If you're starting a business or are self-employed, it is important to understand about sales tax requirements and implications for your business. If you or your business will be selling goods or services to the consumer, then you might be required to register for a GST/HST account and become a GST/HST Registrant. This means you’ll be collecting and remitting the sales tax to the Canada Revenue Agency on a monthly, quarterly or annual basis.
Read below to understand the basics of GST/HST:
How to Register for GST/HST
When to charge GST/HST
How it works
Filing of GST/HST
1. How to Register for GST/HST
Registration is pretty simple and you can register online, by phone, or by mail. If you don't already have a business number (BN), you will have to register for one. Once you’ve determined you are required to, or voluntarily choose to, register for the GST/HST, you will need to register with the Canada Revenue Agency and can be done completely online via the Business Registration Online (BRO) program.
2. When to Charge GST/HST
Not all goods and services are subject to the GST/HST and not all businesses are required to charge, collect and remit the sales tax. Generally, you need to charge GST/HST when your taxable sales exceed $30,000 in a single calendar quarter (3 consecutive months), or over the previous consecutive four quarters. Here's an example of ABC Corporation to help:
ABC's taxable sales from April to June: $10,000
ABC's taxable sales from July to September: $5,000
ABC's taxable sales from October to December: $5,000
ABC's taxable sales from January to March: $10,000
In the above example, ABC company has reached total taxable sales of $30,000 over the previous four consecutive quarters. This means you’re required to register for GST/HST right away and begin to charge, collect and remit the tax.
Let's understand what are taxable sales. Detailed list of taxable sales is available on the CRA’s web page Charge the GST/HST – Type of Supply. Here are some common examples:
Common taxable sales include:
Most of retail goods
New housing sales
Sales and rentals of commercial real property
Sales and leases of automobiles
Professional services such as legal and accounting services
Franchises
Common non-taxable sales include:
Child care services
Long term residential rental
Sales of insurance policies
Most services provided by financial institutions (lending / banking)
Music lessons
Most services provided by charities
Some supplies are Zero-rated under the GST/HST. This means that these types of sales are considered taxable, but are taxable at 0%. The idea behind Zero-rated supplies 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.
Common Zero-rated sales are:
Basic groceries such as milk, bread, and vegetables
Prescription drugs and drug-dispensing services
Many transportation services where the destination is outside Canada
Voluntary Registration for GST/HST
In some situations, it could be beneficial to register for and charge GST/HST even before you reach the $30k threshold. Voluntary registration for the GST/HST is a good idea if you produce or sell zero-rated supplies. Although you are not required to charge GST/HST on sales, ITC’s can be claimed resulting in a refund.
Another good reason to register voluntarily is if you have to spend a lot of money up front to get your business going because the ITC’s on the first few returns would provide a refund of GST/HST paid, and that extra cash could help the business grow a little faster.
3. How Sales Tax Works
As a self employed or business owner, you charge GST/HST on taxable sales. You also pay GST/HST on goods and services that you purchase which is called an “input tax credit” or ITC. When filing your tax return, you or your business must pay to the government the GST/HST that it collects on sales minus any ITCs to pay the difference.
Here are two basic examples to help explain how it works:
In the first example the business collects more GST/HST than paid
ABC company collects $10,000 in GST/HST on its taxable sales during a year
ABC also pays $3,000 of GST/HST on purchases for that year
ABC collected more than paid and so it must pay the difference of $7,000 to the CRA
In this example there is a refund because more GST/HST paid than collected
XYZ company collects $4,000 in GST/HST on its taxable sales during a year
XYZ pays $5,000 in GST/HST on purchases for that year
XYZ will get a refund for the difference of $1,000 since taxes paid are higher than taxes collected
Second example is a good reason to register for GST/HST even if its not required. In the beginning years, your business will have more expenses than revenue and you will likely be eligible for a refund when filing GST/HST return.
4. How to File a GST/HST Return
Once you begin collecting GST/HST, proper record-keeping is very important. There can be many complications when preparing and filing a GST/HST return. You can also check out CRA’s guide to completing a GST/HST return if you need more detail.
Listed below are the easiest methods of filing a GST/HST return for most people:
CRA My Business Account (if you have an account set up)
GST/HST NETFILE - A four digit code is required that is mailed to you by CRA
GST/HST TELEFILE - Calling CRA
Before starting your GST/HST return, have all your numbers ready. If you’re using the quick method, you’ll need the total amount collected in the reporting period. If you’re using the regular method, you’ll need both the amounts collected from customers and paid on expenses.
Filing the Return:
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.
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 complete all the steps as per instruction shown above, you will submit your return. Depending on the sales tax received/paid, either pay the amount owing or await your refund.
Keep in mind that once you have registered for the GST/HST, and begin collecting and charging the sales tax, you are required to let your customers know that GST/HST is either included in pricing or will be added separately. You need to ensure that this information is clearly included on your invoice, contract, etc. and easily visible to customers and must include the sales tax rate being charged along with your registration number.
Most sales tax returns are easy to complete and with some skills and the steps above, you will be able to file your return. However, you should seek professional assistance to ensure these returns are filed according to payment and filing deadlines to avoid trouble with CRA. Feel free to reach out and we would love to help.
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