Introduction – GST/HST Obligations in Canada
Section 165 of Canada’s Excise Tax Act imposes GST/HST on “every recipient of a taxable supply made in Canada.” A “taxable supply” essentially refers to any commercial activity, and it captures most business transactions—e.g., sale of goods or services; barter transactions; licensing or leasing arrangements; etc.
The GST/HST system disregards the commercial supplier while taxing the ultimate consumer. A registered supplier may recoup the GST/HST that it paid to its own business vendors by claiming those amounts as input tax credits (ITCs). Unlike the registered suppliers participating in the supply chain, the ultimate consumer cannot claim input tax credits and hence cannot recover the GST/HST paid to retailers or other suppliers.
That said, although the consumer pays the GST/HST, the registered commercial supplier still bears the burden of charging GST/HST, collecting GST/HST, and paying the collected GST/HST to the Canada Revenue Agency. In particular, a Canadian business earning $30,000 or more in worldwide gross revenues in any year must register for a GST/HST number and begin charging GST/HST on its goods and services. Failure to do so is subject to tax penalties plus interest and possible prosecution for tax evasion.
On the other hand, a Canadian business earning less than $30,000 in annual gross revenue constitutes a “small supplier.” And under paragraph 240(1)(a) of the Excise Tax Act, a small supplier need not register for—and thus need not collect—GST/HST. (This doesn’t apply to a taxi business. Regardless of how little it earns in gross annual revenue, a taxi business must register for GST/HST.)
Yet an otherwise exempt small supplier may still opt to voluntarily register for GST/HST. This article discusses the implications of voluntarily registering for GST/HST as a small supplier. It ends by offering tax tips for Canadian businesses considering voluntary GST/HST registration.
GST/HST Remittance & Filing Requirements for Small Suppliers Who Voluntarily Register for GST/HST
Upon voluntarily registering for GST/HST, a small supplier must (1) charge and collect GST/HST on all goods sold or services rendered and (2) file GST/HST returns for each reporting period—even if the supplier earned no revenue during that period or had no net GST/HST payable for that period.
The length of a taxpayer’s GST/HST reporting period determines when it must file GST/HST returns and pay the net GST/HST. A GST/HST reporting period can be annual, quarterly, or monthly.
- If the reporting period is monthly, then that reporting period’s GST/HST return and net GST/HST payable are both due by the end of the following month.
- If the reporting period is quarterly, then that reporting period’s GST/HST return and net GST/HST payable are both due within one month from the end of the quarter.
- If the reporting period is annual and the business is incorporated, then that reporting period’s GST/HST return and net GST/HST payable are both due within three months of the fiscal year-end.
- If the reporting period is annual and the business operates as a sole proprietorship, then that year’s GST/HST return is due by June 15th of the following year. But that year’s net GST/HST payable is due by April 30th of the following year. (These dates are the same as the income-tax filing deadlines and the income-tax payment deadlines for sole proprietors.)
The length of a reporting period depends on the business’s annual revenue during the last fiscal year. A business that earned $1.5 million or less may opt for an annual, quarterly, or monthly GST/HST reporting period. A business may opt for a quarterly or monthly GST/HST reporting period if it earned over $1.5 million but not more than $6 million. And a business must use a monthly GST/HST reporting period if it earned over $6 million during the last fiscal year.
Voluntary Registration for GST/HST & Input Tax Credits
Although voluntary GST/HST registration obligates a small supplier to charge, collect, and remit GST/HST, it also permits the small supplier to claim input tax credits. The ability to claim input tax credits is indeed the primary benefit of voluntarily registering for GST/HST. If the small supplier paid GST/HST to one or more of its own business vendors, the small supplier may claim those amounts as an input tax credit (ITC), thereby reducing the small supplier’s net GST/HST payable to the Canada Revenue Agency.
Qualifying GST/HST registrants have the option of calculating their ITCs by using a simplified method, which allows the registrant to determine its ITCs by multiplying its qualifying expenses by a specified rate. This allows the registrant to avoid the burden of separately tracking GST/HST in its own records. Under the regular method, the registrant must record the GST/HST paid or payable on each business expense. Under the simplified method, however, the registrant adds up the total amount of expenses that qualify for ITCs—i.e., adds up the total amount of all business expenses for which the registrant paid GST/HST to another registrant. The registrant then calculates the available ITCs by multiplying its expenses by a proportion based on the rate of tax paid on the expense—for example, multiplying by 5/105 for purchases on which it paid 5% GST, by 12/112 for purchases on which it paid 12% HST, by 13/113 for purchases on which it paid 13% HST, etc. Total amount represents the registrant’s input tax credits for the particular reporting period.
A registrant cannot use the simplified method unless it meets all of the following conditions:
- During the registrant’s last fiscal year, the registrant’s annual worldwide revenue from taxable property and services (including those of its associates) did not exceed $1 million. (This limit doesn’t include goodwill, zero-rated financial services, or sales of capital real property.)
