August 8, 2024

What Small Business Owners and Freelancers Should Know About GST/HST Filing?

Written by McCay Duff LLP
An image of a calculator with the TAX+ button

When you operate in an individual capacity as a freelancer, proprietor, or small business owner, you are offering some form of goods or services in return for compensation. You may be required to charge and collect Goods and Service Tax (GST) from consumers on behalf of the Canadian government and remit it to the Canada Revenue Agency (CRA). Failure to do so could attract penalties. Hence, it is imperative for freelancers and small business owners to know their GST obligations and set up the GST accounting and filing process. This article will explain how GST/HST works and how to file GST/HST returns.

How Does GST/HST Work?

GST is a 5% value-added tax levied by the Canadian government on most goods and services sold within Canada. Some provinces charge 13-15% Harmonized Sales Tax (HST), including GST and provincial sales tax.

If you run a restaurant in Ontario, you will charge a customer $11.30 for a good that costs $10 after adding GST. But if you sell the same burger in New Brunswick, you will charge $11.50 after HST. You must show the breakup of the total bill amount and the GST on the invoice. As the restaurant owner, you collect GST/HST from the consumer and remit it to the CRA on or before the GST deadline.

You can also deduct the GST/HST you paid for goods and services used to run the restaurant. This amount is called input tax credit (ITC).

Net tax amount = GST collected – ITC (GST paid to run the business)

The CRA determines the filing frequency and pays GST (monthly, quarterly, or annually) depending on your revenue. However, not all businesses are required to charge GST/HST.

Does Your Small Business Have to Collect GST/HST?

The CRA determines GST eligibility based on the type of supply and total sales. It categorizes all goods and services into three segments.

  • Taxable: The registrant charges, collects and remits GST/HST and claims ITC for the GST/HST paid for business expenses.  
  • Zero-rated: The registrant does not charge, collect, or remit GST/HST but claims ITC for the GST/HST paid to produce the goods and services. These include medical devices or services to businesses outside Canada.
  • Exempt: The registrant neither collects GST/HST nor claims ITC. These include services like childcare.

Once you determine which category your business offerings fall into, you have to look to add that total sales amount. If your sales in a single calendar quarter or your sales for four consecutive calendar quarters reach $30,000, You have to register with GST.

When and How to Register for GST/HST Number?

If you meet both eligibility criteria, you must register with GST. Many businesses with high upfront costs or sell zero-rated goods and services voluntarily register with GST even when they do not meet the eligibility criteria to avail of the ITC benefit.

You can register for GST online via a business registration online program. The CRA will generate a 9-digit business number to recognize your business. This number is essential in all the documents where you collect, report, and remit GST.

Once registered for the GST/HST account, you must file returns regularly as per the reporting period determined by the CRA, even if the tax amount is $0. You could face a $250 penalty if you do not file GST.

How To Collect GST/HST

Once you have your GST number, it is time to collect GST from customers.

  • You first have to identify the GST/HST rate for your business based on the place and type of supply. This part can get tricky, as the GST rules are complicated. It is better to consult a tax expert to charge the correct GST rate.
  • Next, include the date, GST number, and the GST rate in the invoice and contract provided to the customer.
  • Organize your books: As a GST registrant, you must keep records of all relevant financial transactions, including sales and business purchases, to help you calculate your GST amount (GST collected – ITC). You must keep records of all the invoices, receipts, contracts, and bank statements that support your GST amounts and ITC claims for at least six years. Having physical and digital copies of the documents with two or more backups is advisable. They could be a lifesaver in case of a CRA audit.

How to Calculate GST Owed

Once you have collected the GST, it is time to remit it to the CRA, for which you must 1st calculate the amount owed. The CRA allows you to calculate GST in three ways:

  • The standard method: This is the most common method, in which you pay the net GST (GST collected—ITC earned). Accountants, lawyers, and financial consultants must use this method.
  • The quick method: Only a few businesses are eligible for this method. You calculate the GST owed by multiplying a predetermined “remittance rate” with the sales of taxable goods and services. You may be eligible to apply for a 1% tax credit on the first $30,000 of sales, depending on supplies. 
  • The simplified method calculates the GST by multiplying a fixed amount based on the tax rate paid by eligible business expenditures.

Not all businesses are eligible to use the above three methods. It is advisable to consult an expert to determine which method is right for your business.

Know Your GST Deadlines

After calculating your GST obligations, you should pay them as and when they are due.

If your frequency is monthly or quarterly, your GST returns are due the month after the end of the reporting period. The GST payment is due by August 30 for GST collected in July.

If your GST frequency is annual, your GST returns are due within three months after the end of the fiscal year. For GST collected in the financial year ending December 31, your GST payment is due by April 30. However, you can file your GST returns by June 15 of the following year. The due date for submission is in the personalized GST return form sent to you by the CRA.

How to file GST returns

When filing GST returns, you will complete a working copy of your GST/HST return that you will keep for your records and an official tax return form that you will submit to the CRA. Any delay in filing and paying GST attracts interest.

Contact McCay Duff LLP in Ottawa to Help You File GST/HST Returns

Talk to a professional tax expert to help you set up a process for smooth filing and payment of GST. These experts are also updated on GST changes and can help you implement them on time to avoid penalties. To learn more about how McCay Duff LLP can provide you with the best tax expertise, contact us online, or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.