GST/HST for Business in Canada

Sep 8, 2023

 

The Federal Goods and Services Tax (GST), a 5% tax on most Canadian goods and services, was introduced on January 1, 1991 in Canada, replacing the previous Manufacturer’s Sales Tax, which had a hidden rate of 13.5%. The GST aimed to simplify the tax system, particularly for businesses involved in exports.

Unfortunately, not all provinces agreed to merge their existing provincial sales tax systems with the GST. This meant that business owners had to file separate returns for both the GST and Provincial Sales Tax (PST). However, the provinces that did combine their sales taxes with the GST implemented what is known as the Harmonized Sales Tax (HST).

The HST/PST rates vary across provinces, and there are exemptions for many products and services. This creates significant challenges for businesses when it comes to invoicing.

Except for the four western provinces (British Columbia, Alberta, Saskatchewan, and Manitoba), all other provinces charge the HST. Alberta and the territories of Northwest Territories, Nunavit, and Yukon only apply the GST, as they do not have a provincial sales tax. Here are the current rates of PST, GST, and HST for all provinces and territories in Canada.

In Quebec, the Ministère du Revenu du Québec (MRQ) is responsible for administering the GST and HST on behalf of the Canada Revenue Agency. Consumers may not like it, and business groups may criticize it, but the GST is a permanent part of the tax landscape, and most small businesses are obliged to collect and remit the GST/HST. You can contact the MRQ toll-free at 1-800-567-4692.

 

GST/HST Registration for Your Business in Canada

You aren’t obligated to enroll for the GST/HST if you exclusively provide goods and services that are exempt from the GST/HST. Examples of such exempt goods and services include child-care services, music lessons, and used residential housing. If you meet the criteria of being a small supplier, as determined by the Canada Revenue Agency (CRA), and do not fall under any exceptions to the small supplier rule, you are not required to register for the GST/HST.

In general, a small supplier is defined as an individual proprietor, a partnership, or a corporation whose total taxable revenues before deducting expenses amount to $30,000 or less annually. Public service bodies like charities, non-profit organizations, municipalities, or universities are considered small suppliers if their total taxable revenues before deducting expenses are $50,000 or less annually. However, there are certain businesses that must register for the GST/HST even if they qualify as small suppliers. These include taxi and limousine operators, as well as non-resident performers who sell admissions to seminars and other events.

 

When GST/HST Registration Must Take Place

In essence, once your business surpasses the small supplier threshold, you have a 29-day window to apply for GST/HST registration. For example, if your revenues exceed $30,000 on June 1st, you must apply for registration before June 29th. However, it’s important to note that June 1st will become your effective GST/HST registration date, and you’ll be accountable for collecting GST/HST starting from that day.

 

How to Register for the GST/HST in Canada

Registering for GST with the Canada Revenue Agency (CRA) is a straightforward process. You have various options to register, including by phone, online, through mail, or by visiting your local CRA office. It’s important to note that if you are in Quebec, you should contact the Ministère du Revenu du Québec (MRQ) instead of the Canada Revenue Agency for GST registration. Their contact number is 1-800-567-4692. Once you have completed the registration, you will receive a Business Number, which serves as your unique identifier for all interactions with the CRA.

 

Voluntary GST/HST Registration Has Benefits

If you meet the criteria for being a small supplier, it is still advisable to voluntarily enroll for the goods and services tax (GST). Regardless of the nature of your business, you will incur GST/HST charges on the taxable products and services utilized in your commercial operations. By becoming a registered GST/HST participant, you can reclaim a portion of the GST/HST paid on your business expenses through Input Tax Credits.

 

Advantage of Voluntary GST/HST Registration in Canada

If your business qualifies as a small supplier, it’s not necessary to register for the Goods and Services Tax (GST/HST) in Canada, as mentioned earlier. However, there’s a significant advantage to registering anyway─Input Tax Credits.

Input Tax Credits are credits that allow you to recover the GST/HST you’ve paid or owe for the goods or services you obtained during your business activities, according to the Canada Revenue Agency.

By not registering for the GST/HST, you won’t be able to reclaim any of the GST/HST you’ve paid out. For most small businesses, the amount of GST/HST paid for supplies and services throughout the year is substantial, making GST/HST registration financially sensible.

From a tax perspective, it’s worth noting that Input Tax Credits can be accumulated. You aren’t required to claim GST/HST Input Tax Credits in the same reporting period as the purchases were made. In many cases, you have up to four years from the end of the period in which the Input Tax Credit could have been initially claimed to submit the relevant GST/HST Input Tax Credit. Additionally, as a new GST/HST registrant, you may be eligible to claim Input Tax Credits for the GST/HST you’ve paid or owe on the goods or inventory you possess at the time of registration.

