Suppose you are a new self-employed Canadian or are considering starting your own company or supplementing your income with a side gig. In that case, you might be curious about the tax consequences.
Apart from the additional details, you’ll need to provide on your tax return; you will also need to open a GST/HST account to become a GST/HST Registrant. This means you’ll have to pay Canada sales tax on a quarterly or annual basis and remit it to the Canada Revenue Agency. Sales tax is an unavoidable part of running a small business.
Get the basics down so you can concentrate on offering outstanding service to your customers without having to think about unforeseen tax bills later. We layout the basics to help you understand what taxes you’ll need to owe and how to remit them province by province.
GST is a federal tax that can exist in one of two forms, depending on the province where your company is registered:
The HST is the act of combining a province’s sales tax with the GST. The HST model is used in Ontario, Nova Scotia, New Brunswick, PEI, and Newfoundland and Labrador. You only need to collect one form of tax if you do business in these provinces. The participating provinces in Canada who are subject to the HST are the following:
PST stands for province-specific tax, which is collected separately from GST. PST is the name of the provincial tax in British Columbia and Saskatchewan; Retail Sales Tax (RST) is the name of the provincial tax in Manitoba, and Quebec Sales Tax is the name of the provincial tax in Quebec (QST). QST registrants may generally claim an input tax credit (“ITC”) on QST incurred in the course of commercial activity since the QST is a recoverable tax, similar to the GST. In other words, for most registered companies, QST is not a net cost. British Columbia, Manitoba, and Saskatchewan have levied a PST that is not refundable. PST is a consumption tax that is intended to be charged by the product or service’s end-user. Some exemptions may be applicable, such as the sale for the resale exemption. The change will impact sales into the following provinces at the following tax rates:
Canada GST of 5% will also be charged in each of these provinces.
When taxable goods or services are purchased in Canada from a supplier, and the sale is made into one of the four relevant provinces, the buyer is usually expected to pay these provincial transactional taxes. The supplier bills and collects the customer’s taxes, then remit the collected taxes to the government agency liable for the tax.
On taxable goods or services acquired in Canada from a supplier, the customer is usually expected to pay GST/HST. The supplier invoices the customer and collects the GST/HST, after which the supplier remits the collected GST/HST to the government.
The Goods and Services Tax (GST) is a 5% tax levied on most taxable goods and services in all provinces and territories throughout Canada, except where an arrangement exists to collect GST and Provincial Sales Taxes together (PST). The GST and PST are replaced by a Harmonized Sales Tax in this situation (HST). These are provinces and territories that are classified as “participating.” Since there are no provincial sales taxes in Alberta, a $1.00 bag of pretzels would cost you $1.05 at the counter. For example, if you live in Ontario, where the HST is currently 13 percent, the $1.00 bag of pretzels will cost $1.13.
The GST/HST does not apply to all goods and services, and not all companies are expected to charge, collect, and remit the tax. The type of supply you sell and the amount of sales you generate will decide whether GST/HST is a factor in your business.
Goods and services are classified into three categories by the Canada Revenue Agency: Taxable GST/HST- GST/HST is collected, remitted, and charged. You may also claim credits (known as Input Tax Credits or ITCs) for GST/HST paid on the goods and services as a registrant. Zero-rated GST/HST– Although GST/HST is not charged, collected, or remitted, registrants may claim ITCs for GST/HST paid to manufacture products and services. Fresh vegetables are zero-rated, so if your company sells cucumbers at a farmer’s market, no GST/HST is paid or obtained from your customers. Exempt GST/HST- GST/HST is not charged or collected, and you cannot demand ITCs for any GST/HST paid as the registrant. Music lessons and childcare fees are examples of excluded services.
The requirement to register with the GST/HST doesn’t kick in until you’re no longer a “small supplier,” with a few exceptions (such as taxi drivers and ride-share partners). This is often called the $30,000 rule. When your sales (before expenses) exceed either of the following, you’re no longer a small supplier:
Example: – Even if your income was less than $30K per calendar year, if your company pulled in more than $30K between July 1 and June 30 the following year, you’ve crossed the threshold as a small supplier. You are no longer a small supplier if the company receives $30,001 in a single quarter or $30,001 in the previous four quarters combined. This means you must immediately register for GST/HST and begin charging, collecting, and remitting the tax. At this point, the first sale you make should include GST/HST based on the supply location.
Even if you are not required, voluntarily registering for the GST/HST makes sense in certain circumstances. One explanation is to get a head start on preserving proper records. Another explanation would be if you knew your company would easily reach the Small Supplier threshold ($30,000 in revenue, not profit). If you manufacture or sell zero-rated supplies, voluntary GST/HST registration is a good idea. ITCs can be claimed even if you are not required to charge GST/HST on your sales. Another good reason to register voluntarily is to spend a lot of money to get your business started because the ITCs on the first few returns would include a refund of GST/HST paid. That extra cash will help the company grow faster. Knowing the details can help avoid penalties and interest if you are required to register for GST/HST for your self-employment activities.
Once you’ve decided whether you’re eligible to apply for the GST/HST, you’ll need to do so with the Canada Revenue Agency. The procedure is easy, and it can be completed entirely online via the Business Registration Online (BRO) program.
When you start collecting GST/HST, keeping good records becomes even more critical. Too often, new registrants fail to separate those funds and bear the consequences as a result of their poor record-keeping. Staying organized with your finances is simple with QuickBooks Self-Employed. This mobile app lets you stay in control of your business finances and plan for tax time while on the go by allowing you to monitor expenses, mileage, invoices, and HST all in one place. QuickBooks Self-Employed users save an average of $4,340 in taxes per year.
You must notify your customers that GST/HST is either included in pricing or will be introduced separately after you have registered for GST/HST and begun collecting and charging GST/HST. These details, which must include the GST/HST rate being charged and your registration number, must be clearly shown on your invoice, contract or posted on a sign easily visible to customers. You are also required to complete and submit a GST/HST return. You may be required to file a return monthly, quarterly, or once a year, depending on your business. Any GST/HST amounts that you have earned, regardless of the time period, are funds that you have taken from someone in “trust for the Crown” – which must be remitted to the CRA with the return.
Before starting your GST/HST return, have all your numbers ready. You’ll need the total amount obtained during the reporting period if you’re using the quick method. You’ll need both the amounts collected from customers and the amounts paid on expenditures if you’re using the traditional way.