Running a business in Canada comes with its own set of challenges. Out of all, the most overlooked challenge is managing your taxes, especially when you know that the tax policy changes monthly and yearly. Keeping up with the taxes can be pretty daunting, especially when you have so much on your business table.
Compliance is complex, with all the intricacies of GST/HST and tax policies changing monthly or yearly. Business owners who already juggle inventory, payroll, growth strategies, and tax compliance usually take the bottom spot on the ongoing task list. However, neglecting this important area can lead to fines, audits, and unnecessary stress.
Being informed about GST/HST will be a crucial asset to any Canadian business, especially given that it impacts most or all of your purchases, including selling goods and services. However, in today’s world, do you know when to collect GST or HST, file for the return, and claim the input tax credits, or are you exempt? Well, there are so many common questions.
This guide will help to simplify GST/HST for Canadian businesses. Whether you are the owner of a new startup looking to make sense of your first tax cycle or an experienced entrepreneur looking for clarity in compliance, we will tackle everything you need to know.
Understanding GST/HST
GST and HST are the two important components of Canada’s taxation system. GST is a federal tax levied on most goods and services throughout the country, while HST is a combination of GST and provincial sales tax in certain provinces.
Currently, the HST system is used by provinces such as Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. Businesses have to collect these taxes from customers upon sales; therefore, the sources of such taxes are important in knowing how and when to apply them.
For example, if your business is located in a province with HST, you will collect the harmonized rate instead of separate GST and provincial taxes. However, some goods and services are exempt or zero-rated, meaning you won’t charge GST/HST on them. Examples include basic groceries, prescribed medications, and some medical devices.
Understanding GST/HST also involves learning about Input Tax Credits, which allow businesses to reclaim the amount paid in GST/HST over operations-related expenses. Proper guidance on these elements ensures compliance without violating the Canada Revenue Agency’s rules and regulations. It saves potential penalties and optimizes a business’s financial activities within regions.
Difference Between GST and HST
The most basic distinction between GST (Goods and Services Tax) and HST (Harmonized Sales Tax) is how they are designed and imposed in different provinces across Canada.
GST (Goods and Services Tax)
- Scope: GST tax levied across Canada on most goods and services.
- Rate: The GST standard rate is 5%, regardless of the province.
- Administered: It is administered and collected by the Canada Revenue Agency (CRA).
- Separate Provincial Taxes: In provinces where HST is not implemented, GST will be levied with a specific provincial sales tax, also referred to as a retail sales tax.
For instance, in British Columbia, Saskatchewan, and Manitoba, GST and PST are charged on separate line items.
HST (Harmonized Sales Tax)
- Scope: HST combines the federal GST and the provincial sales tax (PST) into one harmonized rate, which makes tax collection easier.
- Provinces using HST: HST is currently used in Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island.
- Rate: The rate of HST differs from province to province. It ranges from 13% to 15% because it combines federal and provincial rates.
- Administration: The CRA collects the HST and distributes its provincial share to that province.
Overall, GST is the baseline federal tax, while HST combines GST with provincial taxes for streamlined collection in participating provinces.
Registering for GST/HST
Let’s decode some of the most commonly asked questions.
Who Needs to Register for GST/HST?
- Small Supplier Threshold
Businesses earning less than $30,000 in a single calendar quarter or over four consecutive quarters are considered small suppliers and are not required to register for GST/HST. The threshold applies to most businesses, but charities and public service bodies have a higher threshold of $50,000.
- Exceptions to the Threshold
Even if you are below the small supplier limit, you should register for GST/HST if
- You offer taxable ridesharing or passenger services.
- You run a taxi service.
- You are a foreign-based vendor who sells to Canadian customers via the Internet, including digital products or services under certain conditions.
- Voluntary Registration
Businesses below the threshold can voluntarily register for GST/HST and receive ITCs on costs incurred, which may allow them to generate more revenue for growing businesses.
How to Register for GST/HST
Step 1: Determine Eligibility
Verify that your business is eligible for registration, whether compulsory or optional. You also need to know what taxable goods and services apply to your type of business.
Step 2: Collect Information
Be prepared with the following information, including the Business name and address and business number (BN) of the CRA—type of business structure – sole proprietorship, corporation, partnership, etc. and estimated annual sales or revenue
Step 3: Register with the CRA:
You can apply for GST/HST through the following means:
- Online: Use the CRA’s Business Registration Online application
- By Phone: Dial the CRA’s Business Enquiries number
- By Mail: Complete Form RC1, Application for a Business Number, and forward it to the CRA
Step 4: Receive Confirmation
Once registered, you will be issued a GST/HST account number, which forms part of your business number (BN). You will need this to file returns and remit collected taxes.
Step 5: Stay Compliant
Charge GST/HST on taxable goods and services and maintain accurate records for filing returns. Understand the filing deadlines and reporting periods assigned to your business.
When Should GST/HST (Taxable Goods and Services) be Charged
GST/HST is applied to most goods and services sold in Canada. The rate of GST/HST varies depending on the customer’s location. Provinces with HST apply a combined federal and provincial rate, while others apply GST with provincial taxes.
Goods and services subject to taxation include retail sales, professional services, and utilities, but some things, such as basic groceries and exports, are zero-rated (taxed at 0%). Residential rents, most health care services, and childcare are exempt from this tax. Businesses must ensure that their sales charge the correct rate based on the customer’s location and whether it is a sale.
Input Tax Credits: What Are They and Why Do They Matter
Input Tax Credits (ITCs) allow businesses to recover the GST/HST paid on expenses incurred for their operations. Such credits are crucial because they ensure companies do not pay taxes on value added to goods and services. For instance, if a business buys inventory, equipment, or services to produce taxable goods or services, it can recover the GST/HST paid on those purchases as ITCs.
ITCs are also important for maintaining cash flow so businesses do not carry the entire burden of the GST/HST. When claiming ITCs, a business can offset the GST/HST it collects from its customers, which it has to remit to the government. This is important for fairness and efficiency, as tax “pyramiding” is avoided, and compliance costs are manageable. Proper record-keeping of invoices and receipts is essential to claim ITCs accurately and avoid any disputes during audits.
Filing And Remitting GST/HST: Frequency of Filing
The filing frequency of GST/HST is based on your business’s annual taxable supplies. Those earning over $6 million must file monthly, between $1.5 million and $6 million file quarterly, and those with $1.5 million or less file annually. The cash flow and administrative workload are affected by filing frequency. Smaller businesses benefit from filing annually, while larger businesses file more often to keep up with remittances.
Conclusion!
GST/HST can indeed seem complex, but what’s essential for a businessperson in Canada is to understand the base. Determining when to collect GST/HST, claiming Input Tax Credits, and filing returns are all part of this process, which may make or break your current financial management. Being aware of tax obligations and ITCs can help avoid costly mistakes.
From the smallest business owner to running a large enterprise, there are many ways to have a smooth GST/HST, such as maintaining proper records and soliciting professional advice when needed. You can then quickly and comfortably concentrate on the growth of your business with full tax compliance knowledge in mind.