Starting a business involves a lot of elements. You almost have to become a jack of all trades, learning to manage your operations, accounting, and taxes that apply to your business. When you start a business or provide services as an independent contractor, one of the primary objectives will be to earn revenue. But unlike a salaried employee, you get paid by invoicing your clients. Any discrepancy in the invoice can lead to late or incorrect payments.
A proper invoice must be comprehensive, easy to understand and comply with the Canada Revenue Agency (CRA) requirements. For most people, a CRA-compliant invoice will charge Harmonized Sales Tax or Goods and Services Tax (HST/GST) on applicable goods and services. The invoice will also be necessary when it comes time to file your taxes.
This week’s blog will discuss when you should charge GHT/HST and how to prepare a compliant invoice.
Why should you register for GST/HST?
The CRA levies a 5% GST, a federal tax, on the selling price of taxable goods and services. Participating provinces, including Ontario, then harmonize their provincial sales tax with the GST and charge HST. Non-participating provinces charge GST and PST separately.
To collect and remit HST, you must register your business to obtain an HST number. You can register online, on the phone, by mail, or in person. When you register, the CRA assigns you a unique business number that identifies your business. You must use this number in your invoices, payroll deductions, accounting system, and tax-related correspondence with the CRA. Once you have collected HST, you then remit this amount to the CRA by filing returns quarterly or annually.
When should you charge GST/HST?
If you are charging for goods or services in Ontario, you should charge the HST on the total billed amount unless your business is exempt. There are only two exceptions:
- No GST/HST applies to zero-rated or exempt goods and services. Goods, such as exports, medical devices, essential groceries, and services such as music lessons or child care fall under this segment.
- No GST/HST applies if your business is classified as a small supplier. According to the CRA, a small supplier is the one whose annual taxable revenue before expenses amounts to $30,000 or less. There are exceptions to this exemption, such as taxi and limousine operators and non-residents.
Once your annual gross revenue exceeds $30,000, you must register for an HST number within 29 days.
How to Prepare a Compliant Invoice
Now that you know when to charge sales tax, you must ensure your invoice is compliant. This invoice will come in handy when your clients want to claim a refund for the HST they’ve paid on each invoice.
Common elements that every HST-compliant invoice should have include:
- The seller/service provider’s name and contact details (physical address, email id, phone number)
- Buyer’s name and contact details (physical address, email id, phone number)
- Invoice date
- The nine-digit HST registration number ending in RT or RT001
- Details of the goods or services sold (number of units/hours, per unit/hour price, description of goods or services)
- An indication of which items GST/HST is levied
- Total amount payable
- Total GST/HST amount charged along with the tax rate, except for zero-rated goods or services
- Terms of payment (example; payment due in 30 days)
- Terms of return/refund, if applicable
It is easy to calculate HST rates if the client and provider are in the same province, but the rate can change when you supply goods or services in a different province or country.
- If you are selling goods and services to another province, you charge the GST/HST rate of the destination province. For instance, your business is in Ontario (which has an HST of 13%), and you are supplying goods to Alberta (which only has 5% GST). Therefore, you will charge 5% GST instead of Ontario’s 13% HST.
- If you sell goods and services outside of Canada, you need not charge GST/HST. However, you will want to check the export/excise taxes on specific products and services to ensure compliance.
Making Life Simple with Technology
Preparing an invoice can be complex, depending on the situation. However, many templates are available for a standard invoice involving HST or GST. In addition, technology has made life easier. For example, many current versions of accounting software make it simple to prepare invoices on the spot. The software prepares a GST/HST-compliant invoice after adjusting the tax rates of various provinces and different currency transactions. You can also use software to track your taxes, revenue, and inventory without hassle.
Contact McCay Duff LLP in Ottawa for Advice on Invoicing and HST Collection as an Independent Contractor or Small Business Owner
The accounting professionals at McCay Duff LLP can guide you through every aspect of your business, from preparing invoices to filing HST or GST returns, so that you can focus on your business.
We offer a team of skilled and exceptionally experienced Chartered Professional Accountants at McCay Duff LLP. They provide our small and large business clients with a full range of services, including business consulting and financing. No matter your company’s specific needs, we can help. Let us keep an eye on the details so you can focus on the big picture. To schedule a consultation with one of our exceptionally knowledgeable accounting professionals, don’t hesitate to get in touch with us online or call us at 613-236-2367 or toll-free at 1-800-267-6551.