When your business income exceeds $30,000, you are required to register for GST. With that, comes the responsibility of charging GST on all goods and services sold by your business and filing an additional tax return – the GST form.
Part of my business philosophy/motto is “Keep it Simple” which means you do not need to over complicate things. That said, I have recommended the QuickMethod of Accounting for GST to many business owners. However, I recently discovered a third way to file so before I get ahead of myself, let me explain each of the three methods available.
The normal method for remitting GST is subtracting the amount you paid on purchases from what you collected from your sales. This is the amount you must remit to CRA or if you paid more GST on your purchases than you collected on sales, CRA will send you a refund.
Pretty simple except there are many rules you then have to know. A few of them include:
- Only 50% of the GST paid on meals and entertainment is deductible
- If you work from home, hydro, gas and repairs have GST so you then have to calculate based on the square footage
- Automobile expenses claimed may not be 100% business use so you have to add back the personal portion of the GST
This method requires you to have a good bookkeeping system in place.
How it works – you remit 3.6% on the total revenue including GST collected to CRA. You would also receive a 1% credit on the first $30,000 in revenue. There is potential for big savings and keeping more in your business; i.e. let’s say you collect $105,000 in revenue including GST. You would owe CRA $5, 000 less the amount you paid on purchases if you calculate GST in the Normal Method. If you have elected to use the QuickMethod, you would only remit $3,480 ($3,780 less $300) which means that $1,520 stays in your business account.
This is usually a good option when you are a service based business, have low overhead, like a home based office, and/or limited expenses with GST paid. Your revenue must also be under $400,000 to qualify.
From a bookkeeping standpoint, the QuickMethod is also less time consuming so you could have additional savings on your bookkeeper’s time. Plus, you don’t have to worry about calculating the GST paid on purchases and all the other rules and exceptions involved.
Another bonus using this filing method is that if you purchase capital assets, you still get the claim for the GST you pay.
Note: there are certain professionals that are not eligible to use this method; i.e. lawyers, bookkeepers, accountants.
The GST you pay on expenses are called input tax credits (ITC’s). When you use the Simplified Method, your bookkeeping records do not need to show the purchase price and GST separately.
To be eligible to use this method, you must meet ALL the following conditions:
- Your annual worldwide revenues from sales are $1.0 Million or less in the prior fiscal year;
- Your total taxable supplies from the prior fiscal year must also be $1.0 Million or less; and
- You have $4.0 Million or less in taxable purchases made in Canada in your prior fiscal year.
How does this method work: you add up your ITC eligible business expenses (including the GST paid) and multiply the total by 5/105. This will reduce the GST collected on revenue and the difference is either owed to CRA or you will be entitled to a refund.
Business expenses like insurance, salaries, bank charges and any other business expense that do not have GST charged on them are ineligible and should not be accounted for when calculating your ITC’s.
This method also has the same add back rules of the Normal Method, such as the 50% on meals and entertainment or personal use of home expenses and automobile. However, under this method, if the expense is used more than 90% for business, you can include it at 100%.
This method may be beneficial for those looking to save time on the data entry for accounting and bookkeeping purposes.
Note: listed financial institutions cannot use this method.
**Please note that the GST rate used is for BC only and rates will vary with each province.
GST is complicated and there are many things to consider so make sure you speak with a Professional Accountant to determine which method is best for you. For more information on GST, check out CRA’s information booklet.
***This blog is for information only and not to be used as tax advice or planning. Information is subject to change without notice.