GST/HST Tips for Small Business Owners: Maximizing Savings and Compliance

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GST/HST Tips for Small Business Owners: Maximizing Savings and Compliance

Sebastien Prost, CPA

Navigating the world of taxes can be challenging for small business owners, especially when it comes to understanding and complying with the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) in Canada. These consumption taxes might seem daunting at first, but mastering them is a crucial component of running a successful small business. This article aims to provide helpful tips and insights to make the process more manageable for small business owners.

GST is a federal tax at a rate of 5% levied on most goods and services, while HST, a combination of federal GST and provincial taxes, has varying rates depending on the province. If your small business earns over $30,000 in sales within a 12-month period, you are required to register for a GST/HST business number. Understanding your obligations to collect and remit taxes will save you time and prevent potential penalties in the long run.

As a small business owner, it’s essential to consider relevant tax rates, the registration process, and the appropriate reporting periods. This knowledge will not only help you maintain accurate bookkeeping but also assist you in making informed decisions when managing your business’s financial growth. In the following sections, we will delve into valuable tips related to GST/HST, ensuring you’re well-equipped to handle these taxes with confidence and ease.

Understanding GST/HST

Basics of GST/HST

The Goods and Services Tax (GST) is a value-added tax applied to most goods and services sold in Canada. The Harmonized Sales Tax (HST) is a combination of the federal GST and provincial sales tax, used in five provinces: New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island. In Ontario, for example, the harmonized rate is 13%. GST/HST rates vary depending on the province and the type of goods or services. Zero-rated and exempt supplies are exceptions and do not have GST/HST applied.

Registration Requirements

Small businesses owners should be aware of the GST/HST registration requirements. Generally, a small business must register for GST/HST when:

  1. The business has annual revenues exceeding CAD 30,000 (including worldwide revenues).
  2. The business is selling taxable goods or services.
  3. The business operates within Canada.

To register for GST/HST, businesses can either do so online, through the mail or fax, or by phone. It’s essential to have a business number (BN) when registering. After registering, a business can collect GST/HST on their sales and pay it to the Canada Revenue Agency (CRA).

Differences Between GST and HST

While GST and HST are closely related, there are some key differences:

  • GST: Applied to most goods and services sold in Canada, at a 5% federal rate.
  • HST: A combination of GST and provincial sales tax, with rates varying by province.

Some provinces, such as Alberta and the territories, only apply GST and do not have an HST. Meanwhile, Quebec uses its own version of the HST called the Quebec Sales Tax (QST). It’s crucial for small businesses to understand the specific tax rates and requirements in their respective provinces.

GST/HST Accounting

Calculating Net Tax

Calculating the net tax is an essential part of GST/HST accounting. The net tax is the difference between the GST/HST collected and the ITCs claimed. To calculate net tax, follow these steps:

  1. Total GST/HST collected from customers during the reporting period
  2. Total ITCs claimed on eligible business expenses during the same period
  3. Subtract ITCs from collected GST/HST to determine the net tax

If the net tax is positive, remit the difference to the Canada Revenue Agency (CRA). If the net tax is negative, you may be eligible for a refund of the excess ITCs.

It is also possible to use the Quick Method of Accounting for GST/HST for certain taxpayers who qualify. This method is a simplified way of calculating GST/HST payable as it is calculated by multiplying taxable sales by a reduced rate without taking into account any ITCs.

Filing GST/HST Returns

Filing Frequencies

Small business owners in Canada must file their GST/HST returns according to the established filing frequencies. Generally, these frequencies are determined based on the business’s annual revenue. They can be:

  • Annual: Applicable to businesses with revenue less than CAD 1.5 million.
  • Quarterly: Applicable to businesses with revenue between CAD 1.5 million and CAD 6 million.
  • Monthly: Applicable to businesses with revenue over CAD 6 million.

It is important for small business owners to know their designated filing frequencies to meet their GST/HST obligations on time.

Payment Deadlines

Meeting payment deadlines is crucial for avoiding penalties and interest charges. Small business owners should be aware of the following payment deadlines for each filing frequency:

  • Annual filers: Payment should be made on or before the last day of the third month following the end of the reporting period.
  • Quarterly filers: Payment should be made on or before the last day of the month following the end of the reporting period.
  • Monthly filers: Payment should be made on or before the last day of the month following the end of the reporting period.

Online Filing Procedures

Filing GST/HST returns online can save time and help small business owners stay organized. Here are the primary steps for online filing:

  1. Register for My Business Account: Access the Canada Revenue Agency (CRA) website and register a My Business Account if not already registered.
  2. Log in to My Business Account: Use your CRA-issued user ID and password to log in.
  3. File your GST/HST Return: Under the GST/HST tab, select “File a Return” and follow the instructions to complete the online form.
  4. Submit and Review: Ensure the information entered is correct, submit the form, and review the confirmation page for accuracy.

