Should you be charging GST? (Part 2)

Last week we talked about when you need to start charging GST. This week we’ll finish off the topic by talking about some other aspects of this tax, such as products for which you don’t charge, what you need to put on your invoice, and remitting the GST you collected to the CRA.

Charging GST

The math for charging is pretty simple—5%, no matter where in Canada you live. And you charge it on just about anything. So if you sell products, you charge GST. If you sell services, you charge GST. However, there are a few exceptions. For the following, no GST is charged.

·         Basic groceries
·         Many farming/fishing products
·         Many medical services
·         Childcare
·         Many financial services (insurance, loans)
·         Some educational services (tutoring, tuition)
·         And a few others

And you also don’t charge any GST if the purchasing person/business isn’t in Canada.

Because some items are charged 0% GST, I think it’s a good idea to charge for the GST portion of the HST separately from the PST portion. You can’t just simply always charge the full HST, because sometimes the item will be exempt from GST, and sometimes it will be exempt from PST. The only way to easily keep it all straight is to have two separate lines on your invoices, each one showing the amount for each tax.

The invoice

The CRA has rules about what you must include on your invoice when you charge GST.

·         Your company name
·         Your CRA Business number
·         The date of the purchase/invoice
·         The total payable
·         A description of the item(s) purchased
·         The terms of payment
·         The amount of GST you are charging.

If your client signs a purchase contract, then you also have to include the following.

·         Your business address
·         The GST reporting period to which the invoice applies
·         The type of supply/service

Remitting the GST you collected to the CRA

The GST you collect from your customers has to be paid to the CRA. This is usually done annually. The process is simple—you complete a short form, and submit it to the CRA with your payment.

You can use a paper form, or you can complete the form online.

There are two main totals you include on this form.

·         The amount of GST you have collected from your customers
·         The amount of GST you have paid yourself, on purchases you made to run your business

Why the second point? Well, as you go about your daily business, you purchase things that you need to do your work. This may include supplies, gas, office furniture, computer software, etc. And for most of these you will have to pay GST. The CRA looks upon that GST as a business expense, and you are eligible to get a refund for it (but only if you are a registrant!). The CRA calls such a refund a GST input tax credit.

In order to claim input tax credits, you must be a registrant, and you must have receipts for your purchases. Those receipts must contain the details we mentioned earlier (your company name, date of invoice, etc.). In fact, it is precisely because some people will use these receipts to claim input tax credits that these details are required.

The amount you actually remit to the CRA when you file the form is determined by taking the total GST you charged your customers and subtracting the total GST you paid to run your business. For most self-employed, you have to pay within 3 months after the end of your fiscal year for which the GST was collected.

Should I register? The pros and cons

Even if you don’t have to become a registrant, you might want to anyway.  That’s because there is an advantage to doing so: you become eligible for the input tax credit.

But there are also some cons to becoming a registrant, most of it paperwork.

·         You have to manage the collection and remittance of the GST you collect.
·         You have to file your GST returns.
·         Your bookkeeping becomes a bit more complicated
·         You have to make sure you have the total GST amount you collected on hand when it comes time to pay.
·         You have to charge your customers GST, which means their total bill will be higher.

However, the amount you save in input tax credits may be worth that extra work!

Best Practices

As a summary of what we’ve learned in this and the last article, here are some of the GST best practices I recommend.

·         Take the time to learn about the GST so you are informed and ready.
·         Keep a running total of each quarter, as well as the total over the past 4 quarters, so you know exactly when you have gone over the $30,000 limit. If you figure out after the fact that you should have charged GST, you can’t go back to your customer and charge them more (they just won’t pay it!). In such a case, you will have to pay that GST to the CRA out of your own pocket.
·         Keep all your business receipts and make sure they have the required information on them so that you can claim the input tax credit.
·         Make sure your company invoices include all the necessary details.
·         Charge for the GST and the PST portions separately on your invoices, so it is clear to your customers how much of each they paid.

So that’s my overview of GST. It’s not complete—there are lots of rules and regulations—so it’s a big topic. But this article gives you a pretty good idea of the basics. And I’m not an expert, so don’t use this article as a rulebook—use it and last week’s article as a starting point for your own learning journey on the topic.

If you want more details you can view the CRA’s General Information for GST/HST Registrants.

Cheers,

Tim

Helping you engineer the business of you