Unlock the mysteries of GST
In 1991, the GST replaced the old federal sales tax as a consumption tax on most goods and services provided in Canada. Many economists support the consumption tax as it encourages savings and investment. GST is a multi-level tax collected every time a taxable good or service is provided. The fact that the GST has stood the test of time highlights its utility.
“A properly designed tax system can strike a balance between helping the poor and, at the same time, giving people the incentive to work” ~Eric Maskin
As part of Canada’s progressive tax regime, the government began the GST/HST tax credit which is paid quarterly for each calendar tax year; in July, October;January; and April on or almost the fifth day of those months. The value of the credit is driven by each family’s net income, plus the number of dependent children. The CRA does not consider the credit to be taxable income. You don’t need to apply for GST/HST credit as it is done automatically through federal tax returns.
GST continues to be an essential consideration in nearly all transactions and the Canada Revenue Agency (CRA) continues to scrutinise those transactions to extracting more revenues for the government coffers.This article has a focus on your GST liability as the small business owner.
The GST applies across the nation, and some provinces have incorporated the federal GST with provincial sales taxes, making a harmonised sales tax that applies to those provinces. In 2015, the CRA collected highest Net GST from Ontario followed by Quebec and British Columbia, please see the undermentioned chart.
Taxable and exempt supplies
GST/HST is charged on most property and services sold or supplied in Canada. Property includes goods, real estate and intangible property. Services include everything other than property but exclude money, salaries and wages. Examples include rental income of commercial real property; legal and accounting services; books; sales and leases of vehicles; and car repairs.
A taxable supply is defined as a supply that is made in the course of commercial activity. A commercial activity excludes the following:
• a business run by an individual, certain partnerships and certain trusts without a reasonable expectation of profit the provision of exempt supplies
• the provision of employment services
Taxable supplies include supplies taxed at the 5% rate or the applicable GST rate for a province that levies GST and zero-rated supplies.
Allocation of tax between taxable and exempt supplies
If you make both taxable and exempt supplies, you must allocate between two types of supplies the recovery of the GST paid on the purchases. Any reasonable method of allocation is acceptable.
The allocation of input tax credits allows you some scope for planning.
It is not essential to use the same method from year to year, though the same method must be used consistently during the course of the year. However, internal changes in business activity may make it advantageous to change the allocation. The allocation of input tax credits allows you some scope for planning.
You might want to consult your CPA as this may result in higher recoverable percentage. It is vital that you thoroughly document whatever method of allocation you choose. In the event of an audit, providing documentation to the CRA will allow them to understand how the allocation was determined clearly.
Liability and Registration
Goods and Service Tax and Harmonized Sales Tax (GST/HST) registration is compulsory for all businesses in Canada except if
- The person is a small supplier.
- The only commercial activity of the person is the sale of real property not in the course of business.
- The person is a non-resident that does not carry on business in Canada.
Note: “Person” for GST/HST includes an individual, partnership, corporation, estate, trust, society, union, club, association, or other organisation.
Small Supplier Exemption
A small supplier is one whose sales of annual GST/HST taxable supplies, including zero-rated supplies, do not exceed $30,000.
Once registered to the GST system of the CRA, you cannot leave (making it a one-way road) even if your income falls below this threshold.
If you have global operations ,your worldwide revenue from associated entities will be included in measuring annual taxable supplies. Associated business can consist of related parties, such as shareholders, corporations, partnerships, trusts or individuals. If your combined taxable revenues exceed the $30000 threshold, all of your businesses must be registered for GST.
There are two tests to determine when the small supplier exemption ceases to apply:
In most cases, it is generally a good idea to register for GST/HST as soon as you’re allowed. Provided your business makes taxable or zero-rated supplies, early registration ensures that GST/HST paid on the cost incurred is recoverable, since any tax paid before registration can generally be recovered in limited circumstances and only on the purchase of inventory, capital property and prepaid services still on hand at the time of registration. You might want to register early because, in many situations, registering late can result in not recovering any GST paid before registration.