By following these steps and keeping track of filing frequencies and payment deadlines, small business owners can confidently file their GST/HST returns and stay compliant with Canadian tax regulations.

GST/HST Credits and Rebates

In this section, we’ll cover important aspects related to GST/HST credits and rebates for small business owners in Canada. The focus will be on Input Tax Credits and Filing for Rebates.

Input Tax Credits

Input Tax Credits (ITCs) are a valuable tool for small business owners who need to offset the GST/HST they paid on business-related purchases. To maximize your ITCs, consider the following tips:

  • Stay organized: Keep accurate records of all business-related purchases and invoices to claim ITCs accurately.
  • Know the eligible expenses: Be aware of the categories of expenses that are eligible for ITCs, such as office supplies, equipment, and certain professional services. Refer to the Canada Revenue Agency (CRA) guidelines for complete information.
  • File on time: Filing your GST/HST return on time ensures you can claim ITCs without the risk of penalties or late fees.

Filing for Rebates

Small business owners may be eligible for GST/HST rebates on certain goods and services. Here are a few tips on filing for rebates:

  1. Identify eligible expenses: Familiarize yourself with the types of goods and services that qualify for rebates. Some examples include fuel purchases and expenses incurred for business-related construction and renovation projects.
  2. Collect supporting documents: Maintain accurate records and retain relevant documents, such as invoices and receipts, that support your rebate claims.
  3. Follow filing deadlines: Understand and adhere to the filing deadlines set by the CRA to avoid possible penalties or delays in receiving your rebate.

Note: For more information on GST/HST credits, rebates, and other related topics, visit the CRA website.

Common GST/HST Mistakes to Avoid

One common GST/HST mistake is failing to register for GST/HST when required. Small businesses should be aware of the requirements set by the CRA, and register with them once their annual revenue exceeds the 30,000 CAD “small supplier” threshold1.

Another frequent error is claiming Input Tax Credits (ITCs) without proper documentation. While you don’t need to submit supporting documents when claiming the ITCs, they must be readily available in the event of an audit. To avoid potential penalties and interest charges ensure that you maintain accurate records.

Avoid incorrectly claiming ITCs on expenses that are not eligible for tax credits. Some common non-eligible expenses include personal expenses, employee wages, and certain types of entertainment costs. Review the CRA guidelines to ensure your claims comply with the regulations.

Lastly, make sure to post HST refunds back to the HST payable account, rather than treating them as income. This approach is necessary to keep the HST return and accounts in balance.

By avoiding these common GST/HST mistakes, small business owners will be better equipped to maintain accurate financial records and minimize the risk of penalties or audits.

Industry-Specific GST/HST Guidelines

Each industry has its own unique challenges and opportunities when it comes to GST/HST compliance. In this section, we will discuss GST/HST guidelines for three different industries: Service Industry, Goods-based Industry, and Digital Services and Products.

Service Industry

In the service industry, GST/HST is generally applied on the supply of services provided in Canada. It is important to understand the place of supply rules to determine if your service is subject to GST/HST. If your service is subject to HST, you need to charge the HST rate based on the province where the service is rendered.

Some common examples of services are:

  • Professional services, such as accounting, legal, or consulting
  • Repair and maintenance services
  • Training and coaching services
  • IT services and software development

Keep in mind that certain services are exempt from GST/HST, such as educational services, healthcare services, and certain financial services.

Goods-based Industry

For goods-based industries, GST/HST is typically applied on the sale of goods in Canada. Businesses need to charge the appropriate GST/HST rates based on the destination province of the goods. In general, taxable supplies of goods include:

  1. Tangible personal property (e.g., furniture, appliances, or clothing)
  2. Real property (e.g., land and buildings) unless specifically exempted

Certain goods may qualify for zero-rated or exempt supplies, such as basic groceries, prescription drugs, and some medical devices.

Digital Services and Products

In the area of digital services and products, GST/HST applies to both B2C (business-to-consumer) and B2B (business-to-business) transactions for Canadian residents.

Some examples of digital services and products include:

  • Digital subscriptions (e.g., streaming services, Ebooks)
  • Online courses
  • Games and software applications
  • Online advertising services

It is essential to charge the GST/HST rate based on the customer’s place of consumption. If your business serves customers in multiple provinces, be prepared to charge different HST rates.

Note: Non-resident businesses providing digital services to Canadian customers may also be required to register for, collect, and remit GST/HST through the simplified registration system, depending on their annual revenue thresholds.

