Goods & Services Tax 101
I commonly see entrepreneurs who are unsure about whether they should be charging GST on their goods and services. The rules for GST are different depending on your industry and the goods and services which you sell. Therefore, I wanted to write this blog post to outline the rules around GST for startups and small businesses located in Saskatchewan. I will follow-up next week with another blog post to outline the rules around PST.
Goods & Services Tax (GST)
Many retail goods in Canada are subject to GST (5%); however, some supplies, such as basic groceries, prescription drugs, most livestock and many agricultural and fishery products are zero-rated. This means that GST applies to them, but at a rate of 0%.
Other supplies, such as child care, health, dental and legal aid services, residential rentals and music lessons are GST exempt. The basic difference between zero-rated and exempt goods and services is that you can claim input tax credits (ITCs) for those that are zero-rated, while you cannot for those that are exempt.
What are GST Input Tax Credits (ITCs)?
A GST input tax credit describes GST which you have paid on your business expenses (i.e. meals, gas, office rent, supplies, etc.) and you are able to deduct your GST input tax credits from GST which you collect from your customers. If your GST input tax credits exceed your GST collected from your customers, then the CRA will send you a GST refund!
How do I collect GST from my customers?
Once you have determined that you need to collect GST on the products or services which you sell then you will need to register for a GST program account with the CRA. You can register for a GST program account by phone, online, by mail, or drop into your local CRA office. After you have registered for a GST program account then you will include your GST number on your receipts, invoices, and contracts with your customers. You have the option of charging GST on top of your selling price (taxes exclusive) or including GST in your selling price (taxes inclusive).
What is the Small Supplier Exemption?
If your gross sales are under $30,000 in the last four consecutive calendar quarters then you can qualify for the small supplier exemption. This means that you do not have to register for a GST program account and start collecting GST from your customers, until your gross sales exceed the $30,000 limit in the last four consecutive calendar quarters.
Early GST Registration Tip:
You can voluntarily register for a GST program account even you qualify for the small supplier exemption, in order to claim the GST paid on your business expenses as an input tax credit (ITC).
This can be a smart idea for startups who have more expenses during the initial stage of their business and could result in them receiving GST refunds from the CRA.
How do I report and pay GST to the CRA?
I recommend to clients that they should use a cloud-based accounting system (such as QuickBooks Online) to track the GST which they collect from their customers and GST which they pay on business expenses.
This allows an entrepreneur to quickly run their GST reports on a monthly, quarterly, or annual basis and they can see the net amount of GST which they owe to the CRA.
Once you have generated your GST report from your accounting system, then you have a few options on how to file the GST Return and pay the GST to the CRA:
1) File and Pay your GST through your Online Banking Website
This is a convenient option for many entrepreneurs as they are comfortable with using online banking for your business.
2) File your GST Return through GST Netfile and Pay your GST through CRA My Payment
The CRA will send you a letter with a GST Netfile Access Code which you can use to log into GST Netfile and electronically submit your GST Return. You can then pay your GST through CRA My Payment.
The topic of sales taxes can be complex and entrepreneurs should seek the professional advice of an Accountant to analyze the facts of their situation and assist them in making the right decision. By taking the time upfront to properly understand which sales taxes apply to the goods and services which they sell, it can save an entrepreneur a lot of money and headaches further down the road. If you have any questions or comments on this blog post, I can be reached via email at email@example.com or via phone at (306) 713-2477.
Jordan N. Brown, CPA, CA
President, Lift Accounting
(Disclaimer: This blog post is for informational purposes only and is not, nor can it be interpreted or relied on as professional advice.)