Your choice on when to charge GST or HST might also be based on who the customer is and whether that client can claim ITC on such service e.g If you are a hair stylist, you might not charge clients the GST/HST until you have to as your clients probably can’t claim the Input tax credit. On the other hand, a consultant might charge a corporate client the GST instantly, as it can be considered as a refundable input tax credit (ITC) for the company.
You can do an online registration by using the Canada Revenue Agency’s (CRA) business registration system, by calling 1-800-959-5525 or through the mail using Form RC1. You will also need your GST number (Business Number) in the course of doing business. Once you have one, you need to display your GST Number on all of your invoices.
The CRA will provide a year-end filing date of Dec. 31,however, this date should be changed if your business has a different year-end as this will streamline bookkeeping for both GST/HST and income tax returns.
Please always remember that you must charge GST or HST based on the province where your customer is located, e.g for a client in B.C. or Alberta, you would charge 5 per cent GST, whereas a client in Ontario would be charged 13 per cent HST.
These are taxable supplies subject to a 0% tax rate, and they include the following:
- basic groceries like milk (excluding snack food)
- prescription drugs
- medical and assistive devices (such as prescription eyeglasses)
- most exports
Exempt supplies are goods and services that are not subject to tax, including but not limited to:
• sales of used residential and long-term residential rents
• financial services (including insurance)
• health and dental services
• educational courses toward a degree or diploma
• childcare services
• long-term rentals of residential accommodations
• bridge or road tolls
A provider of exempt supplies does not collect GST/HST on supplies made and is not entitled to an ITC for GST/HST paid on inputs related to the provision of exempt supplies.
Input tax credits(ITCs)
• If you have paid GST/HST on goods and services used in making taxable and zero-rated supplies, you can recover the GST paid by claiming input tax credits on your GST return. To ensure that your claim will be allowed, you must have supporting documentation in your records in case your claim is every challenged.
GST Audit problems often arise through deficient documentation, even if the deficiency is minor.
Input tax credits may not be claimed on the following:
• the cost of a passenger vehicle used in business over $30,000
• monthly lease payments for a passenger vehicle used in business more than $800 per month
• club memberships
• non-deductible half of meals and entertainment expense
• personal or living expenses
- It would help if you keep receipts for your expenses with the GST/HST information broken out. You might think your credit-card bill with the total is enough, but it’s not.
• Cloud accounting apps such as QBO and XERO get integrated with apps such as receipt bank which can help immensely in organising the supporting documentation such as receipts.
- If your input tax credits claimed in a reporting period exceed the tax owing, the excess will be refunded back to you.
- You(business owner) might not realise that you have four years to claim the GST/HST paid on expenses.
- On some assets, you can claim input tax credits on personal capital property used more than 50% of the time in your taxable business e.g if you purchased a computer which you use 75% of the time in your business and 25% of the time personally, you would be eligible to claim an ITC of 100% of the GST paid.
- You can claim input tax credits on general operating expenses for items used more than 10% of the time in taxable business e.g assume that your business involves the developing of online shopping platforms for websites. You are registered for GST, and all of your sales are taxable. Assume that you purchased some blank USB memory sticks for your business. If you expect the memory sticks will be used 90% of the time or higher in your business, then you would be able to deduct 100% of the GST on those memory sticks.
GST on Cannabis
Canada, led by Prime Minister Justin Trudeau and his Liberal Party, fully legalised Cannabis. Cannabis product sales are taxable under the Goods and Services Tax/Harmonized Sales Tax (GST/HST), as is currently the case for medical cannabis.
GST on Real Estate
Real estate transactions and related activities are subject to complex GST/HST rules. As a rule of thumb, real property transactions are taxable, notwithstanding the vendor is a small supplier. In such situations, the vendor must collect and remit the tax (unless the purchaser is a GST/HST registrant). On the other hand, the sale of used residential property and certain sales of real property by an individual who is not engaged in business are generally exempt from GST/HST.
