Sales Taxes like GST/HST can be confusing for even the most experienced business owners. Tracking & reporting can be confusing, resulting in costly penalties and fees. These are some of the most common GST/HST mistakes that many entrepreneurs make, and how to avoid them!
Quick note: All tax situations are unique. The details below are presented as general information only and tax laws are subject to change; consult a tax pro for your unique situation!
GST/HST MISTAKE #1: NOT CHARGING GST/HST
This can be a confusing area, especially for contractors who work across various industries.
So: when do you need to charge GST/HST?
Any individual, (self-employed OR registered as a business), must charge GST (HST in some provinces) on eligible goods and services once their gross (before expenses) income reaches $30,000 in a twelve-month period (4 consecutive quarters of 3-month periods).
You can also register voluntarily at any point, regardless of income.
Once you are registered for GST/HST, you MUST charge GST/HST on ALL your self-employed eligible activities (services and/or products).
There are some industries & products that are exempt from GST/HST; if you’re unsure it’s a good idea to chat with an accounting specialist about your situation.
Common exempt activities include:
- Daycare/Child Care Services (under 14)
- Music Lessons
- Basic groceries
- Most health, dental & medical services
QUESTIONS TO ASK
So, the questions to ask yourself (or an accountant!) to avoid this trap:
- Am I required to register for GST? (are my products/services taxable or am I exempt?)
- When do I need to register and begin charging GST/HST? (Remember- $30,000 gross over 4 consecutive quarters is the common starting point)
- What system will I set up to track this? Invoices? Spreadsheets? (I recommend a cloud-based accounting tool like Quickbooks or Freshbooks; their self-employed apps are awesome!)
To begin collecting GST/HST, you will need to register with Canada Revenue Agency and set up a GST/HST Tax Account– you can do so online and it’s quick! CRA will then provide you with a schedule of when and how you need to report your GST/HST information- this can be monthly, quarterly, annually, or on a special schedule set by CRA.
TAX TIP: Your GST/HST information return is filed SEPARATELY from your personal tax return (since sales tax and income tax are different types of taxes) so be careful as the dates may be different from personal income tax time.
GST/HST MISTAKE #2. NOT CLAIMING CREDITS
This is one of the most common GST/HST mistakes that new business owners make, and fixing it can save you MONEY!
You may be able to claim the GST/HST you pay on business expenses as a special credit, called the “Input Tax Credit (ITC)”. This credit is applied when you submit your GST/HST return to the Canada Revenue Agency, and offsets the amount you charge to your clients/customers.
The general formula:
GST/HST charged to customers – eligible Income Tax Credits = $ you need to send to the government.
Example for a self-employed contractor with a HST number in Ontario:
1) You earn $50,000 (gross income, before taxes) in 2020.
=$6500 in HST collected (13% charged on $50,000)
Total billed to clients = $56,500, including HST
2) When you add up your expense receipts, you calculate that you spent $800 in HST when paying for eligible expenses for your business
=$800 HST paid on purchases (called ITC: Input Tax Credits)
3) When you report your GST/HST to CRA:
$6500 (HST on income) MINUS $800 (HST paid on expenses)
= $5700 you need to send to the government ($6500- $800)
So make sure you are TRACKING the tax on those expenses with a good reporting system to save you $ and time!
GST/HST MISTAKE #3. SPENDING IT
Spoiler alert: GST/HST is not yours to keep! This is probably the biggest mistake I see clients making. You are collecting it on behalf of the Government, and guess what- they want it 🙂
You may want to set aside the GST/HST portion of every income payment you receive; most banks offer a low or no-cost savings account. This is a smart business practice to begin early to avoid the common “See it, spend it” habit. #Guilty🤦♀️
You can also make installment payments at any point before your return is due and send any GST/HST you collect to the CRA through the CRA website, bank teller, by mail, and even online banking! Then, you balance it all out when you file your final GST/HST return for that period (confirming the GST/HST collected on sales, minus your eligible Income Tax Credits).
So there you have it: 3 Brutal GST/HST mistakes that can derail your business! To recap:
1- Make sure you are charging GST/HST when you need to
2- Track your business expenses to be able to claim credits (online accounting systems are great for this)
3- GST/HST collected is NOT your income; save it or pay it to the CRA, but don’t spend it!
Take the time NOW to lay the foundation for better business habits, conquer these GST/HST mistakes, and get yourself set up for real success!
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