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GST/HST 101

October 29, 2020

The basics

Soon after incorporating your company, you will need register for GST/HST.

Why?

Anyone in Canada that sells goods/services worth more than $30,000 is required to charge GST/HST to customers.

The GST/HST is a sales tax that you collect on behalf of the government from your customers.

How does it work?

The GST/HST you remit to the government is the net amount of: (1) the amount of GST/HST you collect, less (2) the amount of GST/HST you paid.

Tax rate

The sales tax rate you have to charge a customer depends on the good or service you are selling.

Certain goods and services are not subject to GST/HST if they are considered to be (i) zero-rated, or (ii) exempt supplies.

Zero-rated goods or services are not subject to GST/HST however, the merchant can claim Input Tax Credits (ITCs) to recover the GST/HST paid to make these goods available. Zero-rated goods or services include

  • Basic groceries
  • Prescription drugs
  • Most fishery products
  • Certain medical devices
  • Feminine hygiene products
  • Exports
  • Transportation services where the origin is outside Canada.

Exempt goods or services are not subject to GST/HST and the merchant cannot claim Input Tax Credits (ITCs) to recover the GST/HST paid to make these goods available. Exempt goods or services include:

  • Rentals for one month or more
  • Most medical and dental services provided by physicians and dentists
  • Childcare services for children under the age of 14
  • Legal aid services
  • Music lessons
  • Various educational services
  • Most services provided by financial institutions
  • Insurance
  • Property and services provided by charitable organizations,
  • Property and services provided by municipalities and public service bodies.

If the goods or services you sell don’t fall into the category of a “zero-rated” or “exempt”, and your company has revenues of more than $30,000/year then you will need to charge GST/HST.

Selling Outside Ontario

If you’re selling your product or service in Ontario, the sales tax to charge your customers is simple enough, good and services sold in Ontario are subject to 13% HST.

It gets a bit more complicated when you sell your products and services outside Ontario. If you’ve ever lived outside Ontario, you would know that the sales tax you pay when you buy something is based on your billing address. To understand this concept, let’s look at a quick example with a few scenarios:

Example: Assume that you purchase a taxable widget online

  • If you’re billing address is located in Alberta, you will be charged 5% GST (no provincial sales tax)
  • If you’re billing address is located in in British Columbia, you will be charged 5% GST + 7% PST (Provincial Sales Tax)
  • If you’re billing address is located in Quebec, you will be charged 5% GST + 9.975% QST (Quebec Sales Tax)

Note: all tax rates above are current as at October 2020

The bottom line is that if you’re a business selling to a customer in another province, in most cases you will charge and collect sales tax based on the province in which your customer is located.

How to calculate the GST/HST you owe to the CRA?

The standard method to calculate GST/HST owing to the CRA is as follows:

  • GST/HST you collected
  • GST/HST you paid on your expenses

= GST/HST owing or refundable

In order to work through the calculation, accurate record keeping of the GST/HST you’ve collected and paid is critical. Hence, it is highly recommended that you use a bookkeeping software to ensure that your record keeping for GST/HST is accurate.

The CRA allows smaller businesses to adopt other methods of calculating GST/HST owing such as the (i) quick method for businesses with revenues of less than $400,000 and (ii) an alternative calculation of Input Tax Credits (ITCs) using the simplified method for businesses with revenues of less than $1,000,000.

When is payment due?

Although you can file your GST/HST tax annually, the CRA won’t wait for your money. Business that have a GST/HST tax liability of more than $3,000/year are required to make quarterly GST/HST installment payments.

These quarterly installment payments are based on (i) ¼ of the next tax you paid in the previous year or (ii) ¼ your estimate of total net tax in the current year.

Let us help you. Ultimately, the decision of what sales tax to charge customers and how much to pay the CRA can be complex especially if you’re selling your goods and services to different provinces. We can help you make sense of your sales tax situation. Email us: info@verticalcpa.ca

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.

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