Starting Your Business Series - Part 4: When Should You Register For A GST and/or HST Account?
If you are starting a business in Canada, this question has likely run through your mind: Should I start charging GST or HST right off the bat, or should I wait until I am generating a certain level of revenue first? As with a lot of tax-related topics, there is conflicting advice out there.
This blog discusses GST and HST registrations, what it means for your business, and how to decide when to register.
A short note from this point forward we are going to use the language GST/HST instead of just GST or HST. Why? Well the federal sales tax system encompasses both GST and HST and depending on which province you reside in, one will feel familiar and one will feel foreign. The official correct CRA wording for this system is to use both GST/HST. Since our reach is Canada-wide we will use the language GST/HST for this purpose of this blog post.
Are you supplying taxable goods and/or services?
Before we get into this question, we need to translate a bit of CRA- speak. When the CRA refers to “supply,” they mean goods or services. So by asking if your supply is taxable, they are asking whether your goods/services are taxable.
So the first step to answering whether or not you need to/ should register for GST/HST is to figure out whether the goods and/or services that you are offering are taxable, zero-rated or exempt. It’s worth checking because you might be surprised which goods and services are exempt from GST/HST or zero-rated. For example, most health or dental services are exempt from charging tax, and the same goes for music lessons. You can find a comprehensive list from the CRA of all three of these categories HERE.
|
Note: If you figured out that all of your supplies are exempt from charging GST/HST, you likely don’t need to worry about registering, and your sales tax adventure ends here. If you supply any amount of zero-rated or taxable supplies, read on. |
Are you a small supplier?
Now that you know what type of supply you are making, the next question is to determine if you are a small supplier. The CRA defines a small supplier as a business with world-wide taxable income of less than $30,000 in the preceding four calendar quarters or fiscal quarters if you are incorporated. The $30,000 threshold is income generated from taxable and zero-rated supplies.
It’s important to note, that if you are operating a sole proprietorship, meaning your business is not incorporated, that the $30,000 threshold includes all income that is being generated from business activities. So for example, if you are a coach but also sell candles on the side, you have to combine the two to determine whether you are a small supplier. International sales count, too. If you are incorporated and have associated corporations or other subsidiaries you need to look at all revenue as well. If this is your scenario, we recommend you seek personalized guideance.
If your total revenue in the last four quarters of operation is less than $30,000 you are not obligated to collect and charge GST/HST (there are a few exceptions - ride share/taxi operators being one of them). Anything over that amount puts you over the small supplier threshold, and it’s time to register for GST/HST.
Are there any possible benefits of registering early?
If your supplies are taxable or zero-rated and you are a small supplier, you can voluntarily register for a GST/HST. In doing so, you are saying that you wish to charge and remit GST/HST on all your taxable supplies even before you reach the $30,000 threshold. Once you are registered, all sales you make from that point forward are subject to GST/HST.
Read on to find out why this can be beneficial for your business.
Benefits & Considerations of GST/HST Registration:
➡ Reduced Start-up costs:
If you have voluntarily registered for GST/HST at the onset of your entrepreneurial journey, you may be able to claim a refund on the GST/HST you paid on the start-up costs you incurred. This is referred to as an “input tax credit” or ITC by the CRA. This can be helpful in offsetting a portion of your start-up costs while your revenue levels are still in the early stage of growth, hence helping your overall cashflow position in those early days.
➡B2B
If you are a business-to-business entrepreneur, a lot of your clients will likely be registered for GST/HST. This means that they are able to claim the GST/HST you charge them back as an ITC resulting in no additional cost to them after having paid you GST/HST. This means they will not be price sensitive to GST/HST added to invoices and because of this it would not be a drawback of voluntary registration.
On the contrary, when you provide price sensitive services to individuals who are not registered for GST/HST (an example of this would be housekeeping services provided to home owners) the addition of GST/HST on your services increases your total price and you may find makes your prices less competitive. In that case not pursuing voluntary registration would be something to consider.
➡ Decreased worry and freed up mental space:
By registering voluntarily, you don’t have to worry about small supplier thresholds and constantly look to your books to see if you have exceeded the $30,000 limit. You just start charging GST/HST upon your registration date and that’s that. In a sense, it helps to take the pressure off of you and leaves you with less room for worry that you’re going to make a mistake.
Filing Frequency and GST/HST
You can register for GST/HST by simply calling the CRA at 1-800-959-5525. Be sure to have your business number handy when you call to help with the validation process. Once you have registered, you will need to select a filing frequency. The two most common are annual filing and quarterly filing. Annual filing will be the default for businesses generating less than $1,500,000 yearly. However, many smaller companies choose to elect to the quarterly filing.
There are three benefits to filing more frequently:
- It helps with keeping good financial routines and habits as it, in a sense, forces you to sit down and bring your books up to date every quarter rather than scrambling at the end of the year. If you are prone to procrastination this can be a good plan to keep you on track.
- If you are experiencing a period of high costs and low revenue, filing quarterly can be a great strategy to get money back into your business sooner by claiming GST/HST ITC’s paid for on expenses which will possibly ease some cash flow strain.
- It helps you avoid being caught off guard by a large GST/HST bill at year end. If you are in the habit of regularly keeping track of, filing, and setting aside funds into a separate account for the GST/HST that you owe, you are much less likely to reach the end of the year with an “uh oh” feeling when you are faced with a GST/HST bill you hadn’t planned on.
- Added note: If you register for annual filing and you end up with an annualized amount owing of more than $3,000 in a year, and you expect to owe more than $3,000 the year after then you will have to pay quarterly instalments. If you don’t calculate accurately or pay on time you may be subject to interest and penalties from the CRA.
|
Note: A little-known fact is that you can use the CRA agents as a resource. Many people just avoid dealing with the CRA as much as possible, but the agents on the other end are human and there to help and educate you. So don’t be shy about getting some free tax advice and guidance from them once you have them on the phone. |
Common HST mistakes to avoid
- Charging GST/HST and collecting GST/HST before you have properly registered with the CRA
- Exceeding the $30,000 small supplier threshold and forgetting to register or not registering in the allocated time
- Spending the GST/HST you have collected instead of setting it aside into a separate account for the CRA.
- Not charging the right tax rates based on the category of supply you are providing, and the location of your sales.
The Bottom Line
We have given you lots to consider, and you may just decide that you wish to register for GST/HST voluntarily. This is quite common as it has it's benefits such as it helps you get your financial house in order, makes you look like a pro, and saves you mental space from worrying about whether or when you should.
There are instances, however, where it might make more sense to hold off. If you are just testing out a new business idea and want to see how things go, it may make sense to wait for registration until you have a clear picture of where you want to take your business.
Sometimes we have an idea that just never finds a market, and sometimes we realize that we don’t enjoy running that business as much as we thought. In those cases, the less tax admin on your shoulders, the better. For those who are clear on your path and committed to growing a business from zero, it's a good idea to get that GST/HST registration done early and then hit the ground running!
Interested in learning more from us? Follow along with us through our social media accounts (find us on Instagram @growcpa) and sign up for our newsletter for more educational and fun financial content.
Wishing you success in your business,
- Martina + Ashli
Date published: October 14, 2022
Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.
