Whether you are a freelancer, a small business owner, or provide services like graphic designing or ride-hailing, you are billing your clients. And if you are billing someone, you should know about various types of taxes, including sales tax. All entrepreneurs and freelancers are an entity in themselves. They sell goods or services and thus fall under the Goods and Services Tax (GST). Any delays in registering, filing, or paying GST could lead to penalties or interest charges.
In this article, we will discuss some basic things about GST that every entrepreneur and freelancer should know. For starters, what are GST and Harmonized Sales Tax (HST)?
What is GST/HST?
GST is the tax businesses collect from customers and pay to the Canada Revenue Agency (CRA) for consuming their goods and services in the country. HST is when you also add the Provincial Sales tax to the GST.
The CRA determines the GST rate depending on the type of goods and services and the place of consumption. For instance, a 5% GST is levied on a service you provide worth $1,000. It means you will charge a 5% GST on the invoice amount ($50). Your client will pay you $1,050, invoice + GST. You pay the GST collected from the client to the CRA by filing GST returns – monthly, quarterly, or annually, depending on your business.
How GST/HST Works?
When you file GST returns, you can claim an input tax credit (ITC) on the goods and services you used to earn that $1,000. Suppose you are a graphic designer and made an invoice of $1,000. You can claim GST paid to buy a computer, software subscription, and any other direct expense you incurred to perform graphic designing.
Let’s understand with an example.
Amy monthly earns $5,000 and charges 5% GST as per the CRA bracket. Her GST bill is $250. She can reduce her $250 GST bill by deducting the GST she paid on any goods and services she used for the business. This deduction is called input tax credit or ITC.
You can claim ITC on the purchase of capital goods, but it only applies when registered with GST. Hence, if you are a small business incurring heavy expenses, you can voluntarily register for GST to get the ITC. The ITC amount could be significant and give you much-needed liquidity in the early stages of your business.
Are You Eligible for GST/HST?
However, not all goods and services are subject to GST. The two key differentiators are the types of supply and sales amount.
Type of Supply: The CRA has categorized several goods and services into three groups.
- Taxable goods like sales and rentals of commercial real property, clothing, footwear, potato chips, and car repairs. Here, you can charge GST to customers and claim ITC on expenses like advertising, legal and accounting services, franchises and more.
- Zero-rated goods like prescription drugs and drug-dispensing services, groceries, fishery and agricultural products and services to businesses outside Canada. You do not collect GST, but you can still claim ITCs for GST/HST you paid to produce them.
- Exempt goods are the ones on which you can neither charge GST nor claim ITC. Some examples include childcare fees (less than 14 years old), music lessons, and health, medical, and dental services performed by licensed physicians or dentists for medical reasons.
You can find your business in this list on the CRA’s website and see which category it falls under.
Sales Amount: If your sales amount exceeds $30,000 in three consecutive months of a calendar year or within the previous four consecutive quarters (non-calendar), you should register with GST, irrespective of the type of goods and services you provide. So, if your sales crossed $30,000 between October 1, 2022, and December 31, 2023, you need to register for GST or face penalty.
You can voluntarily register with GST if you have high expenses or sell zero-rated goods to claim ITC.
Once you have determined to register with GST, you can start charging it to your clients. But ensure you follow a proper procedure.
How Do You Collect and File GST/HST?
Register – Firstly, you can register your business online with GST through the Business Registration Online (BRO) program. The CRA will give you a nine-digit business number. Secondly, determine the GST/HST rate your business can charge depending on your type and place of supply.
Collect – To collect GST, you have to prepare a GST-compliant invoice, which includes your nine-digit registration number, date, and GST rate. Inform your clients beforehand that you will charge GST separately and include the registration number and GST rate in the contract.
File – Once you start collecting GST, you must maintain books of accounts on how much GST was collected and paid to determine the GST amount you owe. While this may look like a lot of work, daily recordkeeping for GST filing can keep you updated about your business situation and cash flows.
File the GST returns before the deadline to avoid penalties.
Contact Ford Keast LLP in London to Help You with GST/HST and Other Taxes
A professional accountant can help you file GST returns accurately and timely. They can also guide you on the tax credits you can claim, reducing your GST bill. To learn how Ford Keast LLP can provide you with your tax filing and accounting/bookkeeping services, contact us online or by telephone at (519) 679-9330.