What Is a GST/HST Return?
Running a small business is full of complexities that can take some time to get used to.
It can be quite daunting to try and wrap your head around all of the financial information that comes with running a business. That confusion can multiply tenfold when it comes to figuring out what taxes you should and shouldn’t be paying.
One of the taxes that Canadian business owners have to pay is GST/HST.
But what exactly is GST/HST? We’ll take a closer look at the definition, the difference between the two, and what you need to know in order to correctly fill out your tax forms.
Here’s What We’ll Cover:
What Is GST?
The Federal Goods and Services Tax, or GST, is a 5% tax on most Canadian goods and services.
It began on January 1st, 1991, when it replaced the hidden 13.5% Manufacturer’s Sales Tax. It’s aim was to improve and streamline the tax system, especially for Canada’s export businesses.
However, not all provinces signed on to merge their existing provincial sales tax systems with the GST. This then forced business owners to file both GST and Provincial Sales Tax returns, or PST.
All of the provinces that did combine their sales taxes with the GST charge what is known as Harmonized Sales Tax, or HST.
How Do You Calculate GST?
Due to different provinces and territories charging different percentages, it can get quite confusing.
To begin with, we’ll look at the 4 provinces that have no provincial sales taxes. Those are:
- The Northwest Territories
In these areas, GST is charged by calculating 5% of the item’s sale price and adding it onto the final bill.
So for example, let’s say that you are running a boutique clothing store and sell a skirt for $39.99. An invoice for the skirt in any of these areas would simply be:
GST @ 5%: $2.00
Total Price: $41.99
But for provinces that charge GST and PST separately, you’ll get a slightly different story.
In these provinces, you have to charge both GST and PST. PST is different in each area that uses it. Those provinces are:
- British Columbia: 7%
- Saskatchewan: 6%
- Manitoba: 8% - This is known as the Retail Sales Tax, or RST.
- Quebec: 9.975% - This is known as the Quebec Sales Tax, or QST.
A business will have to calculate both the GST and PST, but the GST will be calculated on the price of the goods or service before PST has been applied.
So for example, if you were selling your skirt in Manitoba, you would have an invoice that looks like this:
GST @ 5%: $2.00
PST @ 8%: $3.20
Total Price: $45.19
What Is HST?
Harmonized sales tax, or HST, is a consumption tax that is paid by local consumers and businesses in a number of provinces within Canada.
It works by combining the nation’s federal goods and services tax and the other various provincial sales taxes.
At the current time of writing, there are five Canadian provinces that use the HST. These provinces are:
- Newfoundland & Labrador: Joined in 1997
- New Brunswick: Joined in 1997
- Nova Scotia: Joined in 1997
- Ontario: Joined in 2010
- Prince Edward Island: Joined in 2010
Though some disagree with the idea of a harmonized tax system, it can also be argued that harmonizing taxes improve the competitiveness of Canadian businesses. This is through simplifying their administrative costs which in turn should lead to lower prices for consumers.
The HST is paid by consumers when they come to the point of sale. The seller will collect the tax proceeds by adding the current HST rate to the cost of the goods or services. They would then pass on the collected tax to the tax division of the federal government.
This division is known as the Canada Revenue Agency, or the CRA. The CRA then later allocates the provincial portion of the collected tax to the respective province’s form of government.
How Do You Calculate HST?
In the five provinces that charge HST, you would charge the appropriate percentage of HST on goods and services.
Combining these with GST, the current rates are:
- Newfoundland & Labrador: 15%
- New Brunswick: 15%
- Nova Scotia: 15%
- Ontario: 13%
- Prince Edward Island: 15%
To carry on with our boutique clothing store analogy where you sell a skirt for $39.99.
If you were selling it in Newfoundland, you would calculate the price as:
HST @ 15%: $6.00
Total Price: $45.99
Whereas if you were selling the same skirt in Ontario, then the price would be:
HST @ 13%: $5.20
Total Price: $45.19
What Is a GST/HST Return?
Once a year, any business that pays GST/HST taxes will have to file a return.
This is done by businesses using their Business Numbers, or their GST/HST numbers, to collect, report and remit their due taxes to the CRA.
You will have been assigned your Business Number when you registered for a GST/HST number.
Once you’ve registered, the CRA will mail you a personalized return form. This paperwork will consist of two parts:
- A “working copy” of your GST/HST return. This allows you to work through all of the required calculations.
- The actual tax return form. This includes all of the information you will need to submit your return to the CRA.
On the working copy, you will need to enter the following information:
- Total sales and other revenue
- Total tax you’ve collected
- Total tax you’ve paid
- Any other credits or debits
Once this has been completed, you’ll be able to calculate if you are either owed a refund, or if you need to pay the CRA.
The CRA allows you a number of ways to file your tax return remotely. These ways are:
- Through your bank or credit union
- Through your computer via GST/HST NETFILE
- By phone via TELEFILE
- Via third-party software that the CRA has certified for filing GST/HST returns.
How Do I Keep up-to-Date With My Taxes?
There are a number of ways that small businesses can keep a track of their GST/HST taxes. One such way is through using accounting software such as FreshBooks.
Their accounting solution is a great way to keep all of your financial information in one, integrated place. This allows you to confidently file your return each year, safe in the knowledge that everything is correct and in the right place.
It’s vital that you keep track of your GST/HST taxes. According to the CRA, the penalty for not filing a report during the necessary reporting period is $250. There are also penalty fees for filing your return incorrectly.
These penalties can vary and scale depending on the specifics of the particular tax situation.
Are you looking for more business advice on everything from starting a new business to new business practices?
Then check out the FreshBooks Resource Hub.