So, you’ve joined the hustle. You’re officially an entrepreneur, and you're ready to provide your service or sell your product. You’re ready to make a difference in your community and finally help the people you were called to help.
You’ve registered your Ontario business, and you’re ready to get started. You’ve heard about Harmonized Sales Tax (HST) compliance, but you're not sure what your obligations are to stay out of CRA's bad books.
When you're a startup owner, having the right systems in place will make things easier in the long run, especially when you choose to hire a professional when your business starts to pick up.
We’ve put together this guide to help you understand Goods and Services Tax (GST), HST and your obligations for compliance. We’ll go through how and when to register for a GST/HST account, what to do when you get one, how to file your GST/HST returns, and things to keep in mind for the future. Let’s get into it!
What is GST/HST Compliance?
HST is a combined federal and provincial tax applied to most goods and services sold in Canada. It's a tax that your customers pay when they purchase your products or services.
As a startup owner, you must collect this tax and remit it to the government. Each province or territory has their own GST/HST rate. Some regions only have HST, which is the case in Ontario, whereas others only have GST.
When Do You Need to Charge For GST/HST?
The Canada Revenue Agency (CRA) advises that you must register for a GST/HST account if both of the following apply:
You make taxable sales, leases or other supplies in Canada; and
You are not a small supplier
You are considered a small supplier if you make less than $30,000 over four consecutive calendar quarters. If you make more than that, you must register for a GST/HST account and start charging HST. For more information on the exceptions and timing associated with when you must register for an account (based on your income), please see CRA's chart here. It's important to also note that you cannot charge HST prior to registering for a HST account.
How Do You Register For a GST/HST Account?
Before registering for a GST/HST account, you must register for your nine-digit business number (BN). If you haven't done so already, you can do this by using the online service at Business Registration Online. You can also register your GST/HST account using the Business Registration Online portal.
After registering, you will receive a GST/HST account number electronically or via mail to confirm your registration. You will then register for CRA’s My Business Account to manage your GST/HST account online.
How Much Tax Do I Need to Charge?
The amount of tax to charge depends on where you sell your supplies or services. If you are operating in Ontario and only sell to customers in Ontario, your tax rate will be very straightforward.
However, if you start shipping goods to other provinces, things become more complex as you will charge the sales tax rate for the province or territory that received the goods or services. For example, if you operate out of Toronto but deliver equipment to a customer in New Brunswick, you would charge 15% HST. To assist with this process, the CRA has created a GST/HST calculator, which can be found here.
It’s also important to understand that some items are classified as a "zero-rated supply", meaning they have 0% GST/HST throughout Canada. Zero-rated supplies include basic groceries such as milk, bread, vegetables, and prescription drugs, etc.
When Do I Remit GST/HST to the CRA?
As you start charging GST/HST, it would be helpful to keep this money saved in a separate bank account to be held in trust until it is remitted to the CRA. You will also need to keep accurate records of the GST/HST collected, the amount you paid on your eligible business purchases, and any tax refunded or rebated.
Your reporting period will determine the due date to file your GST/HST return. When you sign up for your GST/HST account, you will be asked what your preferred reporting period is, which is usually monthly, quarterly, or annually.
In the future, reporting periods will be based on your annual revenues. The default reporting period will be quarterly if your business makes more than $1.5 million in revenue. Each fiscal year, the CRA will mail you a return package that will include your reporting periods and due date and the information required to file your next return.
How Do You Calculate Your GST/HST Amount?
Before filing your return, you must first calculate your net tax. Two methods can be used for this:
1. The Regular Method: This amount is the difference between the GST/HST you collected on your taxable supplies and the GST/HST you paid on your business purchases and expenses (input tax credits).
2. The Quick Method: This method involves making an election. It's only available for specific businesses and supplies when their total revenue is no more than $400,000 (including GST/HST) in any four consecutive fiscal quarters over the last five fiscal quarters. The net GST/HST to remit is calculated based on the applicable quick method remittance rate. Using this method, you cannot claim input tax credits for operating expenses.
As a startup business owner, you may not know exactly how to calculate your net tax, and therefore, it is wise to speak to a professional or refer to CRA’s resources.
How Do I Remit my GST/HST to the CRA?
Your GST/HST return can be filed online (using GST/HST NETFILE) or on paper. Sometimes, businesses may be required to file online and cannot file in person. For more information and how it aligns with your circumstances, please refer to CRA's guide here or speak to a professional.
It's important to note that you must file your return by the reporting period due date, even if you have no business transactions. If you are late in filing your GST/HST return, you could be subject to penalties and interest, including the withholding of personal income tax refunds.
After You File
After you’ve filed your GST/HST return, you will receive a Notice of Assessment from the CRA, which indicates whether you will receive a refund/rebate or owe an amount over the amount already paid.
Be prepared for a GST/HST post-assessment review (this is not an audit) to make sure amounts were reported correctly. It is, therefore, imperative that you keep all of your GST/HST records to be prepared.
As a general rule, the CRA requires that you keep receipts for at least six years, but in some circumstances, they may ask that you keep them longer.
Strong Foundation Leads to Long-Term Success
Starting your business can be overwhelming, costly, and stressful. By having the proper systems set up initially, you’ll set yourself up for long-term success.
Be mindful of the income you're bringing in to determine whether you're getting close to the thresholds required to remit GST/HST, and be sure to keep records of everything.
After setting up your account, ensure you're aware of your reporting period, applicable deadlines, and methods that you will charge, track, and save your GST/HST.
If you're unsure what to do in your situation, contact us today! We'll be happy to set up a GST/HST system for you so that you can focus on what matters most: growing your business!