If you’ve started a business or are self-employed, there are a lot of administrative balls to keep in the air. This article will help you with that sortof off-greeny, yellowy coloured ball called sales tax. Sometimes when I think about all of the hoops that the government makes business owners jump through, I picture this scene from Zoolander - Dance Monkey! Maybe I just need to watch more sophisticated movies.
Enough of the silliness, let’s get down to the facts. If you or your business sells goods or services, then it’s important to understand the sales tax implications. We are going to look at the basics of GST/HST, including:
- When you should charge GST/HST
- How to Register for GST/HST
- How GST/HST works
- How to file a GST/HST return
When should you charge GST/HST?
You’ve probably heard that you need to charge GST/HST when you hit $30,000 in sales, but what does that actually mean? Well, the rule actually notes that you should charge GST/HST when your taxable sales over the previous consecutive 4 quarters exceed $30,000. Let’s look at an example to help:
- Taxable sales from July to September $5,000
- Taxable sales from October to December $5,000
- Taxable sales from January to March $10,000
- Taxable sales from April to June $10,000
In this example, it’s now July 1st and you’ve had total taxable sales of $30,000 over the previous four consecutive quarters. You should now register for and charge GST/HST on your next sale.
What are taxable sales you might ask? It is probably easier to ask what types of sales are not taxable. CRA provides a helpful list of taxable and exempt sales on their GST/HST Guide. Here are some common examples so you hopefully don’t have to go digging through CRA’s complicated but thorough explanations:
Examples of common taxable sales include:
- Most sales of retail goods
- Professional services such as accounting, legal, advertising, software development etc.
- Meals and / or drinks sold in a restaurant
- Commercial rent (renting real estate to businesses)
Some common sales that aren’t taxable include:
- Long term residential rental
- Sales of insurance policies
- Most services provided by financial institutions (lending / banking)
- Most services provided by charities
There are also types of sales that are considered taxable, but are taxable at 0%. They’re called Zero-rated supplies. Seems a bit odd, but the idea is that you don’t collect tax on these sales, but you are still eligible to claim input tax credits on your GST/HST return (more info on Input tax credits below). The two most common Zero-rated sales are:
- Basic groceries such as milk, bread, and vegetables
- Taxable supplies made to entities located outside of Canada
If you have taxable sales of greater than $30,000 over the last four quarters, then you should register for and begin charging GST/HST.
In some cases, it could be beneficial to register for and charge GST/HST even before you reach the $30k threshold. Early in your business you will likely be spending more money than you are making, and by registering for and charging GST/HST, you get a couple of benefits:
1. You charge GST/HST and don’t have to remit it until your GST/HST return is due, which is good for cash flow. You still have to remit the sales tax that you collect, but not for a while.
2. You get back any GST/HST that you spend. These are called Input Tax Credits. We like to call them good consumption tax policy (more on these below).
How to Register for GST/HST
It’s pretty easy to register. CRA has done a good job at making this process seamless with their BRO program:
No, not that kind of bro, it’s CRA’s “Business Registration Online”. You can start your BRO journey by clicking this link here. Make sure you have all of the information they are going to ask for (listed here) and follow the steps. There are buttons at the bottom of each page to take you to the next or previous step.
How GST/HST Works
Businesses charge GST/HST on taxable sales. They also pay GST/HST on goods and services that they purchase. GST/HST paid on purchases is called an “input tax credit” or ITC for short. The business must pay the government the GST/HST that it collects on sales, but it is allowed to deduct any ITCs from this and pay the difference. Here are two basic examples to help explain how it works:
Collect more GST/HST Than Paid (Balance Owing)
- The Quick-E-Mart collects $5,000 in GST/HST on its sales in a year
- The Quick-E-Mart also pays $1,000 of GST/HST on purchases in that year
- The Quick-E-Mart must pay the difference of $4,000 to the Receiver General (Canadian government)
More Input Tax Credits than GST/HST Collected (Refund)
- Moe’s Bar collects $2,000 in GST/HST on its sales in a year
- Moe’s Bar pays $3,000 in GST/HST on purchases in that year
- Moe’s Bar will get a refund for the difference of $1,000 when it files its GST/HST return
You might now see why it’s sometimes better to register for GST/HST before it is absolutely required. In the beginning when you have more expenses than sales, you will likely be in a refund position on your GST/HST return.
How to File a GST/HST Return
There can be many complications when preparing and filing a GST/HST return. Today we will be covering the basics which should be useful for most businesses. You can also check out CRA’s guide to completing a GST/HST return if you need more detail.
The easiest methods of filing a GST/HST return for most people are:
- The “file a Return” link within CRA My Business Account (if you have an account set up)
- GST/HST NETFILE - To begin, you’ll need a four digit code that is mailed to you by CRA
- GST/HST TELEFILE - Call a 1-800 number to file your return
Follow the steps provided in one of the three filing methods above and you will arrive at the actual GST/HST return. Here is how to fill that out.
- Line 101 Sales and other revenue - enter the total value of taxable sales made during the reporting period. Don’t include GST/HST or provincial sales tax in this amount.
- Line 105 GST/HST and adjustments for the period - enter the total value of GST/HST collected during the reporting period.
- Line 108 Total ITCs and adjustments - enter the total GST/HST paid on purchases during the reporting period. Note: ITCs that were paid on meals and entertainment expenses are only 50% deductible, so you may have to reduce your ITC claim accordingly.
- Line 109 Net Tax - Line 105 minus Line 108 will give you either a positive balance which means there is GST/HST owing or a negative balance which means you have a refund.
Once you’ve entered all of this information, submit the return and pay the amount owing (methods to pay) or await your refund.
Hopefully your GST/HST return will be straightforward and you’ll be able to follow these instructions and get your return filed. If you come across something that doesn’t seem to make sense or is outside of the basics, you can look through the CRA guide or give us a shout.