What the HST?
What Ontario businesses should know about HST
HST stands for Harmonized Sales Tax, and it is the tax charged in Ontario for goods and services. There are specific parameters around which businesses need to register for an HST number, and those can be found here. The general rule is that unless your business makes less than $30,000 in a calendar year, you need to charge HST. Even if your business makes less than this threshold and technically doesn’t have to charge HST, I believe it is best practice to do so.
Some business’ won’t buy from you unless you are HST registered
Depending on what type of business you have, this may or may not affect you. If you want to sell your goods or services to another business, beware that some have a requirement that all of their suppliers/vendors have HST numbers on their invoices. This is a standard control that many organizations have when selecting vendors to do business with. Not having an HST number can immediately preclude you from a competition between suppliers in these cases.
You can’t claim HST input credits unless you are HST registered
This is the single most important reason for registering for HST.
Let me explain this further.
When you register for HST, you start to charge HST (13% as of this writing) on all of the goods and services you sell. The HST you collect is not revenue for your business, it is revenue for the CRA, and must be remitted to them on a quarterly or annual basis. Your accounting software will automatically put the HST collected into a liability account called ‘HST Payable’ on your balance sheet which you will refer to when it is time to do your filing.
Example - you are selling something for $5,000. The total invoice amount will be $5,650 - with $5,000 going to a revenue/sales account and $650 going to HST Payable.
What a lot of new business owners aren’t aware of, is that the HST paid on purchases your business makes (which are allowable deductions - see my blog post on allowable write-offs) will be reimbursed to them.
That’s right - the HST you pay on business expenses gets reimbursed to you. If you are coding the entire amount spent to an expense line, stop it! Only the base amount of the purchase is a true expense to your business.
Let’s use an example of a purchase you make for a new computer for $1,000. With HST, the total cost is $1,130. The base amount of $1,000 goes to a capital asset account, while the $130 you paid in HST goes to an asset account named something like “HST Receivable”.
To keep things really simple, let’s assume that the $5k sale and $1k purchase were the only transactions which occurred in the quarter for which you are filing HST. The net result of your filing is going to be that you owe $520 ($650 in collected HST less $130 in paid HST).
In months where you spend more money than you make, your HST position will be that of a refund rather than an amount owing.
Important things to remember when filing your HST
One of the fields you will need to fill out when filing your HST return for the quarter or for the year is the total sales volume your business had for that time period. This acts as a reasonability test for the amount of HST collected, as well as paid out (to a lesser extent).
A simple calculation would be to multiply your total sales by 13% to get to the amount of HST you collected in the quarter. If these amounts don’t match - it could be because some of your sales were exempt. Before filing, you want to do a sanity check on this number to ensure that everything looks ok here.
If you are claiming zero sales but you are claiming an HST refund which is larger than usual for your company, you can expect a CRA representative to give you a call for your explanation on this. Your business has a reasonable expectation of making a profit so many quarters in a row with little to no sales might also raise some questions.
The government filing agencies talk to each other
So you’d better have your story straight!
The spot where you claim your total sales for the quarter on your HST return may seem like it is just a check against the HST collected, but this information will also be checked against the sales you claim at the end of the year on your taxes. If the sales numbers you provided quarterly while doing your HST returns do not tally up to the total sales you claim on your income taxes at the end of the year, this will also raise some flags and some questions will be asked.
An example of how this can cause an issue without you realizing it is if you make a sale in one quarter, pay the appropriate HST, and then credit out the sale in a subsequent quarter, without properly allocating the HST on the refund. This will lower your sales numbers on your year-end taxes, but the sales in your HST filing will be overstated.
A good practice here is to ensure that any credited sales get deducted from sales in your next quarters’ filing.
Simple mistakes like this can cause unwanted attention from the CRA.