If you are a recently self-employed Canadian or you are thinking about starting your own business, you may be curious about what tax implications that would have.
Aside from the extra work involved at tax time when filing you annual income tax return, you might also be required to have and charge sales taxes. Collecting GST/HST isn’t always mandatory for self-employed individuals, but you would have to know if the rules apply to you, and when they do.
Let’s review the basics of GST/HST.
What is GST/HST?
The Goods and Services Tax (GST) is a 5% tax applied to most taxable items and services in all provinces and territories in Canada – except where there is an agreement to have GST collected together with Provincial Sales Taxes (PST). In that case, the GST and PST are replaced by a Harmonized Sales Tax (HST).
Alberta, for example, has no provincial sales taxes so a $1.00 bag of pretzels will cost you $1.05 at the checkout. In Ontario, for example, where the GST and PST are combined, that $1.00 bag of pretzels would cost $1.13, as the HST in Ontario is 13%.
Am I Required to Charge/Collect 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 tax either. To determine whether or not GST/HST is a factor in your business, you must consider both the type of business you’re running and to a lesser extent, the amount of sales you have.
It’s about your business.
The first factor which must be considered when determining of you or your business must register for the GST/HST, is the type of goods and services you’re providing.
The Canada Revenue Agency categorizes goods & services into three groups:
- Taxable – GST/HST is charged, collected and remitted. As a registrant, you may also claim credits (called Input Tax Credits, or ITC’s) for GST/HST paid to produce the goods and services.
- Zero-rated – GST/HST is not charged, collected or remitted, but as a registrant, you can claim ITC’s for GST/HST paid to produce the goods and / or services. If your business is selling cucumbers at the farmer’s market, for example, no GST/HST is charged/collected from your customers because fresh vegetables are zero-rated.
- Exempt – GST/HST is not charged, nor collected and as the registrant, you can not claim ITC’s for any GST/HST paid. Examples of exempt services include music lessons and childcare fees.
The full list of each group type of is available on the CRA’s web page Charge the GST/HST.
It’s about your sales.
Although most goods and services are subject to GST/HST, depending on your business, you may not be required to register for the GST/HST, even if you’re selling taxable goods or providing a service that is considered to be taxable. In this case, it now depends on the amount of your sales and revenue.
For most small business owners, the requirement to register for the GST/HST doesn’t come into effect until you have earned $30,000 in sales or revenue. Prior to that amount, you are considered to be a “small supplier”. As soon as you exceed that threshold, you are required to register for GST/HST right away and begin to charge, collect and remit.
Some exceptions do apply, however. Taxi drivers and ride-share partners are required to register for the GST/HST right away. There is no small supplier status for these professions.
The $30,000 “Small Supplier” threshold that is often referred to, ends when you reach either:
- $30,000 in revenue in a single calendar quarter or
- $30,000 in revenue within the previous four consecutive calendar quarters.
* Calendar quarter means a period of three months beginning on the first day of January, April, July, or October in each calendar year.
As soon as your business makes $30,001 in a single quarter or in the last four quarters combined, you’re no longer a small supplier. Note that CRA doesn’t use the term “calendar year”, instead, it’s all about breaking the year up into quarters. This is an important bit of info that can affect your small supplier status.
For example, Jacob started selling his handcrafted toolboxes in July. Business was great from day one and by the end of the year, he has sold $15,000 worth of toolboxes. Jacob was not required to register for the GST/HST as he is considered a small supplier.
In January, Jacob’s sales kept growing. By the end of January, he had sold another $15,001 in toolboxes. Even though Jacob’s sales stretched over two calendar years, he earned $30,001’s, passed the threshold for registering for the GST/HST and lost his small supplier status. Jacob must now register for the GST/HST and begin charging, collecting and remitting on every toolbox he sells going forward.
Voluntary Registration for GST/HST
In some situations, voluntarily registering for the GST/HST makes sense, even if you are not required. One reason is to get a head-start on proper record-keeping. Another reason would be if you know your business was going to exceed the Small Supplier threshold fairly quickly – it’s $30,000 in sales not profit – So distributors or businesses which re-sell high-end items could be required to register fairly quickly.
Voluntary registration for the GST/HST is a good idea if you produce or sell zero-rated supplies. Although not required to charge GST/HST on sales, ITC’s can be claimed. Another good reason to register voluntarily would be if you have to spend a lot of money upfront 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.
Registering, Reporting, and Record-keeping
If you’re required to register for the GST/HST for your self-employment activities, knowing the details can be very helpful and help to avoid penalties and interest.
How Do I Start?
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. The process is quite simple and can be done completely online via the Business Registration Online (BRO) program.
You’ll need some information to complete the application, including:
- your Social Insurance Number
- address of the business
- your business’s name
- and information about your business activities such as income and line of business.
You’ll also want to decide if you’ll be using the regular method or quick method of accounting to calculate your GST/HST payable. In a nutshell, the Quick Method allows you to remit a percentage of GST/HST to the CRA, rather than tracking each item and their Input Tax credit. Learn more about each method on CRA’s web page Quick Method of Accounting for GST/HST.
After you’ve registered for a GST/HST account and begin collecting/charging GST/HST, you’re required to let your customers know that GST/HST is either included in pricing or will be added separately. This information must be clearly indicated on your invoice, contract or posted on a sign easily visible to customers. Additionally, the GST/HST rate charged must be displayed.
You are also required to complete and submit a GST/HST return. Depending on your business, you may have to submit a return monthly, quarterly or just one a year. Whatever the time frame, any GST/HST amounts that you have collected are funds that you have taken from someone in trust for the Crown – and must be remitted to the CRA along with the return. These funds are not to be kept by you, nor used by you, and because these are “Trust Funds” the CRA treats them very seriously.
Once you begin collecting GST/HST, proper record-keeping becomes even more important. Too often new registrants forgot to separate those funds and are faced with the consequences of poor record-keeping.
Ideally, you should set aside the GST/HST collected immediately, preferably into a separate bank account. (Again, you’re just collecting the money.) If it’s not feasible to do this for every sale, total the daily or weekly GST/HST amounts collected.
The GST/HST collected is only part of the equation as you may also be able to claim ITC’s. If you pay GST/HST on supplies or services to operate your business, you can claim these amounts as deductions and include them as credits on your GST/HST return.
Staying organized with your finances is simple with QuickBooks Self-Employed, a mobile app that makes it easy to stay in control of your business finances and helps you prepare for tax time while on the go with effortless expense, mileage, invoice and HST tracking all in one place. Users of QuickBooks Self-Employed find an average of $4,340 in tax savings per year.
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.
CRA has lots of guidance available for completing your GST/HST return. You can access line-by-line explanations, examples for both accounting methods, and even video tutorials!
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