GST/HST Information for Canadian Businesses
GST Registration and the Small Supplier Exemption
The Federal GST (Goods and Services Tax), a 5 percent tax on most Canadian goods and services, began on January 1, 1991, replacing the hidden 13.5% Manufacturer's Sales Tax. It was supposed to improve and streamline the tax system, particularly for export businesses.
Unfortunately not all provinces signed on to merge their existing provincial sales tax regimes with the GST, forcing business owners to file both GST and Provincial Sales Tax (PST) returns. Provinces that did combine their sales taxes with the GST charge what is known as the Harmonized Sales Tax (HST).
To add to the confusion the HST/PST rates differ from province to province, and many products and services are exempt (some from PST but not GST, and vice versa), causing huge invoicing headaches for businesses.
With the exception of the four western provinces (British Columbia, Alberta, Saskatchewan and Manitoba) all other provinces charge HST. The province of Alberta and the Northwest Territories, Nunavit, and the Yukon have no provincial sales tax so only GST is charged. Here are the current PST, GST and HST Rates for All the Different Provinces and Territories in Canada.
In Quebec, the Ministère du Revenu du Québec (MRQ) administers the GST and HST for the Canada Revenue Agency. (You can contact the MRQ, toll-free, at 1-800-567-4692.) No matter how consumers detest it and business groups rail against it, the GST is here to stay, and most small businesses are forced to grapple with collecting and remitting the GST/HST.
GST/HST Registration for Your Business
You do not have to register for the GST/HST if you provide only GST/HST exempt goods and services. Examples of GST/HST exempt goods and services include child-care services, music lessons, and used residential housing. You do not have to register for the GST/HST if you qualify as a small supplier according to the Canada Revenue Agency (CRA), and are not one of the exceptions to the small supplier rule.
Generally, a small supplier is defined as a sole proprietor, partnership, or corporation whose total taxable revenues before expenses are $30,000 or less annually. Public service bodies, such as charities, non-profit organizations, municipalities, or universities, qualify as small suppliers if their total taxable revenues before expenses are $50,000 or less annually. However, some businesses are required to register for the GST/HST even if they are small suppliers:
- Taxi and limousine operators
- and non-resident performers (who sell admissions to seminars and other events).
When GST/HST Registration Must Take Place
Basically, you have 29 days to apply for GST/HST registration from the day that your business exceeds the small supplier threshold amount. So if on June 1st my revenues go over $30,000, I then have until June 29th to apply for registration. Note, though, that June 1st would be my effective GST/HST registration date and I will be responsible for collecting GST/HST from that date.
How to Register for the GST/HST
GST registration with the Canada Revenue Agency (CRA) is the easy part. You can register by phone, online, by mail or drop into your local CRA office. (In Quebec, remember, you need to contact the Ministère du Revenu du Québec (MRQ) instead of the Canada Revenue Agency for GST registration. Their phone number is 1-800-567-4692.) When you've registered, you'll be assigned a Business Number, a business identification number that you'll use for all your dealings with the CRA.
Voluntary GST/HST Registration Has Benefits
Even if you do qualify as a small supplier, you may want to register for the GST anyhow. No matter what kind of business you're in, you will be paying GST/HST on the taxable goods and services you use in the course of your commercial activities. If you are a GST/HST registrant, you will be able to recover some of the GST/HST you paid out on business purchases back through Input Tax Credits.
The Big Advantage of Voluntary GST/HST Registration
As mentioned previously, you don't have to register for the Goods and Services Tax (GST/HST) in Canada if your business qualifies as a small supplier. But even if you don't have to, you may want to register anyhow because of the big advantage of GST/HST registration - Input Tax Credits.
Input Tax Credits are credits you can claim to recover the GST/HST you paid or owe for goods or services you acquired "in the course of (your) commercial activities" (Canada Revenue Agency).
If you don't register for the GST/HST, you have no way of getting back any of the GST/HST you paid out. For most small businesses, the amount of GST/HST paid to acquire supplies and services over the course of a year is considerable, so GST/HST registration makes economic sense.
And tax-wise, Input Tax Credits are "stackable". GST/HST Input Tax Credits do not need to be claimed in the reporting period when the purchases were made. You have up to four years from the end of the period when the Input Tax Credit could have first been claimed to file the relevant GST/HST Input Tax Credit in most cases. Consider too, that as a new GST/HST registrant, you may be able to claim Input Tax Credits for the GST/HST you paid or owe on the goods or inventory you have on hand when you register.
