- Many people think GST/HST is a sales tax but actually it is a consumption tax.
- Supplies made by suppliers to recipients are subject to GST/HST. Therefore, leases, licenses and barter transactions subject to GST/HST.
- Many goods and services are GST/HST exempt. For example, health care services and education.
- Many supplies made by not-for-profit organizations are GST/HST exempt.
- A supplier that uses goods and services purchased (“inputs”) in the course of making “exempt supplies” will not be entitled to an ITC for the GST/HST paid on these inputs. However, if the same supplier uses products to make “zero-rated supplies”, it may well be entitled to claim ITCs in respect of tax paid on inputs.
- A person doing business is often required to register for GST/HST, and thus is required to collect and remit GST/HST.
- The same person is also required to pay GST/HST on its inputs.
- The end consumer with no business activity is also required to pay GST/HST on supplies consumed personally.
- Persons making taxable supplies under a stipulated annual threshold ($30,000 in most situations) are not required to register for GST/HST.
- Individuals are not required to collect and remit GST/HST on wages received in the course of an office or employment.
- Independent contractors are usually required to collect and remit GST/HST.
Input tax credit is a refund of GST/HST to a business on its purchases and qualified expenses. Businesses that are registered for GST/HST are entitled to get input tax credit.
GST/HST registration does not cost anything but there can be administrative costs associated with keeping track of GST/HST. There can be cashflow issues because government will want their money even if you have not collected GST/HST on your sales.
You cannot claim input tax credit for your personal purchases.
If your sales of taxable goods and services exceeds $30,000 during a fiscal period you must register for GST/HST.
HST rate in Ontario is 13%. Some goods and services are taxed at 0% and qualify as business for a refund of GST/HST if the sales of these goods are taxable. You will be able to claim input tax credits on purchases of these goods and services.
Goods and services that are non-taxable or exempt from tax are not eligible for a refund of GST/HST on their purchase. If you sell non-taxable or exempt goods or services, you are not required to register for GST/HST.
Following is an example of zero rated goods and services.
- Sale of basic groceries (Milk, Bread, Vegetables)
- Sale of agricultural products, farm livestock and fishery products.
- Sale of prescription drugs and drug dispensing fees.
- Sale of medical devices (Hearing aids, artificial teeth)
- All Exports.
Following ia an example of exempt goods and services.
- Sales of used residential housing.
- Residential rents.
- Residential condominium fees.
- Most health, medical and dental services performed by licensed physicians or dentists.
- Child care services provided primarily to children 14 years old and younger.
- Legal aid services.
- Music lessons.
- Arranging and issuing insurance policies by insurance companies, agents and brokers.
You can only claim input tax credits on your supplies and servies used by your business from the date of registration. If you operate your business for a year without registering, you cannot go back and claim input tax credits.
Government allows two simple methods to calculate and report your GST/HST.
Simplified Method:
Using this method you add up all your taxable purchases and multiply thee result by 5/105 for GST or 13/113 for HST.
Let us say your taxable purchases = 5,000
Input Tax Credit for GST = 5,000 x 5/105 = 238.10 (Decimal rounded up)
Input Tax Credit for HST = 5,000 x 13/113 = 575.22
To qualify for simplified method your taxable sales cannot exceed $500,000 and your taxable purchases cannot exceed $2,000,000 in the preceding year.
You must keep track of your taxable purchases and non-taxable purchases separately.
Quick Method:
Following example is for a business in Ontario.
Sales = 175,000
HST collected at 13% = 22,750
Taxable expenses during the year = 5,000
HST paid on expenses at 13% = 650
GST/HST registrants who are on the Quick Method are entitled to a bonus reduction of 1% on the first 30,000 revenue.
GST/HST included revenue = 175,000 x 1.13 = 197,750
GST/HST on first 30,000 = 30,000 x 7.8% = 2,340
GST / HST on balance revenue = ((197,750 – 30,000) x 8.8%) = 14,762
Total GST/HST payable = 14,762 + 2,340 = 17,102
Savings:
GST/HST collected – GST/HST paid = 22,750 – 650 = 22,100
GST/HST paid = 17,102
Pre tax profit = 22,100 – 17,102 = 4,998
To be eligible to use quick method your annual taxable sales including GST/HST must be less than 400,000.
Following type of businesses cannot use Quick Method.
- Accounting.
- Audit Services.
- Financial Consulting.
- Lawyers or law offices.
- Insurance.
- Dealers in financial instruments.
