How Does GST and HST Work? … And How To Stop Letting It Be A Pain In The A**!
You are thinking about starting a business or maybe you already have...
and you definitely have heard of HST.You sort of know what it is but you’re not exactly sure of all the rules. The guide below should hopefully help. If you have further questions, just comment below or email us!
Should you Register?
The Canada Revenue Agency (CRA) makes it mandatory for you to register for GST or HST if your revenues reach $30,000 in a single calendar quarter or four consecutive calendar quarters.
That being said, many business owners will voluntarily register for GST/HST prior to earning $30,000. They do this because they either didn’t know they had an option or because they would rather register early on, knowing they will hit the $30,000 threshold within the business year.
If you registered for GST or HST and you aren’t going to make $30,000 in a given year, you still have to charge GST/HST on all of your invoices because you are now considered a GST/HST Registrant. This isn’t always a bad thing - Keep reading to find out why.
How To Register?
The CRA provides you with various options in terms of registration (Internet, Phone, Mail). To review the options, just visit the registration page Here.
Quarterly or Annual Filing?
Upon registering, you will be asked whether you want to file your GST/HST return on a Quarterly (3 month) or Annual (12 month) basis.
The choice is ultimately yours but keep in mind that if you are to file quarterly, you will need to have your records in order every 3 months so that you know how much GST/HST you have collected and spent. On the flipside, this forces you to be on top of your records every 3 months, which is not such a bad thing. If you choose annual, you will have to go through this exercise only once a year, but keep in mind that over a 12 month period, you will have many more records to sift through and compile.
The GST/HST Process
The actual GST/HST process is quite simple. It’s the record-keeping aspect of it that business owners hate. In a nutshell, if you are selling goods and services that are not exempt from GST/HST, you would charge the respective GST/HST rate (for example, 13% in Ontario) on every invoice that you generate. If you are charging your customer $1,000 for a good or service, the invoice would look something like this:
Goods or Service: $1,000
HST (13%): $130
It’s that simple!
The $130 collected from your customer is not your money and effectively you are holding it for the CRA. This amount has to be remitted to the CRA either quarterly or annually (depending on the filing period you chose when you registered).
But, that’s not all - now comes some good news:
The GST or HST that you owe to the CRA (based on the example above) will be reduced by any GST or HST that you incur on any business expenses. For example, if you spent $100 on office supplies, you were most likely charged 13% (Ontario) on that purchase and your total purchase price would have been $113. The $13 you incurred on HST reduces your $130 liability to the CRA. For example, if these were the only transactions generated in your business during the year, you would owe the CRA $117 ($130 of HST collected from customers less the $13 in HST you spend on office supplies).
So, remember at the beginning of this article when I mentioned that it’s not all bad news if you registered for GST/HST prior to earning $30,000? Well, early on in your business, if you are spending more than you are earning (which is quite common), if the GST or HST you spend on goods/services is more than the GST or HST you collect from clients, you will be in a refund position and you will be able to recover the HST you incurred on getting your business up and running.
Yes, that’s right, the CRA will refund you the HST that you have spent on your business expenses.
The CRA makes it quite easy to file your GST/HST returns. You will receive a letter from the CRA with a 4 digit access code. You can then use this code to file your GST/HST returns online.
If you are ever chosen for a GST/HST review or audit, the CRA agents will ask to see your receipts and invoices. Be sure to hold onto all supporting documentation as it is evidence of your purchases and income.
And lastly, as you grow, and your invoices and receipts get out of hand, consider using online accounting software to manage all of your income, expenses, and receipts. There are some good ones out there that are cost effective and will make your life a whole lot easier. We specialize in this - so reach out to us if you need some guidance.