- What Are Sales Taxes?
- What Sales Taxes Currently Exist in Canada?
- Do all small businesses charge GST or HST to their customers?
- Must all businesses become registrants?
- But if all businesses charge tax to all other businesses, isn’t tax being charged over and over again on the same product or service?
- How to Track Sales Tax in QuickBooks Online
I’ve been around long enough to remember the introduction of the GST.
Yeah, that tax.
The sales tax everyone loves to hate. To some folk, especially those born around 1991 when the GST was first introduced, I might be considered an old guy.
Okay. Fair enough.
But I’m not old enough to forget the heated debate that the GST fostered.
There were two opposing camps, each one firm in its beliefs.
Proponents talked about fairness, while detractors railed about how unfair it all was.
And that debate lingers still.
There are some who say the feds should introduce a different tax; others tell us they should simply abolish the whole thing.
But the world of conjecture, based as it is on wishful thinking, is not why we’re here.
We’re here to deal with its polar opposite, the here and now of reality. And of course, the more important issue of compliance.
And so, we’re here, really, to walk you through the whole sales thing. Give you a primer of sorts.
So, if you’re ready, let’s get going
Sales taxes are a levy imposed by a governing body on qualifying products and services that are sold by a business to its customers.
It is the responsibility of the governing body to draft the rules and regulations as regarding sales taxes, and it is the responsibility of the vendor (or business owner) to accurately collect sales taxes from a customer, and to remit those taxes to the government agency.
The GST (Goods and Services Tax) is a nationwide tax administered by the Canada Revenue Agency (CRA).
The GST tax rate is 5% and it applies to a long list of products and services.
As previously mentioned, it is a vendor’s responsibility to charge GST on the sale of any and all taxable products and services.
In addition to the GST, many Canadian provinces piggyback their own sales tax to CRA’s GST.
Ontario and most of the Atlantic provinces, for example, tack on their own tax
(depending on the province, that’s anywhere from 8 to 10%) and they call that merged tax HST (Harmonized Sales Tax).
It’s important to note that some provinces (British Columbia, Manitoba and Saskatchewan for example)
have distinct and separate provincial taxes with their own individual rules and levies.
For the sake of brevity, the discussion of these provincial taxes is outside the scope of this article.
There are two general rules regarding the application of sales tax.
The first deals with the taxable status of what’s being sold.
For example, some products and services are always taxable.
Think of office supplies, or legal and accounting fees.
On the other hand, items such as groceries and bank fees have no tax imposed on them.
Who decides what’s taxable and what isn’t?
The tax agencies (CRA mostly) make that call.
You can refer to this website for more examples of taxable items
There’s a second rule, though, that quickly breaks down into a series of if-this-then-that sub-rules.
Let’s see if we can break those sub-rules down into a logical format.
First of all, only businesses that are Sales Tax registrants are allowed to charge sales tax.
What’s a registrant, you ask?
A registrant is a business that opens a GST account with CRA for the purpose of charging sales tax to its customers.
And if a business is a registrant, and if it is selling taxable supplies, then it has no choice but to charge sales tax to its customers.
CRA long ago established a hard number that determines who must be a registrant and who can choose to become one.
That number is $30,000.
What that means is, if your business sells less than $30,000 in any four consecutive quarters, then it can choose to become a registrant.
(assuming of course, it sells taxable supplies)
However, if your business has revenue of more than $30,000 then it must register for GST.
There are no ifs, no buts and no howevers.
- That $30K is a hard and fast cutoff.
- Over $30K and you must register.
- Under $30K and you can choose to register.
But if all businesses charge tax to all other businesses, isn’t tax being charged over and over again on the same product or service?
That’s a very good question, and it’s also a common misconception.
Yes, it’s true that every business charges tax to its customers, even to those customers that are also businesses who then charge tax on the sale of the same item to their customers.
But remember that GST (and HST) is a form of tax often called value-added tax.
What that means is there’s a refundable component to the tax.
Here’s an example that should makes things clear.
- Let’s say my business sells your business a road bike for $1,000. And let’s say I’m registered for HST and that I therefore charge you tax of $130.
- Now let’s say you’re also an HST registrant and you sell that same road bike to your customer for $1,500 plus tax of $195.
- In the above analysis it looks like we both charged tax on that same item, which in fact we have.
- However, given that you paid me tax on that road bike, and given that you charged tax when you resold it to your customer, you only have to remit to CRA the difference between those two amounts.
- The calculation is as follows: Subtract $130 (the amount of tax you paid on the purchase) from $195 (the amount of tax you charged on the sale) and remit the difference of $65 to CRA.
There’s a term, by the way, for the tax a business pays on its purchases. It’s called an input tax credit (or ITC for short).
Gee, that whole things sounds complicated. How do I keep track of all those amounts I pay, and I charge on all the items I buy and sell?
That’s another good question and the answer is: QuickBooks Online to rescue!
Here let’s break it down step by step (with screen shots too).
Step 1: Per the example below, use the Expense form to record the purchase of the road bike:
- In QuickBooks Online, enter the supplier’s name
- Record the date and supplier’s reference number
- To indicate that the amount you paid included HST, choose Tax Inclusive
- Choose the type of expense
- Enter the amount
- Choose the sales tax that your supplier charged you
- Click Save to record the transaction
Step 2: Now let’s use a QBO invoice to record the sale of that bike:
- Enter the customer name
- Enter the date
- Select Exclusive of tax (which means you’ll be adding sales taxes to your selling price)
- Choose the item that you’re selling
- Enter the price
- Choose the tax
- Click Save and, that’s it, you’re done.
QBO makes that a snap. Here are the steps:
- To view the amount of tax owed, click Taxes
- The Sales Tax window gives you an at-a-glance summary of the amount you owe
For a detailed view click the drop-down arrow and select View GST/HST details. This will open the GST/HST Detail Report (see further below) and you will see every transaction making up the tax amount that you owe
- To open the tax return, click Prepare Return (See Step 4 in the image above)
- From the Tax Return window that opens (see below), copy the amounts from relevant lines (usually 103, 106, 108 and 113) to the tax form that you will file with CRA. Once done, click Mark as Filed
From the tax window, scroll down to the Filed Returns section and find the period that you just filed. The orange alert logo makes that tax return very easy to find.
Click Record Payment (see the image above) and in the window that opens (below), enter:
- The bank account you used to make the payment
- The payment date
- The payment amount
- Click Save
Is that all there is to it?
Yes, that is in fact all there is to it. Just follow the steps as described above and you’ll be on top of the sales tax game in no time. Go ahead, give it a try, you sales tax ninja you!