For most small business owners, it’s safe to say that collecting GST/HST on behalf of the government is nothing short of a nuisance. And yet, it is a must. Unless your business falls into the category of businesses that makes less than $30,000 in annual revenue and also doesn’t choose to voluntarily register to collect GST/HST, then collecting and remitting these taxes are a necessary evil.
Collecting GST/HST falls into a category of taxes known as trust money, or trust accounting. Essentially, this means that as a business owner, you are collecting and holding that money ‘in trust’ for the government. The tax law surrounding this is complex and it’s easy to make costly mistakes. What’s more, CRA auditors are more than eager to find those mistakes for you.
Here are the most common GST/HST errors we see small businesses make.
Failing to register with the CRA. This is a big one. New business owners, in particular, make this mistake. If your business hits the $30,000 mark within the previous four quarters, you must register by the end of the month following the crossing of that threshold. If your business hits that threshold in a single quarter, then you are required to register by the time you send your next invoice. If you don’t, your business is still required to pay GST/HST to CRA, even if you failed to charge it.
Incorrectly claiming Input Tax Credits (ITCs). The only upside to collecting and remitting GST/HST is that you can claim credits on the GST/HST on business purchases — as long as you do so properly. For a business receipt to be considered appropriate it must be itemized and it must clearly show the vendor’s GST/HST number. Credit card statements or the credit card slips are not acceptable forms of documentation. Any claims using these items in lieu of proper receipts (or made without receipts) will be withdrawn in an audit. And remember, the ITCs your business claims link back to the company that charged the GST/HST in the first place, and vice versa — the GST/HST your business pays may be an ITC for another business. Mistakes could have a domino effect.
Mistaking inter-province tax rules. In Ontario, the provincial and federal tax is harmonized (hence HST). It is not in all provinces. And, the tax rate in each province varies. Businesses selling products or services in another province must charge the sales tax applicable to that province, not to the province of operation. Charge the wrong amount, and your business could end up having to dip into revenues to pay CRA the difference.
Failing to file on time. File your HST returns late and you immediately raise a red flag with CRA. Even if your business doesn’t have the cash flow to make the HST payment, file your return on time. However, it is preferable to pay on time as well. With trust accounting, your business is essentially holding money that has never belonged to the business so there’s no reason to be unable to make a payment.
If you charge it, pay it
If your business does receive notice of a GST/HST audit, don’t panic; it’s a fairly common request for businesses of all sizes. The key is to always keep organized records, have proper receipts to back up every claim and to call your accountant immediately.
The most important thing to remember is: don’t mess around when it comes to GST/HST. If you charge it, pay it.