- For all preceding quarters of the current fiscal year, the registrant’s total revenue from taxable supplies (including those of its associates) does not exceed $1 million. (This limit doesn’t include goodwill, zero-rated financial services, or sales of capital real property.)
- During the registrant’s last fiscal year, the registrant’s taxable purchases in Canada did not exceed $4 million.
This is a very general description of the simplified method of calculating input tax credits. For more information on the simplified method, take a look at our article “Simplified Method for Claiming Input Tax Credits (ITCs).” If you have questions about the simplified method of calculating ITCs, please schedule a consultation with one of our expert Canadian tax lawyers.
Yet regardless of whether a small supplier uses the regular method or the simplified method, the small supplier must meet certain criteria to qualify for the ITC itself. For instance, the small supplier must have been a GST/HST registrant during the reporting period in which the GST/HST was paid or became payable. In addition, “before filing” a GST/HST return claiming the ITC, the small supplier must obtain documentary evidence substantiating the ITC. A registrant must obtain, among other things, the following information in support of the ITC claimed:
- The name of the supplier who charged the GST/HST underlying the ITC;
- The total amount paid or payable to that supplier;
- The amount of GST/HST paid or payable to that supplier;
- The date on which the GST/HST was paid or became payable; and
- The supplier’s GST/HST registration number.
The Canada Revenue Agency’s GST/HST auditors routinely deny ITCs because of insufficient supporting documents.
Corporate Small Suppliers that Voluntarily Register for GST/HST & Director’s Liability for Unremitted GST/HST
A corporation is a separate legal entity. In other words, a corporation’s obligations, rights, and liabilities are its own, and they generally don’t extend to the corporation’s shareholders, directors, or employees. So, if the corporation, for instance, defaults on a loan or on rental payments, the creditor may sue the corporation for the unpaid debt. Yet the shareholders, directors, and officers aren’t personally liable because the corporation—not its shareholders, directors, or officers—borrowed the funds or signed the lease. (Of course, if the lender or landlord obtained a personal guarantee from a shareholder or director, then the shareholder or director would be liable. But the liability stems from being the guarantor, not from being the corporation’s shareholder or director.)
That said, the Canada Revenue Agency can pursue a corporation’s directors for the corporation’s GST/HST debts. If the corporation failed to remit GST/HST, subsection 323(1) of the Excise Tax Act confers vicarious tax liability on “the directors of the corporation at the time the corporation was required to remit.” Each director becomes “jointly and severally liable” to pay the corporation’s unremitted GST/HST. Hence, if you solely own and operate an incorporated business that would otherwise be exempt from GST/HST registration, you should appreciate that voluntary GST/HST registration comes with a risk of personal liability. Namely, if the corporation accrues GST/HST debt while you served as its director, you may personally inherit that GST/HST liability.
Pro Tax Tips – Input Tax Credits & CRA Tax Audits: Verifying Your Suppliers to Protect Yourself from Fraud and Defend Your ITCs from a Tax Auditor’s Scrutiny
As mentioned above, by voluntarily registering for GST/HST, a small supplier must collect GST/HST but gains the ability to claim input tax credits. If you registered for GST/HST and your commercial suppliers charged GST/HST on their services, you may reduce your net GST/HST payable to the CRA by claiming the GST/HST you paid to your suppliers as an input tax credit.
Before claiming that ITC, however, you must confirm that your supplier has a valid GST/HST registration number. The CRA’s tax auditors will deny your ITCs if you cannot produce a valid GST/HST registration number for your supplier—even if you can prove that you did in fact pay GST/HST to that supplier. This problem typically arises when a supplier’s invoice lists (i) a GST/HST number that doesn’t exist, (ii) a GST/HST number that is registered under another supplier’s name, or (iii) a GST/HST number that wasn’t registered on the date of the invoice (e.g., it was cancelled as of the date on the invoice or was registered after the date on the invoice). Unfortunately, neither the CRA nor the courts are very sympathetic to the fact that your supplier may have fraudulently charged you for GST/HST.
You should therefore confirm the validity of your supplier’s GST/HST registration number before paying the supplier any amount that you intend to claim as an input tax credit.
You can confirm a supplier’s GST/HST registration number by using the GST/HST registry search on the Government of Canada’s website (https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/confirming-a-gst-hst-account-number.html). You can also confirm a supplier’s GST/HST registration number by calling the Canada Revenue Agency’s business-enquiries line at 1-800-959-5525.
Our experienced Canadian tax lawyers can provide GST/HST advice about whether it makes sense for you to voluntarily register for GST/HST as a small supplier and whether the simplified method makes sense for your business. Our tax law professionals can also provide advice on protecting your business from GST/HST fraud and on ensuring that your ITC claims withstand the scrutiny of the Canada Revenue Agency’s tax auditors.