HST will be best for your individual situation can be complicated. To help make this determination easier for you we have built a calculator that will help you determine which method is best for you.
Additional cANADA rEVENUE aGENCY(cra) lINKS
Find out if you have to register and start charging the GST/HST.
Register for, change, or close a GST/HST account.
Determine which rate to charge, manage receipts and invoices, and learn what to do with the tax you collect.
Calculate your net tax, and complete, file, or correct a return.
When and how to remit (pay) the tax, including by instalments.