Should You Be Charging GST/HST?

For any small business, knowing how and when to charge GST/HST can be tricky. If you are confused, you are not alone.

Have you recently launched your own business? Congratulations! According to Statistics Canada, you are now one of the 3 million and counting Canadians who have chosen to work for themselves.

If you’re just starting out, one of the most important decisions you’ll have to make is whether or not to register your company to collect the federal goods and services tax (GST) and, in some provinces, Ontario included, the harmonized federal-provincial tax (HST). Here are some of the most frequently asked GST/HST inquiries we hear on a regular basis and some useful answers.

What is GST?

The goods and services tax (GST) is a federal indirect sales tax that is levied on the purchase price of certain products and services. The GST is added to the product’s price by the business, and the buyer pays the sales price, which includes the GST. The GST share is collected and forwarded to the government by the business or seller.

What is HST?

Purchasers pay the HST at the point of sale (POS). By adding the HST rate to the cost of goods and services, the seller collects the tax, which is then sent to the Canada Revenue Agency (CRA), the federal government’s tax division. The CRA then distributes the provincial part of the HST to the governments of each province.

Prior to the implementation of the HST in 1997, Canadian sales taxes were split into two categories: federal sales tax (GST) and provincial sales tax (PST). Each province had its own set of tariffs, resulting in major variations in sales taxes across the country. The HST was designed to simplify the recording and collection of federal and provincial sales taxes across the country by consolidating them into a single, consistent charge. Advocates say that because it streamlines sales-tax-related bookkeeping, it should lower expenses for businesses (and, in turn, customers).

Unfortunately, in practice, the HST tends to make businesses’ lives more difficult. While the goal was to establish a national sales tax, the Canadian government made HST adoption optional, and some provinces chose not to participate, opting instead to preserve their own systems and rates.

As a result, businesses that operate across provincial lines or across the country—whether in physical locations or through e-commerce—must cope with variances in tax rates depending on whether their customers are from a HST province or a GST/PST jurisdiction.

Is it necessary for me to register for GST/HST?

Knowing just when you’ll need to charge these taxes can be tricky. If your new business is still a side hustle or you don’t make more than $30,000 per year in income, you’ll be classified as a “small supplier” and won’t be required to charge GST/HST to your customers. If your company grows, or you decide to go full-time with it, you’ll have to start charging these taxes.

If you sell digital items or services to Canadian clients, you also have to charge GST/HST if you meet the thresholds as well, and this is usually true even if, technically, your business is based outside Canada.

When should I begin collecting GST/HST?

If your firm earns more than $30,000 per year, you must begin collecting GST/HST from your customers. Here are four scenarios to consider:

Scenario 1: You immediately receive a GST/HST number.

If you know how much money you’re going to make, you might want to register for GST/HST as soon as you start your company. If you are on track to earn more than $30,000 in the near future, this is the right move for you. You’ll want to get any GST/HST refunds from the government on your business expenses, especially if you’re just starting out.

Scenario 2: You earn $30,000 over a 90-day period.

You may believe you’ll be a small supplier for a while, but your firm takes off in an unexpected way, and you earn more than $30,000 in a three-month period (also known as a quarter). Probably a great feeling, but for tax reasons, an immediately more complex situation.

In this example, the day you make the sale that pushes you over the $30,000 marks the end of your status as a small supplier. Even if you haven’t registered yet, you must charge GST/HST on the sale that pushes you over the $30,000 threshold, as well as all subsequent purchases. From the date of the sale, you’ll have 29 days to register with the government for a GST/HST number.

Scenario 3: You slowly but steadily earn more than $30,000.

You will legally remain a small supplier if your company has been gradually growing and bringing in revenues of more than $30,000 for four (or fewer) consecutive quarters. For those four calendar quarters, plus the following month, you’ll be regarded as a small provider. However, after that extra month, your first sale, and all subsequent sales, will have to include GST/HST. You’ll have 29 days to register from the first day of the second month.

Scenario 4: You earn $30,000 over the course of two quarters.

In this scenario, you are considered a small supplier, but your company generates over $30,000 in revenue over the course of two calendar quarters. After exceeding the $30,000 limit, you’ll be designated a small supplier for one month, after which you’ll have to start charging GST/HST on all sales. From the first day of the second month, you’ll have 29 days to register.

While we hope this gave you some insight into GST, HST, how to charge it, and when, it’s OK to still be very confused, as most small business owners are. What it’s not OK to be is anxious about it. At K.K. Chartered Accountant, we can work with you to determine if and when you’ll need to charge GST/HST, help you understand the numbers and timelines that might change your status and the process in general.

The earlier you start, the better, so why not contact us today to learn more about how we can help you with these issues as well as with small business accounting in general.