Starting a new business in Canada can be exciting, but it can also be confusing, especially when it comes to taxes. One of the key tax topics that new business owners need to understand is the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST). These taxes can impact how you price your products or services, so it’s important to know what they are and how they work. In this guide, we’ll break down the essentials of GST and HST in simple terms.
What is GST?
The Goods and Services Tax (GST) is a value-added tax applied to most goods and services in Canada. It was introduced in 1991 and is set at a rate of 5%. This means that when customers buy something, they pay an additional 5% on the total price. For example, if someone buys a shirt for $20, they will pay $21 in total ($20 for the shirt plus $1 for GST).
What is HST?
The Harmonized Sales Tax (HST) combines the federal GST with provincial sales tax (PST) in certain provinces. The HST simplifies the tax system by merging these two taxes into a single tax. In provinces that use HST, the rate can vary. For example, in Ontario, the HST is 13% (5% GST + 8% provincial rate), while in Nova Scotia, it’s 15% (5% GST + 10% provincial rate).
Which Provinces use HST?
As a new business owner, it’s essential to know if your province uses HST. Here’s a list of provinces where HST is applied:
- New Brunswick
- Newfoundland and Labrador
- Nova Scotia
- Ontario
- Prince Edward Island
Do You Need to Register for GST/HST?
If you start a business in Canada, you will likely need to register for GST/HST. Here are some scenarios where registration is required:
- Your total taxable revenue exceeds $30,000 in a calendar quarter or over the last four consecutive quarters.
- You provide transport services, even if your revenue is below $30,000.
- You are a non-resident offering taxable supplies in Canada.
If your revenue is below the $30,000 threshold, you can choose to register voluntarily. Registering can allow you to claim Input Tax Credits (ITCs), which we will discuss next.
What are Input Tax Credits (ITCs)?
Input Tax Credits (ITCs) are credits you can claim for the GST/HST you pay on business expenses. If you are registered for GST/HST, you can reduce the amount you owe to the government by the amount of GST/HST you have paid on your business purchases. For example, if you buy supplies or pay for services that include GST/HST, you keep track of those taxes and claim them back when you file your return.
How to Collect GST/HST
As a business owner, you need to charge GST/HST on your goods or services if you are registered. Here’s how to do it:
- Add the correct GST or HST rate to your sales price.
- Clearly show the tax amount on invoices or receipts.
- Keep accurate records of all sales and the taxes collected.
How to File GST/HST Returns
Once registered, you must file GST/HST returns. These returns report how much tax you’ve collected and the ITCs you’re claiming. You’ll need to do this either quarterly or annually, depending on your business’s revenue. Here’s how to file:
- Gather all of your sales and expense records.
- Calculate total GST/HST collected.
- Calculate total ITCs you are eligible for.
- Fill out the appropriate form, either online or on paper.
- Submit your return and pay any tax owed.
Common Mistakes to Avoid
Starting something new often results in mistakes. Here are a few common pitfalls to avoid regarding GST/HST:
- Not keeping good records: Always keep track of every transaction for accurate reporting.
- Forgetting to charge GST/HST: It’s easy to forget to add taxes; make it a habit.
- Not filing on time: Ensure you know your deadlines to avoid late fees.
Conclusion
Understanding GST and HST is a crucial part of running a successful business in Canada. Knowing how to register, charge, and file these taxes can save you from legal trouble and help your business thrive. As you grow your business, stay informed, keep good records, and don’t hesitate to seek advice from a tax professional if you need help. Your success is worth it!
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