Guest post by: Adam Singer, CPA, CA
Singer Steinberg Professional Corp
Believe it or not, Tax as it relates to entrepreneurs often has some embedded PROS that are generally misunderstood. To get some flavour for one of these taxes, we will use Ontario’s sales tax as our example, the Harmonized Sales Tax (HST).
In general, if you generate more than $30,000 of annual sales, you must have an HST number. That’s not a recommendation, that’s tax law. So, as you may be filing an annual income tax return soon, keep this in mind.
Now to the good part: Are there actually benefits of registering for an HST number, in addition to it being a requirement to become a Jiffy Pro?
YES! This is surprising to most, but consider those who do not have an HST number. For these people, you do not collect any HST from clients, but you also do not get to recapture the HST from expenses.
We will go through an example shortly, but let’s understand that HST is a tax you are charging to the client and then holding onto it to remit later to CRA. This means that if you don’t have an HST number and your services cost $100, then you would bill your client $100 and that is your money. However, if you do have an HST number, you would bill your client $100 + HST (13% or $13 in Ontario) and you would then collect $113 from the client. $100 is still your money. This is unchanged between examples.
So, if you have no expenses, whether you have an HST number or not, you earned $100. The only difference is that if you have an HST number, you need to remit that $13 you’re hanging onto to CRA at the end of the year. This means, you have had $13 of CRA’s money that you could have earned interest on or used to support your business throughout the year. That is a huge benefit!
But let us go one step further.
Let’s say you have an expense for $50 + HST or $56.50 (assuming we’re in Ontario).
If you do not have an HST number, you pay $56.50 for this item and that is it, nothing else to do. However, if you are HST registered, this $6.50 of HST you paid to purchase the item is now allowed to be offset against the HST you collected for CRA from your client.
This means that when you initially had $13 to remit to CRA, you would now only have $6.50 to remit as CRA lets you net these together.
Let’s look at the way this shakes out under both circumstances of being HST registered or not;
NO HST Number
- Sales - $100.00
- Expenses - $56.50
- Net Cash in your bank account - $43.50
With an HST Number
- Sales - $100.00
- HST collected - $13.00 (A)
- Net Cash Collected = $113.00 (B)
- Expenses before HST - $50.00
- HST recoverable - $6.50 (C)
- Net Expenses Paid = $56.50 (D)
- Cash collected less Expenses Paid (B - D) = $56.50 (E)
- Net HST to pay to CRA (A – C) = $6.50 (F)
- Net Cash in your bank account (E – F) - $50.00
Yes, that’s a lot of equations, but if you go through it, the result of having an HST number is a $6.50 positive cash variance! This is because CRA allows you to reclaim all the HST paid on your supplies, materials, and other expenses (including 50% of your meals and entertainment).
So if you’re looking for a way to have the CRA help finance your business and increase your cash flow - perhaps registering for an HST number was the best kept tax secret!
Get an HST number (Ontario) quickly and easily from the CRA: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/account-register.html