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While it’s always best to audit-proof your return by keeping relevant records and calculations, don’t overlook the importance of registering for the GST/HST once you’ve billed $30,000 in any 12-month period.
The fact that people can (and many do) gross $30,000 or more and neglect to register for the GST/HST, and that the government seems not to come after them about it, lulls them into a false sense of security.
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In this, part two of a two-part Tip about the GST/HST, we’ll discuss your options if you find you haven’t registered for your HST/GST number before hitting the $30,000 limit.
In reality , the Canada Revenue Agency (CRA) regularly reviews old income tax returns to find people who haven’t registered. And when they do, they often forcibly register those people and retroactively demand all the GST/HST the person was supposed to have collected for those years. It can add up.
If this has happened to you, you have some options. None of them are painless, but some are better than others.
Option One
The first is the most obvious, and what CRA will immediately suggest: that you take all your revenue on which you should have charged GST/HST, multiply it by the GST/HST rate that applies in your province or territory (e.g., in Ontario it would be 13% HST, in Alberta it would be 5% GST) and submit that amount to the government.
Where do you get this money? Well, you can retroactively bill your clients for the HST, issuing new invoices clearly showing your new GST/HST number and the calculated HST and requesting that they pay. Most companies which are themselves registered would find this more annoying than expensive – they have to move some money, but because it’s GST/HST they’ll actually get it back on their next tax return.
However if some or all your clients refuse, you’ll have to make up the difference out of your own funds.
Option Two
More complicated but less expensive is to go back and recalculate your income in such a way that the total you collected becomes a base amount plus GST/HST, and then you give CRA the newly-calculated GST/HST.
The GST/HST you infer as contained in your earnings will always be lower than the amount calculated as GST/HST on top of your earnings.
Example:
John, who lives in Ontario, has billed $45,000 for his services as a computer consultant each year for the past two years. Now CRA says he should have registered for GST/HST at the beginning of last year. Based on his reported gross of $45,000, they want 13% HST* back, or $5,850.
He can try and get that amount back from his clients and remit whatever he collects plus some of his own funds to make up the full amount.
However, if his clients refuse, or if he can’t or won’t re-bill them, he is allowed to take a different approach, inferring an amount of GST/HST in his fees and remitting that. In other words, he can treat his $45,000 in billings as if it already includes the 13% HST, split it into the HST and non-HST part, and proceed accordingly.
John calculates that $45,000 would be the total if he had billed $39,823 plus HST**. You can see that the 13% HST calculated on $39,823 would be $5,177. Add them together and you end up with a grand total of $45,000, which is in fact what he collected from his clients.
Seen this way, he only must remit $5,177 to the government. Moreover, his gross income now shows as $39,823, which means he can adjust his income tax return and lower his taxable income. This would retroactively reduce his income tax by about $1,605 (based on Ontario’s provincial income tax rate). That means he only has to come up with $3,572 out of his own pocket.
Note also that whichever route he chooses, in either case he can also offset the HST he remits by claiming back any GST/HST he charged on business expenses. That will save him some money as well, but it also requires a second adjustment to the income tax return since he will now be deducting only the non-GST/HST portion of his expenses (he can’t deduct an expense that is getting refunded to him).
* The rate, and the fact that it’s HST and not GST, is because he lives in Ontario. If he were in Alberta, they would want 5% GST instead.
** To split up a dollar amount into a base amount plus tax (or to calculate the tax back out of an amount) you divide by [1 + (tax rate/100)]. In this case, with HST at 13%, you divide by 1.13. $45,000/1.13 = $39,823.
If math isn’t your bag, this may seem extraordinarily complicated or even illegal! To someone who deals with taxes all the time it’s not that complicated, and it is definitely legal. It might be worth having a professional help out, especially if CRA has forced you to register for the GST/HST and presented you with a bill.
Don’t know how to register for your HST/GST number? Last week’s Two Minute Tax Tip can walk you though the steps:
Click here to read Do I Really Have to Get a GST/HST number?
Booking an appointment:
Contact our scheduling manager at scheduling@personaltaxadvisors.ca to set up an appointment. Let us know which tax year(s) you’re filing, whether you have self-employment income, and whether you’re a new or returning client and we’ll get you set up ASAP.