HST 101
Sorry, not the most exciting topic. But I get asked about HST – at a fairly basic level – at least twice a week. So please view this as a public service blog….
As consumers, we all know what HST is: it’s that annoying tax (normally 13% in Ontario) that we have to pay on top of nearly everything.
For businesses, it’s totally different: Normally HST costs you nothing. In fact, it can help your cashflow. But…. it’s a constant source of worry to many business owners. And I’ve seen it kill businesses, when done wrong.
How it works…
HST is a tax that falls squarely on the end consumer. Most businesses have to add it to what they charge their customers, and send that to the government. On the other hand, businesses get to reclaim the HST they paid on their inputs (known as “input tax credits”). So, the tax “flows” up through the value chain:
- The wood mill charges $13 HST on the $100 bill for finished lumber sold to the carpenter, and sends $13 to the government;
- The carpenter pays $113 but then reclaims that $13 HST; and charges $26 HST on the $200 bill to the retailer. So s/he sends net $13 ($26 less $13) to the government.
- The retailer pays $226 but reclaims $26 HST; and charges $39 HST on the final sale price of $300. So s/he sends net $13 ($39 less $26) to the government.
So… not too complex. The end consumer is the only one who actually suffers cost, because in all other cases the business is only paying over what’s been collected from the next person in the chain.
So why does this cause so much grief?
Think of yourself as an unpaid tax collector for the government.
This is the easiest way for a business person to understand it. Essentially, Revenue Canada has outsourced the collection of this tax to you.
You have some fairly basic obligations: in almost all cases, you have to register for HST; you have to provide a receipt or invoice that shows your HST number; and you have to pay over the right amount.
Be under no illusion: Revenue Canada takes this VERY seriously. If you should have collected HST from your customers, but failed to do so, too bad – Revenue Canada will pretend you did, and send you a bill for 13% of all your cash collections. This can kill a business. To make things worse, HST is what’s known as a “trust account” (you’re holding it on trust for others). Meaning, that even if you have incorporated your business, you (as a director of the company) are still on the hook for it personally.
Don’t panic. So long as you are disciplined about it – and keep your books in order – there should be nothing to worry about. In fact, you can even use this to your advantage.
How do I do that?
Hopefully, you are collecting more HST from your customers than you are paying to your suppliers. Yes, eventually you will have to pay it over to the government. But, in the meantime, it’s an interest-free loan from Revenue Canada. Just don’t forget you will have to pay it.
We’re all different, so this is easier for some than others. If you are a smaller business, Revenue Canada may let you file and pay HST once a year. If so – and you can be disciplined about it – then you can hold a significant amount of cash for up to 12 months after collecting it. If you don’t feel you can be disciplined – or just don’t like the idea of owing that much money – ask to file or pay instalments quarterly. That’s a good compromise between keeping on top of it, and the nuisance of monthly filing.
So…. can I avoid this?
Well…. Some businesses (mainly in the financial / health / education fields) are what’s called “exempt”. This means that HST doesn’t apply to them. They don’t have to charge it to their customers. But they can’t reclaim the HST they’ve paid to suppliers.
This may be simpler, but… if your business is classified “exempt supplies”, then bad luck: many of your costs have just gone up by 13%.
It’s more complex if you are “partially exempt” – you have to charge HST on some of what you do, but not all of it. You still have the record-keeping headaches, and to pay over what you collect. But you only get to reclaim a part of what you paid your suppliers.
I’m just starting out. Can I ignore this?
Well… yes and no. Revenue Canada tries not to sweat the small stuff. So, you don’t have to register until you hit $30,000 in HST-able sales. Below that, they’ll ignore you.
If you’re not going to hit that magic number soon, or never plan to, you could choose not to register. [Warning: The people who read your tax return talk to the HST people. They’ll know if you do hit it.]
But it might be worth your while to register, and do so early. Until you do so, you are paying 13% more than you need to. If you are buying $20,000 of equipment, that’s $2,600 you’ve kissed goodbye if you haven’t signed up yet*.
Ignoring paperwork, the only downside of registering is that you have to charge your customers 13% more than you would otherwise. Many new business owners worry about this. I say not to. As Canadians, we are used to paying tax on most things. And… do you really want to build your business on customers who don’t want to pay the same tax that the rest of us do?
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Obviously this is grossly simplified, and there’s much more to it than that. But, for most businesses, keep the HST paperwork under control, and it’s no problem. Read Allison’s blog on “Receipt Bank” for a cool idea on how you could do this.
Really. Nothing to worry about.
~Jules
*Footnote: If you’re buying a $20,000 piece of equipment, that’s what your bank will lend you: $20,000. Not $22,600. Be aware of this when planning cash flows.