Goods and Service Tax (GST) & Bookkeeping

GST, bookkeeping, audit

This Federal tax was first introduced in Canada in 1991. It is a sales tax that is charged on sales between individuals, businesses and organizations. It was the first tax of its type introduced at the federal level. The purchaser or consumer must pay a tax on the purchase price and submit it to the seller.  The seller is then responsible to remit it to the federal government, Canada Revenue Agency (CRA). GST is not only a sales tax but is also what is called a consumption tax.  This means the amount of GST the seller needs to remit is based on the amount of GST collected on sales minus the amount of GST paid on its purchases. Every business in Canada must keep track of not only the GST they collect from the consumer but also the GST they pay on their own consumption. GST is considered a value-added tax which means it is applied as value is added to a good or service. The federal government had the long-term vision of the GST being harmonized with provincial sales tax, HST. This has only occurred in the Atlantic provinces. Quebec has its own tax called Quebec Sales Tax (QST) and the Atlantic provinces have Harmonized tax sales tax (HST) in which both federal GST and provincial sales tax are combined in one tax. 


In Saskatchewan, British Columbia, Alberta and Manitoba the taxes are still separate, GST plus each province has its own provincial sales tax. The bulk of this article is discussing GST in provinces that are not harmonized.

GST is charged on most services and goods. There are a few exceptions that the government chose to not tax in the interest of lower income earners. These exceptions are either tax-free or tax exempt. Tax-free goods include prescription drugs, groceries, and medical devices. Often tax-exempted items are chosen to keep prices more affordable. Residential rent, daycare, health and dental care, and educational services are examples of exempt items.

You can call CRA business line to register 1-800-959-5525 or register through your online Service Canada Account. A GST is the same 9-digit number as your business number, but the letters change.

123456789BN0001 Business number
12456789RT0001 GST Number

You can opt to file remittances monthly, quarterly on the calendar or the fiscal calendar (if Incorporated) or annual on the calendar if sole prop, or on the fiscal year end if incorporated.

I suggest quarterly for most clients as it is easier to maintain cash flow. Monthly, is often too difficult for busy business owners to comply with.

CRA has the right to assess a late filing penalty on any overdue returns and yes, they take full advantage of that. They also will charge interest on any unpaid GST.

You can file and pay your GST returns through most online banking. You can still pay at most banks, but you will need a payment stub. If paying online, pay attention to the posting dates. Sometimes it may take a few days for the payment to be forwarded to CRA and you will receive a late payment charge. You can also file and pay you GST through your online Business Account. You can file and not pay it through here or do both. The old-fashioned paper filing by mail is still accepted but you must have it to your nearest tax centre by the due date.

 

Bookkeeping for GST 

First and foremost is keep all sale invoices and purchase receipts. This is a requirement under the Income Tax Act. No, your bank or credit card statement will not satisfy a CRA Auditor. The responsibility falls upon the taxpayer to provide proof of income and expenses.

CRA requires every business owner to register for GST once their annual sales have reached over $30,000.00 unless you are a supplier of 100% GST tax-free or exempt services or products. Anyone can voluntarily register before this benchmark in sales have been met. However, the rule is specific to $30.000.00. Every business must pay attention to their sales and register as soon as the 30K has been reached even if it is mid-year.  Once registered for GST, CRA states that invoices must have your GST number present and the GST portion must be broken out on the invoice. Do not include GST collected in your sales totals. If you have sales that are exempt or tax-free, they should be tracked separately from the sales that are GST applicable.

GST inputs, (the GST paid on purchases) are also to be tracked separately from the expenses. An Input is not considered an expense, it is used to reduce the GST submitted from the GST collected on sales. If an item cost $100, the $100 is expensed and the $5.00 is tracked in a GST Input liability account. To be clear, if you are collecting GST on your sales, you can not use the GST paid on purchases to increase your expenses for tax purposes. In the above case, the $5 paid would be used to reduce the amount of GST that needs to be remitted from the GST collected on sales. If you sold $100, the GST collected would be $5. The collected $5 minus the paid $5 in inputs reduces the amount owing to zero.

GST inputs do not have to be claimed in the remittance period that is was paid. A business can opt to save the inputs throughout the year and claim all in one quarter if they chose. CRA allows you to carry forward GST Inputs up to four years. Note that in an audit this gets difficult to prove that you have not claimed the inputs prior.

In order to claim inputs, a business must have GST taxable sales at some point in the year. In the case where a business only has expenses and no sales, the GST inputs will not be allowed. 

Inputs cannot be claimed unless GST has been registered. For a business with large start-up costs, it is to their advantage to register for GST despite not having sales yet. For example, if the first quarter the business is only in the process of setting up, then opens the doors in the second quarter, the GST Input from the first quarter can be used in the second quarter. Often new companies lose out on GST refunds as they have not registered for GST soon enough.

CRA states that every business is also responsible to ensure that the inputs claimed are legitimate. You are not to claim inputs unless they are clearly broken out on the invoice and the seller must have a registered GST number on the invoice. Inputs that are not correctly verified will be denied in an Audit.

Meal expenses require special handling for the GST inputs. We are only allowed to claim 50% of meals for business expenses on our taxes. Therefore, we are only allowed to claim 50% of the GST inputs. Many business owners incorrectly record 100% of the GST paid.

GST on the sale of assets is often overlooked. If you are registered for GST, you must charge it on all items you sell including assets. Yes, that desk you sold for $100 cash, is subject to GST. This includes vehicles.

 

GST Audit Triggers

  1. Sales and your GST collected do not match on the GST Returns.
  2. Sales reported on the tax return do match sales reported on the GST remittances.
  3. Sales are over 30K and you are not registered for GST.
  4. You usually are paying GST and then are in a refund position for one return.
  5. Repeated GST refunds.
  6. Consistent late filed GST Remittances

 

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