The federal sales tax (GST) and the provincial sales tax are historically segregated in Canada (PST). Each province sets its rates, resulting in broad variations in sales tax rates across the country. With the launch of the HST in 1997, this started to shift. The aim of this system was to merge federal and provincial tax rates into a single, uniform rate for all provinces. Despite the fact that some provinces have progressively implemented the system, the majority continue to use the old scheme.
In this article, we've answered some of the most pressing inquiries on Harmonized Sales Tax- what you need to know as a self-employed business, its benefits and lots more.
What is HST?
The harmonized sales tax (HST) is a market tax that incorporates the federal GST and regional/provincial sales taxes in Canada (PST). If your business is registered to levy an HST, The Canada Revenue Agency (CRA) collects it and then remits the necessary sums to the participating provinces. It is priced at the point of sale. Thus, if a product sells for $200, the overall cost price that the buyer would be charged is the actual cost price plus the percentage of HST.
The federal government tax (GST) is set at 5%, while provincial taxes range from 6% to 9.975%. For example, if your company operates in Ontario, where provincial tax is 8% of the cost price, you should charge your customer $26 HST (13 percent of cost price) on a $200 transaction, totaling $226.
When should you register for HST?
The registration of HST is subject to certain conditions. If your company mainly involves the supply of exempt supplies, you should not apply for an HST account or receive HST. What are exempt supplies?
According to the CRA, health and medical care facilities, legal services, and other services are among this category.
Similarly, if you're a small business, you won't be able to file or charge HST. According to the CRA, being a small business means you are a self-employed individual or a small-scale enterprise that has not met the $30,000 sales mark in four consecutive calendar quarters. Thus, you are excluded from HST registration except if you choose to enroll voluntarily.
Aside from these conditions, registering for HST is mandatory when your business has enough sales for it.
In any case, it is crucial to be aware of these little details.
The day your business matures, crossing the $30,000 threshold, the HST becomes effective on your sales. And the deadline for registration comes 29 days afterward. Here is an example to help you understand this better:
The $30,000 threshold is measured over four yearly quarters. In a scenario where you passed the mark just after the third quarter, with a gross income of $34,000 as of September 30, you should not wait until the fourth quarter to begin charging HST on taxable sales. Rather, it would be best if you began charging HST immediately. You must go back through your sales and charge HST on the specific sale that pushed you over the $30,000 mark as well.
Of course, running a small business, you may not want to go back to a client and let them know you should have charged this amount and ask for an additional fee. You can always take the amount out of your net sales, but the best practice would be to start adding HST to your invoices going forward.
Who should and should not charge HST?
Let's talk about who you can charge HST and who you shouldn't, having come to the knowledge of whether you're a small business or not.
Generally, you do not need to register for an HST account if you sell exempt supplies. Should your company provide both exempt and taxable services, you must enroll but not charge HST to customers who purchase exempt supply services.
Those who purchase zero-rated products are another group of people who should not be charged HST. These supplies include agricultural products, most farm animals, feminine hygiene products, and some medical devices.
Lastly, it would be best not to charge HST to customers who reside outside of Canada. As those goods are being sold in different jurisdictions, they are not liable for HST taxes. You should check local restrictions and/or consult with your tax professional to see whether you should be charging additional fees.
You should also keep track of where your service is being delivered in Canada. Let's say you run an online cosmetics shop and need to send items to a customer in British Columbia, where the HST isn't applicable. In this case, you must charge the normal GST rate of 5% and the PST rate of 7% (for British Columbia), all of which must be remitted to the required networks.
Benefits of charging HST?
Since HST registration can be overwhelming, you can get ahead of the game by registering before your income reaches $30,000 and taking advantage of the voluntary registration option. This has the advantage of allowing you to claim an input tax credit (ITC) on your business expenses. ITC helps you reclaim GST/HST charged or payable on sales and operating expenses incurred on your commercial sales activities.
According to the CRA, Harmonized Sales Tax is mandatory for you so long as you are no longer considered a small business. However, it would be best if you remembered not to charge it on the purchase of exempted supplies and zero-rated products. With HST, you can rest assured of enjoying the benefits that come with Input Credit Tax. As always, if you have any unique situations or are concerned with certain sales practices, it is best to speak with a qualified tax professional for advice on the matter.