There’s one of two ways you’ll have to pay this: with cash on the closing day, or through your mortgage. If the builder has included the GST/HST in the purchase price, then it’ll automatically be included in your mortgage. However, if the sign says “$500,000 + HST”, you need to be prepared to pay for the tax upfront.
Fortunately, no matter where you live in Canada, if your new home is priced below $450,000 before GST/HST, you may be eligible for a partial rebate of the 5% GST portion.
The GST/HST New Housing Rebate amount changes on a sliding scale, depending on the purchase price of your home e.g if it was priced at $350,000 or less, your GST might be reduced to just 3.5%. The only catch – the home must be your primary residence.To claim the rebate, fill out Form GST190 and file it with your personal income tax.
In the case of bare land, if the property has been subdivided into more than two parts, even an individual must charge GST/HST when the property is sold, unless it is sold to a related individual.
GST on imported goods
Imported goods are subject to GST. The duty rates vary according to the type of goods you are importing and the exporting country. The CBSA calculates any duties owing based on the value of the products in Canadian funds. Depending on the goods or their value, some other taxes may apply, such as excise duty or excise tax on luxury items
GST paid on importation should be recoverable and should not become a sunk cost. But the recovery of the tax is not a given, and careful planning is required. If an ITC is not available to the taxpayer, a flow-through method of recovery or drop shipment rules may be used to avoid adverse tax consequences.
GST on a gift to the customer
If as a sign of appreciation, you provide a customer with a gift or a free product or service, you do not charge GST or HST on such items. You can, however, claim ITCs for the GST /HST you pay or owe on your purchase provided these items so long as they relate to your commercial activities e.g if you operate a hair salon and you wish to thank one of your customers for their loyalty over the years by giving them a complimentary bottle of shampoo, you would not collect GST or HST on this item. You would, however, claim an ITC for the shampoo that you purchased.
To claim ITCs, detailed records of purchases including GST/HST paid on those purchases are required. You can avoid the costs and complexities of detailed record-keeping requirements by using either the quick method or the simplified ITC method to determine the amount of the required net GST/HST remittance for a period.
Quick Method :
It’s an alternative for businesses for which sales plus GST/HST income amounts to less than $400,000 in the last four quarters, irrespective of whether the business is incorporated. The quick method is meant to reduce the administrative burden on everyday business sales and purchases. With the not-so-everyday purchases of capital assets such as vehicles and equipment, you are still eligible to claim an input tax credit.
Your business has to be GST/HST-registered for at least a year to qualify for this method.
• It is often best for your business if it has relatively few expenses as you can avoid going through the trouble of detailed record-keeping requirements for calculating the GST/HST on every item. The quick method can save you GST/HST payable.
• When you sell the used capital goods like old computers your vehicle, etc., then you will also have to remit the GST on the sale, over and above the “Quick Method” calculation.
• The amount of the required GST/HST remittance is based on specified remittance rates applied to taxable supplies, excluding zero-rated supplies.
• If you can qualify for this method, all you need to do is apply the specified remittance rate to taxable supplies sold in the year (excluding zero-rated Supplies ) ; deduct the lesser of 1% of $30,000 and 1% of taxable supplies made in the year (excluding zero-rate supplies) ; and deduct ITCs on capital expenditures at the regular GST/HST rate for the province.
With this method, you do not calculate or obtain input tax credits on ordinary business expenses. These input tax credits are replaced with the portion of the 5% sales tax not remitted to the GST office.
The simplified method of calculating GST input tax credits
This method applies to the determination of ITCs only. The advantage of the method is that detailed record-keeping is not required for GST/HST paid on inputs except for capital Expenditures for real property. The ITC is determined as:
[GST/HST rate / (100 + GST/HST rate)] × GST/HST inclusive on fully taxable purchases
The following items are excluded from GST/HST fully taxable purchases:
• capital expenditures for real property (ITC is determined separately)
• purchases of zero-rated supplies
• purchases of exempt supplies
A common error which you might commit while using the simplified method is not excluding exempt purchases from the calculation, such as :
Salaries and wages, which are not taxable supplies; Amortization, which does not represent the expenditure of cash on a taxable supply; Insurance, which is not a taxable supply; Bus passes given to employees, as public transit fares are exempt supplies.
