Running your own business can be one of the most challenging tasks you’ll ever undertake — and one of the most rewarding.
Rewarding for obvious reasons: You provide a good or service that people buy, and sometimes you might even craft a friendship. Tough because of the stringent regulations imposed by the Canada Revenue Agency (CRA) and individual provincial governments, which may or may not apply to your company. Keeping track of the regulations that do — and don’t — apply to your business is difficult, but it’s not out of reach. For example, what is HST?
Up until 1991, the manufacturer’s sales tax stayed hidden in the price of all goods and services purchases; individual business owners didn’t have to track its collection. This 13.5 percent sales tax instead became the goods and services tax (GST) — a five percent sales tax meant to present a more open taxation system and improve competition amongst Canadian businesses.
What is the Canadian HST?
HST, or harmonized sales tax, is a sales tax applied in certain provinces. It’s a combination, or “harmonization,” of the GST and the province’s provincial sales tax (PST). The HST application occurs in provinces that opted to combine their PST with the federal GST when it went into effect. The federal government desired an HST across the country, but some provinces didn’t agree. Therefore some charge GST and PST separately, while others charge the HST. So, how do you know which taxation applies to your business?
Where Is HST Charged in Canada?
HST applies in five of Canada’s provinces:
- Prince Edward Island—15%
- Newfoundland/Labrador—15%
- New Brunswick—15%
- Ontario—13%
- Nova Scotia—15%
If you’re a business owner in one of these provinces, you collect the HST, remit it to the CRA, and then the CRA returns the appropriate portion to each province for their PST.
The exact amount of HST differs depending on which of the five provinces your business operates. Each province established its own percentage for PST collection and harmonized it with the GST. If your province doesn’t participate in HST collection, the CRA collects only the GST that concerns your applicable sales and purchases.
How Does HST Collection Apply to Your Business?
If your business is in or does business in one of the five provinces that charge HST, you are responsible for charging, collecting, and remitting HST to the CRA. There are certain exceptions, such as items or services that are GST/HST exempt or zero-rated, or your business has small-supplier status. In these instances, you don’t need to charge or remit HST. To figure how much GST/HST you should collect, this rate calculator is a fantastic tool.
What is small-supplier status?
If your small business generates less than $30,000 in revenue per year, you’re not required to register with the CRA to charge or remit GST or HST. Even though it’s not a requirement, registering for GST/HST collection voluntarily has several benefits, such as the ability to claim input tax credits (ITCs) on the GST/HST you’ve paid while conducting business. If you’re registered, and you qualify for ITCs, you’ll receive a credit on the current year’s tax return based on your return from the previous year. If you’re a small supplier, you do not need to register with the CRA, but before you decide not to, weigh the pros and cons of your unique situation.
How to calculate your revenue
When figuring your revenue, you must include your sales worldwide, even those considered zero-rated, as well as the sales of any companies or other agents who sell on your behalf. While the calculation is an annual one, it’s not performed according to the calendar year.
At each calendar quarter’s end (the last day of March, June, September, and December), you’ll total your revenue for each of the past four quarters. Once your total revenue (minus expenses) crosses the $30,000 threshold, you’ll need to register with the CRA and begin GST/HST collection. The GST/HST rate you’ll collect depends on your business and the provinces where your business functions. When charging GST/HST on purchases outside of your province, you’ll charge the purchaser’s province’s rate. Here you’ll find a complete schedule of rates for Canadian GST/HST.
What If You Sell Products or Services Outside of Your Province?
What if your business operates in Prince Edward Island and sells a product online to a customer in Ontario? The HST you collect on sales within Prince Edward Island is 15 percent (five percent GST and 10 percent PST), but your sale to the customer in Ontario gets charged 13 percent (five percent GST and eight percent PST). Sales from your business to a territory such as Manitoba are different still, as Manitoba has a retail sales tax (RST). Manitoba’s RST is eight percent, and it’s applied to the selling price of the item or service before applying the federal GST. Keeping track of your sales and where they occur is crucial when filing your return with the CRA.
As of December 2020, there are new tax law updates pertaining to businesses who host an online marketplace or sell accommodations online.
What about sales that occur outside of Canada?
If your e-commerce website allows you to sell your products or services worldwide, you collect no GST, HST, or PST on sales outside of Canada. The practice also applies to other Canadian businesses, as long as the shipping address (for products) or destination (for services) is not within Canada.
Maintaining Accurate Accounting Records and Associated Documents
As soon as you register for GST/HST collection, you must document all GST/HST you collect, as well as any GST/HST your business pays on supplies and services. If the CRA considers your business a small supplier, like a food store in a small community, GST/HST registration isn’t mandatory, but it’s still a good idea to register as early as possible. You never know when you may get an order that pushes you over the threshold of $30,000. If you’re not paying attention to your records, you could end up owing GST/HST for sales made months ago on which you didn’t collect taxes.
To optimally set up your business for ITCs, you should keep stringent accounting records and document everything, especially your receipts. Many accounting software programs allow you to upload scanned photos of your receipts and save them — no more keeping track of paper receipts. If any documents need physical copies, keep those copies safely in your business or home.
All invoices should reflect your suppliers’ name, the date they billed you, and anything additional that justifies your ITC claims at the end of the year. A yearly inventory count is also important. When you’re able to match your beginning and ending inventory counts with your revenue figures, you’re less likely to face a CRA audit, though it can happen at any time. Your accounting software maintains GST, PST, and HST amounts you’ve charged, paid, or need to pay, so in the event you’re audited, your business’ activities are much more transparent.
Having a certified accountant on your payroll can help you weigh the pros and cons of voluntary registration, and help you set up your business’ accounting system and establish proper procedures.
There are many ins and outs to running your own business. HST is just one of the systems that seem complicated at first but quickly become second nature. The guidelines above should help you get a quick grasp of HST to follow the regulations for your particular business area. Once you’ve got the basics down, you can get back to focusing on other (more important) aspects of the business.