In this article we review what HST is, when you have to register, how to register, how often to file, and what to do if you missed reporting an input tax credit.
Harmonized Sales Taxes – “HST”
HST is a value added tax that applies to the sale of most goods and services. When registered for HST, you collect sales taxes on behalf of the Canada Revenue Agency. The language “on behalf of” is an important distinction. The sales taxes you collect is not your money. You are simply a conduit between the Canada Revenue Agency and the end consumer of the goods and services being provided. The monies you collect are legally owed to the CRA, and if you spend money owing to CRA for HST, you could find yourself in a lot of difficulty when it comes time to pay the HST debt.
While the HST collected is owed to the government, as an HST-registrant, you are entitled to report the “input tax credits” you incur on business expenses as a deduction against the amount of HST you have collected.
For example, 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 (HST collected – $1,000 x 13%). If you incur an expense of $200 upon which you paid HST (total cash outlay of $226), you can deduct $26 ($200 x 13%) against the $130 collected. The net amount you would owe to the Canada Revenue Agency upon filing the HST return would be $104 ($130 collected less $26 in input tax credits). If your input tax credits exceed HST collected, the Canada Revenue Agency will issue you a refund.
Voluntary Registration vs. Mandatory Registration
Real estate activities are considered to be taxable supply for HST purposes. You will have to mandatorily register when you exceed over $30,000 of income over four consecutive calendar quarters, or you exceed the $30,000 threshold in a single calendar quarter.
Someone may wish to consider registering for HST from the outset even if they do not meet the above thresholds because the individual knows they will reach those thresholds and wishes to be able to claim “input tax credits” on start-up expenses incurred.
Opening an HST Account
As a newly self-employed individual, you would not have a business number issued to you yet. You will need to apply for a Business Number from the Canada Revenue Agency and can do so online using the CRA’s “Business Registration Online” system, or by mail, fax, or telephone.
While registering, you will need to make some decisions surrounding filing frequency. We will look at your options in the following section.
Once you are successfully registered, the Canada Revenue Agency will issue a confirmation that the registration is complete and you will use the “Business Number” for all future filings. You will also need to provide this business number to your brokerage for their recordkeeping purposes. You should also provide this Business Number to your bookkeeper and/or Accountant.
Filing Frequency
The Canada Revenue Agency uses an annual taxable supply calculation to determine how often you are assigned to file an HST return. In some cases, you then have an option to accelerate the filing frequency if you so choose.
When you are first starting out, you will very likely fall into the category of less than $1,500,000 of taxable supply (income). The default assignment will be annually. However, you can choose to report monthly or quarterly.
Some small business owners do choose annually. While it reduces compliance work (there’s only one filing per year), in my experience this is the easiest method to find yourself in future “hot water” by inadvertently spending the money that should have been earmarked as HST money. If you choose annually, it is strongly recommended that you set up a separate HST bank account to ensure you have funds set aside that you do not spend.
Annually may also not be the best option where you are incurring a lot of start-up expenses and could otherwise accelerate the refund of input tax Credits.
I most frequently see small business owners choose to file quarterly. This is a good trade-off (compliance filings four times per year and the funds are being remitted more frequently so there is less risk of inadvertently spending monies owing to the CRA).
A quarterly filing frequency also encourages you to stay on top of your bookkeeping more regularly as you need to report your income, HST collected, and HST input tax credits. While income and HST collected is fairly straightforward (from the reports received from your brokerage), you will only know your input tax credits if you have tracked your expenses and captured the amount of input tax credits incurred (i.e., HST you paid).
If you reach taxable supply of over $1,500,000, you are assigned 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.
If you’re over $6,000,000 in annual taxable supply, the assigned reporting period is monthly with no other option. This conceptually makes sense – big dollars involved and CRA wants to ensure it’s being collected from a tax base perspective.
Missed an input tax credit?
Don’t fret. If you missed reporting an input tax credit in a previous HST filing, you can report the previously unclaimed input tax credits on a future HST return. Input tax credits must be claimed within four years after the end of the reporting period in which the input tax credit could have first been claimed (assuming your annual income is less than $6 million).
