The GST/HST is a value added tax that applies to the additional value created by a business in the supply of a good or service. GST stands for “Goods and Services Tax”, and is the tax collected by the Federal Government. In some cases, Provinces chose to opt into the value added tax system and harmonize their sales tax with the GST, giving rise to the HST or “Harmonized Sales Tax”. The HST reduced compliance burdens and tax costs for business in the provinces that have it. The starting point, if you sell any good or service, is that GST/HST applies and has to be charged, collected, and remitted unless you find a specific exemption that applies.
The tax is collected on behalf of the Government of Canada and the funds collected by your business are held in trust for the Government of Canada. Depending on a business’s reporting period for GST/HST, the business is required to report the amount of GST/HST collected or collectable in that period as well as the Input Tax Credits (ITCs) deductible from the GST/HST collected. ITCs are the amounts of GST/HST charged to you and paid by you to suppliers of goods and services you use or consume in the process of providing your business’s own goods and services. The difference between GST/HST collected and ITCs deductible, is the Net Tax. Where the total amount of the GST/HST charged is more than the amount of ITCs you can claim for a period, in other words where the Net Tax is positive, you have to remit the Net Tax To the Government of Canada. However, where the amount of GST/HST you charged is less than the ITCs deductible, you are entitled to and can claim a refund from the government.
You are required to register your business for GST/HST if your business revenues from taxable supplies exceed the small supplier threshold ($30,000 in a quarter not taking into account any expenses). If you are a small supplier, you may still wish to voluntarily register for GST/HST so you can claim ITCs on purchases for your business. Not every business that exceeds the small supplier threshold needs to register for GST/HST with the Canada Revenue Agency. If your business ONLY provides exempt supplies (e.g. Child Care Services, Long tern residential rentals, most educational services including music lessons, and others) you do not have to collect GST/HST and are also not entitled to claim ITCs. Your tax expert can help you determine which of your goods and services are taxable, exempt, or zero-rated, and whether or not you need to register for GST/HST. You register for a GST/HST account by using your Business Number (BN) with the Canada Revenue Agency by filling out a Form RC1 “Request for a business number and certain program accounts”.
As with any self-reporting system, the Government of Canada relies on the honesty and accuracy of business owners in administering this tax. Your reporting period is the period that your business uses to file your GST/HST returns. If you provide annual taxable supplies of less than $1,500,000 then you are assigned an annual reporting period, where the value of your taxable supplies is between $1,500,000 and $6,000,000, you are assigned a quarterly reporting period, and where your taxable supplies exceed $6,000,000, you are assigned a monthly reporting period. The government, through the Canada Revenue Agency (CRA), conducts audits to make sure that business owners are reporting the GST/HST collected or collectible accurately, and are not claiming ITCs they are not entitled to. In other words, the CRA ensures that you are meeting your reporting requirements for each period.
Audits can be very demanding, both on your business and personal resources as well as emotionally and mentally. The CRA does not publish the reasons they decide to audit or not audit a business, however, experience has shown that there are a number of audit triggers for GST/HST audits. These triggers can include:
- Claiming a GST/HST refund;
- Having losses for a number of quarters;
- Claiming ITCs that exceed the industry average;
- Reporting revenues that fall well below the industry average;
- Being in high-risk industries (exports, temporary employment services, cash-heavy industries); and
- Reporting discrepancies across various returns.
Audits may also be consequential, meaning that if the CRA’s audit of a client or supplier of yours flags your business as a potential risk for tax evasion, the CRA may choose to also audit your business.
It’s always best to assume that your business is going to be audited and be prepared to defend your position. The best defence against an audit is to make sure you keep good records of sales and expenses. When it comes to sales records, make sure that the record contains enough information about the good and service provided, the date, the customer contact information, and any information about coupons, discounts, or promotions applicable. When it comes to invoices for goods and services you use or consume in your own business, make sure your supplier gives you an invoice that has the following information:
- The legal name and address of your supplier;
- Details about the nature of the good and service supplied;
- The breakdown of the cost of the goods or services, the GST/HST applies, and the total paid;
- A date for the invoice (supply date and due date); and
- The GST/HST number of the supplier (you have to check to make sure that they are in good standing with the CRA).
You should also hold on to copies of any GST/HST elections you make as well as copies of past filings and payment confirmations.
Given that GST/HST is a trust debt, you are personally (as a sole proprietor or partner), and you as director (where the business is run as a corporation), are, in most cases, liable for the tax debt of the business. Hiring a CPA will help ensure that you charge and collect the right amount of tax on the right goods and services, that you deal with your ITCs claimed properly, and that you are meeting your filing requirements so as to avoid audits, obtain favourable results in an audit, and avoid paying penalties and interest.