Canadian GST/HST for Small Business: What You Need to Know
As a small business in Canada, understanding the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) is key to being tax compliant. GST and HST are taxes that you collect for the government. It is important that you work with an experienced small business accountant to handle GST/HST because not being compliant can result in penalties or lost input tax credits. In this article, we will break down the basics of GST and HST, the rates, when and how to register, and what you need to know to be CRA compliant.
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What is GST/HST?
The Goods and Services Tax (GST) is a federal tax on most goods and services sold in Canada. GST is 5%. The Harmonized Sales Tax (HST) is the federal GST and the provincial sales tax combined in certain provinces. HST is in provinces that have opted to harmonize their provincial tax with the federal GST, which includes Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The HST rate varies by province from 13% to 15%.
In provinces where HST is not applied, businesses collect a separate provincial sales tax (PST) in addition to the GST. For example in British Columbia, there is a 7% PST and in Alberta, only the 5% GST with no provincial sales tax.
When Should a Small Business Register for GST/HST?
As a small business owner, you need to register for a GST/HST account with the CRA if your business has $30,000 or more in gross revenue in a calendar quarter or 4 consecutive quarters. This threshold applies to most businesses including sole proprietors, partnerships, corporations and nonprofits. Once you exceed this limit, you need to collect GST or HST on your sales and remit it to the government.
However, even if your business is under $30,000, you may want to register voluntarily. Voluntary registration allows you to claim input tax credits (ITCs), which are credits for the GST/HST you pay on business expenses like supplies, rent and equipment. Discuss with a certified small business accountant Toronto to see how these credits can offset the amount of tax you owe and reduce your overall tax burden.
How to Collect and Remit GST/HST
Once registered, your small business must charge GST or HST on the sale of most goods and services. You need to know the correct rate to charge depending on the province where the sale takes place. For example, if you’re selling to a customer in Ontario, you would charge 13% HST and to a customer in Alberta, you would charge 5% GST.
The GST/HST you collect from customers is not your revenue. You must remit it to the CRA on a regular basis, usually annually, quarterly or monthly depending on your business’s revenue and reporting period. The CRA will let you know your reporting schedule when you register for a GST/HST account.
Input Tax Credits (ITCs)
A big benefit of registering for GST/HST is the ability to claim input tax credits (ITCs). These credits allow you to recover the GST/HST you paid on business expenses. For example, if your small business spends $1,000 on office supplies and pays $50 in GST, you can deduct that $50 from the GST you collect from customers. This will reduce the total tax you owe to the government.
To claim ITCs, you need to keep detailed records of your purchases and have receipts or invoices showing the GST/HST paid. The CRA requires businesses to keep records for at least 6 years in case of an audit.
Penalties for Non-Compliance
Not registering for GST/HST when required, not charging the correct rate or not remitting collected taxes can result in serious penalties. The CRA can fine you, charge interest on outstanding amounts or take legal action if you repeatedly don’t comply. It’s important for small businesses to stay on top of their GST/HST obligations.
Conclusion
GST and HST is important for small businesses in Canada. By knowing when to register, how to collect and remit, and how to claim input tax credits, small business owners can stay compliant with CRA and optimize their tax. Proper management of GST/HST will help you avoid penalties and improve your bottom line which is crucial for long-term success.
