In this article, we explain what HST is, when you need to register, how to register, how often to file, and what steps to take if you missed reporting an input tax credit
Harmonized Sales Taxes – “HST”
The Canada Revenue Agency (CRA) applies HST, a value-added tax, to most goods and services in Canada. When you register for HST, you collect sales tax on behalf of the CRA. Any sales tax you collect is not your money. You’re simply collecting it from your customers to pass on the CRA. The money you collect legally belongs to the CRA, and using it for other purposes can cause serious problems when it’s time to pay your HST bill.
While the HST collected is owed to the government, you’re entitled to report the “input tax credits” you incur on business expenses as a deduction against the amount of HST you’ve collected.
For example, in Ontario, if you earn $1,000 of income, you would collect $1,130. You keep $1,000 (your income) and you owe $130 of HST to the government ($1,000 x 13%). If you incur an expense of $200 on which you paid HST at 13% (total $226), you can deduct $26 from the $130 collected. The net amount you would owe to the CRA would be $104 ($130 collected – $26 in input tax credits).
If your input tax credits exceed HST collected, the CRA will issue you a refund.
Voluntary vs. Mandatory Registration
You must register when your income exceeds $30,000 over four consecutive calendar quarters, or exceeds $30,000 in a single calendar quarter.
Some choose to register for HST as soon as they start their business even if they don’t meet the above thresholds because they wish to take advantage of input tax credits on start-up expenses.
Opening an HST Account
As a new business owner, you need to apply for a Business Number from the CRA using their Business Registration Online system, or by mail, fax, or telephone.
While registering, you will need to make decisions around filing frequency. We’ll look at your options in the following section.
Once you’re registered, the CRA will issue a confirmation that the registration is complete and you will use the Business Number for all future filings.
Filing Frequency
The CRA makes a calculation to determine how often you’re assigned to file an HST return. In some cases, you have an option to accelerate the filing frequency.
When you first start your business, you’ll likely fall into the category of less than $1,500,000 of taxable supply (income), so the default frequency will be annually. However, you can choose to report monthly or quarterly.
Some small business owners choose annually. It reduces compliance work, but can lead to trouble by spending money belonging to the CRA. If you choose annually, I recommend a separate HST bank account to set funds aside, protected from spending.
Annually may also not be the best option if you’re incurring significant start-up expenses and could accelerate the refund of input tax credits.
Most small business owners choose to file quarterly. Filing and payment is more frequent, so there’s less risk of spending the CRA’s money. A quarterly filing frequency also encourages you to stay on top of your bookkeeping.
If you reach taxable supply over $1,500,000, the CRA assigns a quarterly reporting period (annually is no longer an option). You can still choose to accelerate it to monthly, but again that comes with added compliance considerations.
Missed an Input Tax Credit?
You can report previously unclaimed input tax credits on a future HST return if missed in an earlier filing. You must claim input tax credits within four years after the reporting period when you could have first claimed them.
If you need help surrounding HST requirements and options, feel free to contact us at Compass CPA. We’re happy to help.
