Do you regularly sell goods and services? If yes, do you collect the proper amount of sales tax from customers? If you are unsure about the answer to the second question, it may be time to reach out to our team to ensure you are compliant with Canada Revenue Agency (CRA) rules. Differentiating between sales tax types, knowing which goods taxable, which are exempt, and when to file a sales tax return are all essential components of sales tax cycle of charging, collecting, calculating, filing, and remitting this information to the CRA.
What is Sales Tax?
You may be asking yourself, what is sales tax? Sales tax is a special tax that is paid when a good or service is purchased. Canada has two different sales taxes: the goods and service tax (GST) and the provincial sales tax (PST). The GST tax is a 5% federal tax that is imposed on most goods and services, while the provincial sales tax is a tax that varies by province.
For easier reporting, the Government of Canada has created a harmonized sales tax (HST) category that combines the GST and PST in some provinces which are called participating and non-participating where GST and PST are still split. The harmonized sales tax is 15% in all provinces except Ontario where it is 13%. Please note that provinces or territories that use non-harmonized PST have specific reporting and remittance requirements that may affect your business.
What Goods are Included and Excluded?
Most basic goods and services are subject to some type of sales tax. Goods such as lodging, food at a restaurant, utilities and other common goods have sales tax calculated. However, there are some goods that are excluded. Basic groceries, prescription drugs, medical devices, health services, rent, transportation, and childcare expenses are excluded according to the CRA. Understanding which sales are taxable and exempt is critical to calculating and remitting the correct net sales tax amounts to the CRA.
As a GST/HST registrant you can claim input tax credits (ITCs) against your HST collected when calculating your net sales tax owing. Claiming all your ITCs correctly can drastically reduce your HST tax remittance so it’s important you know what qualifies as an ITC. Generally, all GST or HST paid can be claimed as an ITC so make sure your records are organized just in case the CRA has any questions about your GST/HST return.
When Do I Have to Report Sales Tax?
All businesses must register for a GST/HST number if your worldwide taxable sales are over $30,000 or you the have option to enroll even if your worldwide taxable sales are less than $30,000.
As a GST/HST registrant you must file returns even if there are no business transactions and no net tax to remit. Remittance can be done electronically, at a local financial institution or by mail. All payments over $50,000 are required to be paid electronically or to a local financial institution and you may have to pay installments throughout the year if your net amount owing for your last annual filing was over $3,000.
The GST or HST is reported on the Form GST34-2 with a due date determined based on your reporting period. If the CRA does not receive your GST34-2 return timely, they can impose stiff fines and penalties and even withhold your personal income tax refund.
How Does Sales Tax Affect my Business?
The GST or HST require additional procedures to be in place throughout your business operations. First, you will need to have proper software or equipment that collects sales ,tax when a sale is made. The sales tax is added on to the purchase price of goods that your customers pay. If you neglect to have the proper sales tax withheld at the point of sale, you could end up being liable for the customer’s portion.
Additionally, the CRA is very strict with the filing date and amounts remitted, making it critical that you don’t make any mistakes. The CRA will be quick to point out any mistakes and charge you fines and penalties, which could be costly, especially for a small business.
Talk to the Experts: MG & Co.
Because of the strict rules the CRA has, it is a best practice to consult with a qualified accountant, like our team. Not only can our trusted experts advise you on effective sales tax collection procedures, but they can also help you stay on track with timely filings. The last thing you want to do is have the CRA withhold your tax refunds because of missed sales tax filings and remittances. Skip the hassle and build a mutually beneficial relationship with our team.