Canadian Sales Tax 101 for Small Business Owners | Calgary Bookkeeper
You know that old saying about how two things in life are certain: death and taxes? Whoever came up with that needs to know it ain't that simple when you’re a small business owner.
This blog is for the Canadian entrepreneur who isn’t sure when to start collecting sales tax, and how to get set up to receive it. Most importantly, what to do with it when it hits your bank account (sorry, that cash isn’t for you!)
Sales Tax in Canada: the basics.
Any business in Canada providing goods and services with revenue totaling more than $30,000 in the last four consecutive calendar quarters is required to register for GST or HST. This is because reaching the $30,000 threshold no longer qualifies you as a “small” supplier. If you haven’t hit the threshold but wish to register for GST you can do so voluntarily so you’re prepared as your business continues to grow.
Example of a business exceeding the $30,000 threshold:
You started your business on May 1, 2020 and made the following sales:
First quarter (April 1 - June 30, 2020)
$10,000 in sales
Second quarter (July 1 - Sept 30, 2020)
$5,000 in sales
Third quarter (Oct 1 - Dec 31, 2020)
$10,000 in sales
Fourth quarter (Jan 1 - March 31, 2021)
$10,000 in sales
Total sales in last 4 consecutive quarters
$35,000
In this example, you crossed the $30,000 threshold in four consecutive quarters and according to CRA, you stopped being a small supplier as of April 30, 2021 (the end of the month after the quarter you exceed the threshold). Your effective date of registration is no later than May 1, 2021. You have to start charging GST/HST to your customers as of your effective date. You have to register for GST/HST (via CRA’s Business Regisration Online) within 29 days of the effective date.
It’s very important to note that the threshold sales tracking did not reset to $0 on January 1st. This is a common mistake business owners make.As a GST registrant, you’re responsible for collecting GST from your customers throughout the year and then you’ll have to file a GST return and send the money you’ve collected to the CRA at the end of the reporting period.
Being a GST registrant does have a number of pros and cons (let’s be real, mostly cons). One of the primary benefits of being registered is the ability to recover Input Tax Credits (ITC). ITC’s are the GST/HST that you, as a business owner, pay on your expenses which essentially reduces the overall amount of money you need to send to the CRA. The cons are mainly tied to the increased paperwork and tracking involved with collecting GST on every sale, especially if you’re in a high-volume business. Pro tip: using a bookkeeping system like Quickbooks Online to track GST collected and paid is super useful in staying organized.
The magical GST formula
GST/HST collected from customers - GST/HST paid on purchases/expenses (ITCs) = Net GST/HST owing or refund.
Phew, say that 10x fast.
TLDR: if the net GST/HST number is positive, that means you collected more than you paid and you’ll have an amount owing to the CRA. If the net GST/HST number is negative, that means you paid more than you collected and should expect a refund from the CRA (yay!).
Place of supply rules
Here’s where things can get tricky. Regardless of which province your business is registered in, the end destination of your products or services ultimately determines the tax rate you have to charge.
For example, if you’re a bakery in Alberta and you make all of your baked goods in the province, deliveries to Alberta will be charged 5%. However, deliveries to Ontario will be charged 13% and deliveries to PEI will be charged 15%. This is simply due to each province having its own HST rates.
E-commerce business tip: pay close attention to where your customer is receiving/consuming the goods/services. Most e-commerce platforms will allow you to customize tax rates based on your customer’s location (i.e. make sure to collect your customer’s address) and with the rise in online sales, it can be assumed the CRA will be paying close attention.
Getting started with Canadian Sales Tax
Sales tax rules can be confusing so if you have more specific questions you’d like to answered, book a Clarity Call today and I’ll get you sorted!
