Having started a company (incorporated or sole proprietorship), many business owners in Canada are aware that they need to start charging customers GST/HST when they have reached $30,000 in taxable sales over the previous four (4) consecutive quarters. Tracking this milestone can be a time-consuming headache, especially when those consecutive quarters cross over two different year-ends. Why not make it Easy!
Here are four reasons why small businesses should save themselves the effort and simply take the plunge into registering for GST/HST (apply same logic for QST, but there have been legislative changes to QST registration requirements, so this article sticks to GST/HST).
Just because a company is charging its customers GST/HST, does not mean that it has to remit the full balance collected to the Canadian Government. Business owners are allowed to add up any GST/HST they have paid on business expenses, called input tax credits (“ITCs”), and only remit the difference between tax collected and ITCs to the government. This means that if you register for GST/HST from day 1, you can file returns to claim back the GST/HST paid on company expenses, such as:
- Office furniture
- ERP software, other office software
- Certain Legal Expenses
- Professional Fees
- Material/supply purchases
- 50% of business-related meals
Additionally, if your customers are registered for GST/HST and purchase your goods and services as part of their business, they will also receive a credit or refund on their ITCs paid, offsetting their cost of doing business (they must be registered for GST/HST as well).
Tax Note:
Once you register, any sale from that point forward, even if it is the first $10, needs to have GST/HST collected on it. You do not register and then wait to charge GST/HST on the first dollar past $30,000.
Further to the point above, depending on your filing frequency (Monthly, Quarterly, or Annually), your first few returns may actually be refunds versus payables, as significant costs are incurred on company setup. Think about some of the upfront costs you will incur on implementing your ERP or CRM (or even just Microsoft Office), the hefty professional fees that may come for setting up your new corporation, among many other expenses. If you wait to register, the GST/HST paid on these expenses will become a sunk cost to your business, reducing your precious cash flow in the early stages. You can typically, back date your registration 30 days from the date you register with the CRA (or to your incorporation date, whichever comes first).
Just because you may not have any sales from the start, or several months into the early stages of your business, does not mean you cannot file a GST/HST to recover your ITCs on company setup. The CRA knows that you will incur expenses prior to your initial sales, and that is why they allow a 30-day roll back to try and include as many start-up fees as
possible. Register, and use that tax refund to your advantage!
Tax Note:
For companies with zero-rated taxable supplies, you may be inline for a refund with every return, do not delay your registration!
The quirkiness of tracking 4 consecutive quarters of sales versus a calendar year, or fiscal year, means keeping track of your sales volume for sales tax purposes can become a difficult and time-consuming process for a new business.
For example, your company has a calendar year-end and sales over the five previous quarters are:
- Q1 2020 $3,000
- Q2 2020 $7,000,
- Q3 2020 $8,000,
- Q4 2020 $10,000 and,
- Q1 2021 $6,000
Are you really thinking that you need to register for tax by April 30, 2021, at the latest, when your 2021 YTD sales are $6,000?
To make matters worse. if a company makes more than $30,000 and does not register for GST/HST, the Canada Revenue Agency (CRA) will not send a reminder, or a warning to register and collect. However, this does not mean they will not find out. It is not difficult to cross reference sales reported on an Income Tax return to those reported on a GST/HST return, or lack thereof. Eventually, the CRA will discover that GST/HST returns should have been filed (or an account registered), and a small business could end up owing failure to file penalties and arrears interest on unremitted GST/HST. If it takes the CRA 3 years to put the pieces together, the amount assessed may be extremely costly. Instead of juggling 4 consecutive quarters, save the effort and simply ensure compliance. If it does not reduce your business expenses in the short term, it will be much cheaper for you in the long run avoiding number crunching and/or assessed interest and penalties.
Tax Note:
Depending on what you sell or where you sell it, your sales may be zero-rated (0%) for GST/HST purposes. Just because you may not collect GST/HST does not mean that you do not have to register for GST/HST when your sales eclipse the $30,000 threshold. Perhaps you export your goods and services to the U.S. or sell certain zero-rated food supplies – these sales are still considered taxable supplies and will count towards the $30,000 threshold.
Putting that critical GST/HST number on your invoices shows clients you have made it, that you are a stable company with a proven track record (at least over the last four quarters) of getting things done, and that you have a client base which extends beyond them. This instils further confidence in a company’s brand and moves it from the realms of fly-by-night into a serious going concern. Do not underestimate the confidence this will give your clients in your brand and in your ability to deliver on even larger contracts or obligations.
How would you feel after receiving an invoice from a business with invoice number of 003 and no GST-HST number present or charged? Unless it is your child or close friend, you may not have full confidence in the experience that has been presented!
Most businesses (registered for GST/HST) who purchase your product will receive a refund on the ITC that they have incurred. For the rest of us end consumers, we fully anticipate that every cost comes with GST/HST added.
Tax Note:
When invoicing, ensure your GST-HST registration number, 9 digits followed by RT0001 (or similar account reference), should be clearly visible on your invoice. Otherwise, your customer may have an issue if they are audited by the CRA and your invoice is selected. No registration number = no refund.
When to Register and start charging the GST/HST
The CRA has provided a helpful table for businesses, charities, public service bodies, non-residents, and commercial ride-sharing drivers here, and we provide the table for business below:
Small supplier limit calculation for most businesses
IF
You do not exceed the $30,000 threshold [1]
Over four consecutive calendar quarters. [2]
THEN
You are a small supplier.
WHAT YOU NEED TO DO
You do not have to register. You may choose to register voluntarily if you make taxable sales, leases, or other supplies in Canada.
Your effective date of registration is usually the day you request your GST/HST account (for up to 30 dyas before that day).
IF
You exceed the $30,000 threshold [1] in a single calendar quarter. [2]
THEN
You are no longer a small supplier and have to charge GST/HST on the supply that made you exceed $30,000 within the calendar quarter.
WHAT YOU NEED TO DO
You must register for the GST/HST.
Your effective date of registration is no later than the day of the supply that made you exceed $30,000.
You have to start charging GST/HST on the supply that made you exceed $30,000
IF
You exceed the $30,000 threshold [1] over the previous four (or fewer) consecutive calendar quarters (but not in a single calendar quarter). [2]
THEN
You are no longer a smaller small supplier at the end of the month following the quarter in which you exceed $30,000.
WHAT YOU NEED TO DO
You have to register for the GST/HST.
Your effective date of registration is no later than the beginning of the month after you are no longer a small supplier.
you have to start charging GST/HST on your taxable supplies starting on your effective date of registration.
To find out how the place of supply affects the GST rates head to the Government of Canada page.