The Rules for Claiming GST/HST Input Tax Credits
The rules for claiming GST/HST Input Tax Credits are very similar to the rules for claiming business expenses on income tax. According to the Canada Revenue Agency's General Information For GST/HST Registrants' Guide, you may claim Input Tax Credits for operating expenses such as commercial rent, utilities, and office supplies, and for meal and entertainment expenses. You may also claim GST/HST Input Tax Credits for expense reimbursements you pay to your employees or partners. And you can claim Input Tax Credits for a capital property as well.
Expenses That Don't Qualify as Input Tax Credits
Some purchases or expenses cannot be used to claim Input Tax Credits. The main category of purchases or expenses that can't be used are goods and/or services that you bought or imported for your own use (as opposed to being bought or imported for business consumption).
Some of the other purchases or expenses that don’t qualify are:
- taxable goods and services bought or imported to provide exempt goods and services
- some capital property
- "membership fees or dues to any club whose main purpose is to provide recreation, dining, or sporting facilities" (CRA).
Convinced that you should register now and wondering how? What's the GST Registration Process? provides the phone numbers and addresses you need.
Reporting Periods and the GST/HST Return
When you register for the GST in Canada, the Canada Revenue Agency (CRA) assigns you a GST/HST reporting period based on your total annual sale of GST/HST taxable goods and services. This reporting period may be monthly, quarterly or annual.
The Canada Revenue Agency will assign you a reporting period based on your total taxable supplies of goods and services in the previous fiscal year when you register for the GST/HST. Depending on what that figure is, you may be able to choose a different optional reporting period. (To change an assigned GST/HST reporting period, you can either call the Canada Revenue Agency or fill out and send in Form GST20, Election for GST/HST Reporting Period.)
Remember that you need to file your GST/HST returns on time according to your reporting period schedule even if you haven't conducted any business activities or collected any GST/HST during that reporting period.
For each reporting period, you have to prepare and send to the CRA a GST/HST return which shows the amount of GST/HST you charge your customers, and the amount of GST/HST you paid or owe your suppliers. The difference between these two is your net tax. (For more details about situations such as GST/HST charged and not recovered, and bad debt adjustments, see the Calculating Your Net Tax section of RC4022 - General Information for GST/HST Registrants (CRA)).
Wouldn't it be nice if it was as simple as I've just described it? It’s a little more complicated, though, because of Input Tax Credits and the different classes of GST/HST goods and services. The goods and services you provide may be GST/HST taxable, GST/HST exempt or GST/HST zero-rated.
GST/HST Taxable Goods and Services
These are the ones that businesses charge GST/HST on and can claim Input Tax Credits for on their GST/HST returns. Most goods and services fall into this category and you charge and collect GST or the appropriate HST on the transaction. See How to Invoice for current GST/PST/HST tax rates for the various provinces and territories.
Think of buying/selling a toy, a piece of jewelry, gasoline or a hard drive. Or hotel accommodations or buying or leasing a car. Two goods or services that pertain directly to business and fall into this category that you may not be aware of 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
As a business, you charge the consumer no GST/HST on GST exempt or GST zero-rated goods and services, but the two classes of goods are different when it comes to Input Tax Credits. With GST exempt goods and services, you do not charge GST/HST and you cannot claim Input Tax Credits. With GST/HST zero-rated goods and services, you charge 0% GST/HST and you can claim Input Tax Credits.
GST/HST exempt goods and services include childcare services, music lessons, many educational services, and used residential housing. For details on these and more examples, see the Canada Revenue Agency's list of GST exempt goods and services in RC4022 - General Information for GST/HST Registrants. Zero-rated goods and services include basic groceries, prescription drugs, and exports.
Bookkeeping for the GST/HST
To correctly calculate your Input Tax Credits and complete your GST Return, you need to be sure that you not only keep track of how much GST or HST you collect and how much GST or HST you pay, but also keep track of your GST/HST by category.
Canadian versions of accounting software programs such as Quickbooks and Simply Accounting can simplify keeping track of the GST/HST considerably because the program will automatically track the GST/HST paid on every transaction and produce a GST/HST report.
Obviously, keeping meticulous records is critical if you're going to stay on top of your GST/HST payments and maximize your GST/HST Input Tax Credits. But you need to do that anyhow for income tax purposes. Keeping your GST/HST records updated should be part of your regular bookkeeping procedures.