- Notary Public.
- Tax preparation Services.
- Tax Consulting.
Use of quick method reduces administrative costs.
In general you have upto four years from the date GST/HST return was due to claim your input tax credits.
If you are a quarterly filer your GST/HST return is usually due one month after the end of quarter.
Your purchase invoices should have following information to qualify for input tax credits:
- Your business or trading name.
- Date of invoice.
- Total amount paid or payable.
- Total amount of GST/HST you paid.
If a purchase invoice does not have above information, the government can deny input tax credits on your purchases. It is your responsibility to ensure that all information is present to substantiate your claim.
If a supplier issues you an invoice with a false GST/HST number on it, you will be denied input tax credits.
CRA has created an internet based GST/HST registry that lets you validate GST/HST number of a business which helps to ensure that claims submitted for input tax credit only include GST/HST charged by suppliers who are registered for GST/HST. You can also use registry to verify GST/HST registration for other purposes.
Address of the website:
www.cra-arc.gc.ca/esrvc-srvce/tx/bsnss/gsthstrgstry/menu-eng.html
Always keep a copy of the GST/HST registration confirmation of any new supplier in case your input tax credit claim is ever questioned. You can also call CRA to obtain the status of a company’s GST/HST registration.
If you have made some capital purchases in a year it is quite possible that your filing of GST/HST will result in a refund. GST/HST on capital purchases is refundable if capital items are used in your business.
Calming input tax credits on goods and services that you will use after you register for GST/HST:
If you consumed any purchases in your business prior to registering for GST/HST you cannot claim input tax credit for these. However, if you are using assets in your business, you have four years from filing first GST/HST return to claim ITC.
You can also claim input tax credit on services that became payable before you registered for GST/HST if the services were provided after you registered for GST/HST.
If you paid rent before you registered that was for a period of time after you became a registrant, you can claim input tax credit.
If you use personal capital property like computer, office equipment, office furniture in your business for more than 50% of the time you can claim input tax credits.
Rules are different for real property like Land and Building. If you operate your business as a sole proprietor and you use the property you purchased more than 50% of time for business you can prorate claim of input tax credits based on your percentage of business use. If your usage is more than 90% you can claim 100% input tax credits.
If you operate your business as partnership or corporation and use your property more than 90% of the time for business purposes, you can claim 100% input tax credit.
If use of your personal vehicle is more than 90% in your business, you can claim 100% input tax credits.
You can claim input tax credits on 50% of meals and entertainment expenses.
GST/HST paid on your golf membership, fitness club membership, hunting club member ship or fishing club membership is not eligible for input tax credits.
If you are a yearly filer, your return is due, along with any remittance required, three months after the year-end of your business. If you are required to make quarterly installments, your installment is due one month after the end of your business quarter.
Failure to file penalty applies to any return you file late, unless there is no amount owing or you’re expecting a refund. The penalty is equal to 1% of the amount owing multiplied by the number of months the return is overdue, to a maximum of 12 months. Penalty and interest are compounded on daily basis.
If you offer your customers discount for making payments early, you are required to charge GST/HST on the full amount of the sale, even if your customer takes advantage of the discount.
As a GST/HST registrant you are required to charge GST/HST on all sales in your business, which also includes sale of used capital assets. Even though these sales are not typical for your business, you are still required to charge tax and remit it to government.
If you provide your customers a free product or service, you do not charge GST/HST on such item. Free gift items should relate to your commercial activities.
If your customer provides you with a deposit for a good or service to be provided in future, you do not collect GST/HST. It will be collected on deposit when it is actually applied to the purchase price. However, if the customer does not make the purchase and loses the deposit, GST/HST on the forfeited amount becomes applicable. If your customer is a registrant for GST/HST he/she is eligible to claim ITC for the GST/HST paid on the forfeited amount.
Disclaimer:
This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.
References:
Canada Revenue Agency Website
A Practical Guide to the GST/HST, a book published by CCH a Wolter Kulwer Business. This book is written by Sheila Wisner, CA
167 Tax Tips for Canadian Small Business by Stephen Thompson
http://welchllp.com/tax/quick-method-of-accounting-and-the-bottom-line-of-your-small-business/
Mansoor Suhail (Mani)
Accountant
MS TAX – BSBA – EA – ICIA – RA
Tax for Canada and U.S.A
Web: www.theaccountingandtax.com and www.taxservicesguru.com
Blog: http://taxservicesguru.blogspot.ca
416 – 283 – 8774