Record Keeping for GST/HST

Required Documentation

Small business owners must maintain organized and accurate records for GST/HST purposes. These records should include all accounting and financial information documents, such as:

  • Sales invoices
  • Purchase invoices
  • Receipts or proof of payment
  • Bank statements

The specific content of these records may depend on the type of business, GST/HST registration status, and reporting period.

Retention Period

According to the Canada Revenue Agency (CRA), small business owners are usually required to keep their records for six years from the end of the year to which they relate. This includes all documents related to business operations and GST/HST obligations. In some cases, the CRA may request that records be kept for a longer period.

It’s essential to store these records in a safe and easily accessible manner to facilitate future tax audits or inquiries, giving peace of mind to both business owners and the CRA.

Dealing With Audits and Assessments

Being Prepared is crucial when dealing with audits and assessments of a small business. Ensure all necessary financial records and documentation are easily accessible and organized. Accurate record-keeping will not only help the audit process run smoothly but also reduce potential errors during the audit (source: Demystifying the Auditing Process).

Understanding the Audit Triggers will help small business owners be aware of the possible reasons for an audit. Some triggers include:

  • High cash transactions
  • Consistently late filing or non-filing
  • Unusual fluctuations in income or expenses

Being familiar with these triggers will allow business owners to proactively identify and address potential issues before they escalate. (source: CRA Audit Triggers)

Communicating with the auditor is essential. Maintain open communication, ask questions, provide necessary documentation, and ensure you understand the auditor’s inquiries. Professionalism and cooperation will help establish a positive and productive relationship.

During a GST/HST audit, keep in mind that the Canada Revenue Agency (CRA) has discontinued combined audits. Businesses will either be subject to an income tax or GST/HST audit (source: GST/HST audit and examination – Canada.ca).

If a business disagrees with a CRA reassessment, they have the right to file a GST/HST objection within 90 days from the date of the reassessment. This allows ample time to gather additional information and challenge the auditor’s findings (source: GST/HST Audit – What To Expect).

Remember, a proactive approach and understanding of the audit process will help small business owners effectively navigate GST/HST audits and assessments.

Frequently Asked Questions

At what revenue threshold does a small business need to register for and start collecting GST/HST?

A small business in Canada needs to register for GST/HST when its annual taxable supplies exceed $30,000. This includes all the revenues generated from sales of goods and services, as well as commercial property leases and other similar arrangements. It is important to monitor your business revenue and register for a GST/HST account when required.

How can a sole proprietor determine if they must obtain a GST number for their business activities?

A sole proprietor must obtain a GST number if their business has annual taxable revenues exceeding $30,000. In order to determine this, the business owner should evaluate the revenue generated from all goods and services sold, and any leases, licenses, or similar arrangements. If the taxable supplies surpass the aforementioned threshold, obtaining a GST number is mandatory.

What is the proper procedure for a small business to collect and remit GST/HST to the CRA?

To collect and remit GST/HST, a small business must first obtain a business number (BN) and register for a GST/HST account. With a GST/HST account, businesses are able to collect the appropriate amount of tax on their sales and services. The accumulated tax should then be reported and paid to the Canada Revenue Agency (CRA) on a regular basis, as determined by the assigned reporting period. This can be done monthly, quarterly, or annually, depending on the specific situation of each business.

Can a business voluntarily register for GST/HST, and what are the advantages of doing so?

Yes, a business can voluntarily register for GST/HST, even if their annual taxable revenues do not exceed $30,000. Some advantages of voluntary registration include the ability to claim input tax credits, which can help offset the GST/HST paid on business expenses, and enhancing the business’s professional image, as it may signal to customers and suppliers that the business is a legitimate and established entity.

What are the key steps to accurately calculate GST/HST for business transactions?

To accurately calculate GST/HST for business transactions, businesses should follow these steps:

  1. Determine if the good or service being sold is subject to GST/HST.
  2. Identify the appropriate GST/HST rate for the transaction, based on the province where the sale occurs.
  3. Calculate the GST/HST amount by applying the relevant rate to the total taxable amount of the transaction.
  4. Include the calculated GST/HST in the invoice or receipt provided to the customer, clearly indicating the amount of tax charged.

Sebastien Prost, CPA

Written by Sebastien Prost, CPA

Seb Prost, a CPA with over 10 years of experience in taxation and accounting, offers a unique blend of insights from his time at the CRA and his experience in public practice. Originally from QC and now based in Nelson, BC, he specializes in guiding Canadian startups, SaaS companies and other online businesses for all of their accounting and taxation needs.

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