If you’re self-employed or own a small business in Canada, you’ve probably heard that you’re supposed to register for the GST/HST when you hit 30K in sales.
But what if you don’t?
First, the most basic of primers: Back in 1991, a value added tax was added to the Excise Tax Act, called the Goods and Services Tax “GST”, which replaced a previous hidden 13.5% manufacturers’ sales tax “MST”. Some provinces, including Ontario, have combined their provincial sales tax with the federal GST as the Harmonized Sales Tax “HST”, and its oversight is looked after by the Canada Revenue Agency “CRA”. Originally, the GST was 7%, but the rate has since been lowered twice and now sits at 5%.
Ontario’s HST totals 13% and registration is legally required for all businesses, unless you’re a “small supplier” with less than $30,000 in taxable sales per year. The downside to being a small supplier is that they are unable to claim reimbursement for Input Tax Credits “ITCs” on HST that they pay on their materials and inputs. Generally, if you have eligible expenses intended only for business, you can claim those as ITCs for the full amount of the HST paid. Many businesses operate at an overall loss for the while, so they neglect to register. If only they knew that in many cases they’re leaving money on the table in the form of ITCs that would otherwise be refundable.
Don’t be alarmed if you are still in the testing stage and not sure about the viability of your business idea or if you’ve just started a small side hustle in your spare time and don’t expect it to scale up to 30K, at least for the foreseeable future. But, if and when you decide to make a real go of it, remember that the main benefit of registering for sales tax is that it allows your growing business to claim back 100% of GST/HST of your business related paid expenses. This is very helpful when a new business has high upfront costs with rent, office expenses, computers and other equipment.
When your small business does sell more than $30,000, the Excise Tax Act considers the business to be a “registrant” and requires you to collect and pay HST on its sales. You must properly register the business for GST/HST and receive a business number from the CRA. If you don’t register, your business won’t be allowed to claim back ITCs on expenses, and will acquire large tax penalties related to not filing those GST/HST returns when required by tax law.
So, when/if the CRA undertakes a tax audit of your business and finds out you have enough sales, but haven’t been collecting sales tax, it will give your company a business number and issue HST assessments and apply tax penalties. They will also deny all available ITCs, including start-up costs, legal and accounting fees, rent, office expenses, phone and utilities, and even car expenses. If you want to claim them, you’ll have to finally file those HST returns or a notice of objection to dispute the HST tax amounts assessed. The penalties for not filing and the denial of ITCs can make for huge debts which the CRA will be coming to collect.
Retroactive Registration
Just as when you file several years worth of personal tax returns, you must file a Voluntary Disclosure Application if you haven’t registered your GST/HST on a timely basis. The Voluntary Disclosure Program was set up by the CRA for people who are behind in reporting their taxes. If you voluntarily register, you may apply for relief from penalties and interest for disclosures related to GST/HST. The application may involve undisclosed tax liabilities, improperly claimed input tax credits, refunds or rebates, unpaid tax or net tax from a previous reporting period, and any other amount not previously reported to the CRA.
With your voluntary disclosure application, provide proof of your business activities including bank statements, invoices, receipts, contracts, business papers, and any credit card transactions that show you’ve paid for expenses, and proof that those purchases and expenses are reasonable and eligible to claim as an ITC. Usually the CRA is willing to assign a retroactive GST/HST registration number to the date of the first customer invoice that was created. Penalties and interest can only be forgiven for a ten calendar year period, and the latest you can send a GST/HST return to claim your ITC is no later than four years after the due date for the return in which you could have first claimed the ITC. ITCs older than four years old are not available to be paid back upon GST/HST registration, although they can be used as a credit to offset any GST/HST payable in order to lower the ultimate amount you owe for any prior reporting period.
With the Voluntary Disclosure Program, GST/HST stream applications are processed under three tracks, and the determination of which category an application will be processed under will be made by the VDP on a case-by-case basis.
- Wash Transactions Program
Wash transactions are those where a supplier has not charged and collected GST/HST from a business that is entitled to a full input tax credit. This program provides full relief to registrants who want to correct unintentional errors.
- General Program
This program provides relief to business owners who want to correct unintentional errors. If your application is accepted, you will not be charged penalties and you may be granted partial interest relief of 50% of the applicable interest rate that applies for the years disclosed.
- Limited Program
This program limits the level of relief to business owners who intentionally avoided their tax obligations. No interest relief is provided. You will avoid criminal prosecution, with respect to the information being disclosed, and no gross negligence penalty will be applied even where you would otherwise be liable. The following factors are considered when determining if an application is accepted into the Limited Program:
- GST/HST was charged or collected but not remitted
- efforts were made to avoid detection, including “under-the-table” cash deals
- disclosure is made after the CRA contacted your business
- there was deliberate or careless conduct which falls below the appropriate standard of care.
Once you cross that $30,000 threshold in any 12-month period (not a calendar year), you must get a GST/HST number and start charging your customers or clients. If you’ve passed that milestone and didn’t register when you should have, you can still do it now. UpSide Accounting can help you get on track with a GST/HST registration and filing returns so you can pay the least amount of interest, penalties and net tax.