GST on Taxable Benefits to employees
When a benefit conferred on an employee must be included in that employee’s income, the employer is also engaging in taxable transactions for GST purposes. The provision of taxable benefits , such as the gifting of an iPad, is considered to be the sale of that benefit for consideration equal to the taxable benefit required to be included in the employee’s income (i.e., its fair value). In turn, ITCs may be claimed on the related expenditures.
GST on Pension Plans for employees
As an employer, you must quantify and remit GST/HST in respect of the deemed supplies such as your staff time and resources incurred to support the pension plan on the last day of your fiscal year. This is the case regardless of whether or not a charge is made to the pension plan(s).
Filing GST return
Every business has a GST reporting period based on the revenue of the associated group. Many businesses are required to report quarterly; however, large businesses (Over 6 million in annual taxable supplies for the associated group)must report monthly, while smaller businesses (Under 1.5 Million in annual taxable supplies for the group) are commonly put on an annual filing frequency.
You might want to file your GST/HST annually, but please keep in mind that you will still be required to make quarterly payments. The CRA will wait for your return, but they don’t want to wait for your money.
If you have high sales and less eligible expenses for ITC’s, you might have to pay more GST/HST than corporate taxes, but you might not have much net income. As a result, you may have cash-flow issues when the time comes to remit GST/HST quarterly. It is advisable to put the GST/HST money you’ve collected on sales aside and be prepared to pay it.
While quarterly filing requires more reporting to the CRA, you may prefer it to keep on top of things. You can speed up ITC refunds by electing to file quarterly or monthly.
When you make a sale and invoice your customer, you must remit the GST on the sale for that reporting period, regardless of when you collect the account. Remember to request a refund of the GST and PST on Accounts Receivable that you have written off.
Instalments are not needed if you do quarterly/monthly because you already pay the GST owed with the return The instalment is more of an issue if you do annual filing, so you have to go and look net remittance in the prior year, If you (business owner) owe more than $3,000 in GST/HST, then quarterly instalment is needed, these are due for payment one month after the quarter end. If you don’t make the payments, instalment interest will be charged.
If you file late, you will have to pay the penalty based on a percentage of GST/HST owed, as well as a penalty for inaccurate reporting. Remit your GST on time and reduce the amount you pay as CRA has the right to go to any means to collect the outstanding taxes.
You are personally liable to CRA for any GST/HST debt even if you operate the business through a corporation or the corporation closes.
If you aren’t sure of your GST/HST responsibilities please call your CPA or the CRA; both are capable of giving you all of the information. They want to help you.
GST/HST Statistics Tables (2011 to 2015 calendar years …. https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/income-statistics-gst-hst-statistics/gst-hst-statistics/gst-hst-statistics-tables-2011-2015-calendar-years.html
At A Glance: Cannabis Taxation – Minister Of Finance.” Insert Name of Site in Italics. N.p., n.d. Web. 28 Dec. 2018 <https://www.fin.gc.ca/n17/data/17-114_2-eng.asp>.
GST and HST basics – how to do right by the CRA and your …. https://www.theglobeandmail.com/business/article-gst-and-hst-basics-how-to-do-right-by-the-cra-and-your-business/
GST/HST On New Homes | New Housing Rebate | Ratehub.ca. https://www.ratehub.ca/gst-hst
This article is being provided as general information only and is not meant as legal opinion or advice. Cloudiverse CPAs Inc cannot accept any liability for the tax consequences that may result from acting based on the information contained therein. Each situation is unique and should be reviewed on its own with the proper attention and care it deserves.Please contact any member of our team if we can be of further assistance in this regard.