 

The Rules for Claiming GST/HST Input Tax Credits in Canada

The guidelines for obtaining GST/HST Input Tax Credits closely resemble the guidelines for claiming business expenditures on income tax. As outlined in the ‘General Information for GST/HST Registrants’ Guide’ by the Canada Revenue Agency, you have the opportunity to claim Input Tax Credits for various operational costs like rent, utilities, and office supplies. Additionally, you can seek GST/HST Input Tax Credits for reimbursing expenses to your employees or partners, including meal and entertainment expenses. Moreover, you are eligible to claim Input Tax Credits for capital properties.

 

Expenses That Don’t Qualify as Input Tax Credits

Certain purchases or costs are ineligible for claiming Input Tax Credits. The primary group of purchases or expenses that are excluded comprises goods and/or services acquired or imported for personal use, as opposed to being acquired or imported for business consumption.

Other purchases or expenses that do not meet the criteria include:

– Taxable goods and services obtained or imported to offer exempt goods and services.
– Certain capital assets.
– Membership fees or dues paid to clubs primarily focused on providing recreational, dining, or sporting facilities, as stated by the CRA.

 

GST/HST Registration in Canada

If you’re convinced that you should register now and wondering how, we’ve got you covered. The GST Registration Process includes the necessary phone numbers and addresses that you’ll need.

 

Reporting Periods and the GST/HST Return

When you sign up for the GST in Canada, the Canada Revenue Agency (CRA) will assign you a GST/HST reporting period based on your total annual sales of taxable goods and services that are subject to GST/HST. The reporting period can be monthly, quarterly, or annual.

Upon registration for the GST/HST, the Canada Revenue Agency will allocate a reporting period to you based on your total taxable supplies of goods and services in the previous fiscal year. Depending on this amount, you may have the option to select a different reporting period. To modify your assigned GST/HST reporting period, you can contact the Canada Revenue Agency or complete and submit Form GST20, the Election for GST/HST Reporting Period.

Keep in mind that even if you haven’t conducted any business activities or collected any GST/HST during a reporting period, you still need to file your GST/HST returns promptly in accordance with your reporting period schedule.

For each reporting period, you must prepare and submit a GST/HST return to the CRA. This return should indicate the amount of GST/HST you charged your customers and the amount of GST/HST you paid to your suppliers or owe them. The difference between these two amounts is your net tax. For more detailed information regarding specific situations, such as GST/HST charged but not recovered and bad debt adjustments, you can refer to the “Calculating Your Net Tax” section of RC4022 – General Information for GST/HST Registrants (CRA).

However, the reality is a bit more complex than the simplified description I provided. Input Tax Credits and the various categories of GST/HST goods and services add to the intricacy. The goods and services you offer may fall into the categories of GST/HST taxable, GST/HST exempt, or GST/HST zero-rated.

 

GST/HST Taxable Goods and Services in Canada

These are the items that businesses apply GST/HST to and can later claim Input Tax Credits for on their GST/HST returns. Most products and services belong in this group, and when conducting transactions, you should charge and collect GST or the appropriate HST. Check the How to Invoice guide to find the current GST/PST/HST tax rates for different provinces and territories.

Consider purchasing or selling a toy, a piece of jewelry, gasoline, or a hard drive. Also, think about hotel accommodations or buying or leasing a car. Two specific goods or services that directly relate to business and fall into this category are franchise fees and advertising (unless the advertising is provided to a non-resident of Canada).

 

GST/HST Exempt and Zero-Rated Goods and Services in Canada

In your business, you don’t apply the GST/HST tax to goods and services that are exempt or zero-rated, but there’s a distinction between the two in terms of Input Tax Credits. When it comes to GST exempt goods and services, you don’t impose the GST/HST tax and you’re unable to claim Input Tax Credits. On the other hand, with GST/HST zero-rated goods and services, you impose a 0% GST/HST tax and you can claim Input Tax Credits.

GST/HST exempt goods and services consist of childcare services, music lessons, various educational services, and previously owned residential housing. To find more examples and specific information, you can refer to RC4022 – General Information for GST/HST Registrants, the Canada Revenue Agency’s list of GST exempt goods and services. Zero-rated goods and services include essential groceries, prescription drugs, and exports.

 

Bookkeeping for the GST/HST in Canada

To ensure accurate calculation of your Input Tax Credits and proper completion of your GST Return, it is essential not only to monitor the amount of GST or HST you collect and pay, but also to categorize your GST/HST transactions.

Using Canadian accounting software programs like Quickbooks and Simply Accounting can greatly simplify the task of tracking GST/HST. These programs automatically record the GST/HST paid for each transaction and generate a comprehensive GST/HST report.

Maintaining meticulous records is crucial for staying on top of your GST/HST payments and maximizing your GST/HST Input Tax Credits. Moreover, it is necessary for income tax purposes. Keeping your GST/HST records up to date should form part of your regular bookkeeping procedures.

 

CBES is here to assist you; feel free to contact us for expert guidance.

 

 

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