If you’re newly self-employed or thinking about starting your own business or side gig, you may be wondering about tax implications. Aside from effects on your annual income tax return, sales tax may also be involved. Collecting GST/HST isn’t mandatory for all self-employed individuals, but how do you know if the rules apply to you? Let’s review the basics of GST/HST.
What is GST/HST?
The Goods and Services Tax(GST) of 5% is appliedto taxable items/services in all provinces but, depending on where you live, this tax may be combinedwith provincial tax at the cash register. Alberta, for example, has no provincial sales tax (PST) so a $1.00 bag of pretzels will cost you $1.05 at the checkout. Same goes for all three territories.
Other provinces charge both GST and PST. Saskatchewan imposes a provincial sales tax (PST) of 6% to eligible purchases, in addition to GST. That same $1.00 snack will cost you $1.11. Other provinces that apply two taxes are British Columbia, Quebec, and Manitoba.
Finally, the remaining provinces charge a combination of provincial sales tax and GST. Both components are rolledinto one tax called the Harmonized Sales Tax (HST). In all four Atlantic provinces as well as Ontario, your receipt will show one tax applied, even though it’s made up of two parts. Whenyoupurchase that $1.00 bag of pretzels in Halifax, the final price including HST will be $1.15.
Am I Required to Charge/Collect GST/HST?
Not all goods/services are subject to GST/HST and not all businesses are required to charge/collect 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 the amount of sales you have.
It’s about your business.
The first determining factor for charging/collecting 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. You may also claim credits for GST/HST paid to produce the goods/services. Thisapplies to most goods & services.
- Zero-rated – GST/HST is not charged/collected, but you can claim credits for GST/HST paid to produce the goods/services. If your business is selling cucumbers at the farmer’s market, no GST/HST is charged/collected from your customers.
- Exempt – GST/HST is not charged/collected and you usually cannot claim any credits for 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 charge/collect GST/HST, even if you’re selling taxable goods or providing a service that is considered to be taxable. It depends on your sales/revenue.
For most small business owners, the requirement to charge/collect GST/HST doesn’t come into effect until you’ve hit $30,000 in sales/revenue. Up until the $30K mark, you’re considered to be a “small supplier”. Some exceptions apply of course. For example, taxi drivers and ride-share partners are required to charge/collect GST/HST from day one. There is no small supplier status.
Once you’re no longer a small supplier, you must register for a GST/HST account and begin charging/collecting GST/HST. Your business is no longer a small supplier 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 ofthree months beginning on the first day of January, April, July, or October in each calendar year.
So, essentially, if your business makes $30,001 in a single quarter or inthe last four quarters combined, you’re no longer a small supplier. Note that CRA doesn’t use the term “calendar year”. It’s all about the quarters. Thisis an important bit of info that can affect your small supplier status. Here’s an example:
Jacob started selling his handcrafted toolboxes in July. Business was great from day one. By the end of the year, he sold $15,000 worth! Not bad for a new business. At this point, Jacob is not required to charge/collect GST/HST as he’s still a small supplier.
In January, Jacob’s sales kept growing. By the end of January, he had sold another $15K in toolboxes. Even though Jacob’s sales stretched over two calendar years, he’s now lost his small supplier status due to the “quarters” rule. Jacob must now start charging/collecting GST/HST on every toolbox he sells and register for a GST/HST account.
Voluntary Registration for GST/HST
In some situations, opting into the GST/HST program is a good idea, even if you are not required to register. One reason is to get a head-start on proper recordkeeping. If you know your business is going to hit that magic $30K mark right away, consider setting up your GST/HST account early. Remember, it’s $30,000 in sales not profit. So if you’re a distributor or resell expensive items, you’ll be at $30K quickly. Sorting out the paperwork is much easier if you use the same system from day one.
Opting in to the GST/HST program is a good idea if you produce/sell zero-rated goods. Although you don’t need to charge GST/HST on your sales, you are eligible to claim ITCs. If you have paid GST/HST to produce your goods, you could claim a rebate of that tax just by registering and filing a GST/HST return. For example, if you’re selling fresh fish to the local grocer, you may be able to claim GST/HST you pay for supplies, fuel, etc.
Registering, Reporting, and Recordkeeping
If you’re required to charge and collect GST/HST for your self-employment activities, knowing the details is important.Let’s review the process of becoming a GST/HST registrant, GST/HST returns, and the importance of good recordkeeping.
How Do I Start?
Once you’ve determined you are required to collect GST/HST (or opt to voluntarily become a registrant), the first step is to register for a GST/HST account with the Canada Revenue Agency. The process is quite simple and be done completely online via the Business Registration Online (BRO) program.
You’ll need some information tocomplete the application. Thisincludes 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. 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 addedseparately. This information can be relayed by receipt/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 net GST/HST amounts due are submittedwith the GST/HST return.
Once you begin collecting GST/HST, proper recordkeeping becomes even more important. In essence, you’re just holding money that belongs to the government. Too often new GST/HST registrants forgot to separate those funds and are faced with the consequences of poor recordkeeping.
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. You may also be able to claim input tax credits (ITCs). 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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