If you are just starting a business in Canada, you might have heard that you don’t have to register for GST/HST(Goods and Services Tax/Harmonized Sales Tax). Can this be true? Quite possibly. Let’s not just assume you don’t which could get you into trouble.
In this 3-part series, we are going to discuss this further. Some people have to register, you may not. Maybe you don’t have to, but you might choose to do so.
So, let's find out what is right for you.
We’re going to focus on these three areas:
A very basic description of how GST/HST works.
How the CRA (Canada Revenue Agency) views what you are selling and what that means to you.
How to work out if you are small enough that you don’t have to register if you don’t want to.
To start, we should make sure you have a basic understanding of how GST/HST works.
If you are registered for GST/HST:
You collect the tax from the person you are selling to.
You subtract the GST/HST you’ve paid on what you’ve purchased to make those sales.
Then you settle the difference with the CRA on a regular reporting period determined by the CRA. (You get some say, but have to stick within CRA guidelines.)
The GST/HST on your purchases is often referred to as either GST ITCs or HST ITCs.
ITC stands for Income Tax Credit. You can only claim the ITC if you have proof that it is valid. This is why you should make sure that any invoices/receipts you have have the company’s GST or HST number on the receipt/invoice. If you suspect any funny business with the number (e.g., that they are charging you GST/HST when they aren’t actually registered) you can search the number to confirm its validity here: https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/confirming-a-gst-hst-account-number.html
If you collect more money in HST than what was spent, you will pay the difference to the CRA. Or if you’ve collected less money in HST than what was spent, the CRA will pay the difference to you. When you are getting started this can be helpful if you are spending more than you are bringing in.
It’s important to note: this settling up with the government doesn’t happen automatically, it’s a business’s responsibility to track and correctly report it to the government. You can’t just send the government a cheque for the amount of the tax with your GST/HST number in the memo line and think everything is okay. It’s also important to note that the HST funds you’ve collected on behalf of the CRA are not yours. You are essentially holding them in trust for the CRA. They frown on not handing it over when you are supposed to.
GST is charged across Canada in every province and territory.
However, the provinces and territories determine how much provincial sales tax they charge. There is a real mix between what each province or territory follows; no provincial sales tax, provincial sales tax on top of GST (British Columbia, Saskatchewan, Manitoba, and Quebec do this), and some provinces charge a harmonized sales tax.
What does harmonized sales tax mean? The provincial portion is taxed and filed with the GST portion so you only have to do one filing for both the provincial and federal portions.
If you are curious about what the different tax rates are across Canada, the Retail Council of Canada has a nice chart that lays out what each province or territory has determined. If you are interested, you can see it here: https://www.retailcouncil.org/resources/quick-facts/sales-tax-rates-by-province/
Okay, back to do you have to register for GST/HST or not…
To start just know that there are a few exceptions to the rules; namely if you are a:
public service body,
a taxi operator/commercial ride-sharing driver.
If you qualify as one of the listed exceptions you will want to talk to a professional, like a qualified bookkeeper (think CPB--Certified Professional Bookkeeper) or an accountant who is a CPA (Chartered Professional Accountant).
For everyone else, you need to know two things:
What are the CRA's rules about what you are selling?
Are you what the CRA considers a "small supplier"?
That’s what we’ll be discussing in future weeks.
Don't forget, as with anything else you can google on the internet, these are general guidelines, not specific to your unique situation or business. Sales tax can be complicated. If you are thinking of starting a business this is a good time to get your A team lined up (accountant, bookkeeper, and lawyer), and talk with someone about your specific situation.