If you’re a social enterprise operating in Canada, whether as an individual sole proprietor, partnership or an incorporated company, you need to be thinking about HST.
What is HST?
HST is a sales tax that you collect on behalf of the government. It is NOT income tax or corporate tax. Those are separate types of tax that you pay on your profits.
When do you need to start charging HST?
You need to charge HST if your social enterprise has earned more than $30,000 in revenue in any 12-month period. This does NOT mean a calendar year – it’s 12 months.
This is an important distinction. Let’s look at an example.
Your social enterprise earned $22,000 in revenue between May 2012 – December 2012. Many social entrepreneurs assume that the HST tally of $30,000 starts again January 1, 2013; however, this is not the case. The $30,000 tally is for any 12-month period. So, if your business earned another $8,000 before April 2013, you’ve earned $30,000 over 12 months and you’d have to start charging and collecting HST.
From this point, you have 29 days to register and start collecting HST. If you don’t start collecting, when you submit your 2013 HST return, you’re on the hook to pay for any HST that SHOULD have been collected post April 2013. But, if you haven’t been charging HST, you don’t have any additional money and will have to pay out of pocket. Very scary.
HST Refund vs. HST Owing
For the purposes of this post, I’m going to explain HST in a non-technical and simplified way.
In essence, the long method of HST works like this:
HST PAID>HST EARNED = refund
HST EARN>HST PAID = owe
Your social enterprise earned $100 in revenue and collected $113 including HST. $13 is HST EARNED. Your social enterprise spent $40 in supplies from a supplier who charged HST. So you really spent $45.20. $5.20 is HST PAID.
Therefore, your amount owing could be $13 – $5.20 = $7.80.
The Quick Method of HST
There is another method of HST called the Quick method. For the quick method, you pay a specific HST rate to the government regardless of what you’re actual HST earned and HST paid is.
Business A sells a product. Business B sells a service. Each business has a specific remittance rate that is dictated by the government.
The remittance rate is 4.4% for Business A and 8.8% for Business B. Each has $45,000 in revenue to Ontario customers.
|Business A||Business B|
|$45,000 X 4.4% = $1980||$45,000 X 8.8% = $3960|
|– $300 (1% of $30,000)||– $300 (1% of $30,000)|
|Owe $1,680 in HST||Owe $3,660 HST|
You should sit down with an advisor or accountant and figure out if your social enterprise qualifies for quick HST and if it is better for you to do the Quick method or the Long method of HST.
1. Remember that your business is collecting HST on behalf of the government. It is not your money. A good practice to start is to move HST earned on each invoice into a separate bank account when you deposit money so that you always have more than enough to cover your HST at tax time.
2. Keep receipts and track expenses properly. You can lower how much HST you need to pay back to the government by keeping receipts and claiming the HST you’ve paid to suppliers.
3. Always try to use HST charging suppliers. It is more likely that you will lower the amount of HST owing if your suppliers are in Ontario or other HST participating provinces since your HST paid will be higher.
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Shannon Lee Simmons is a financial consultant, speaker, media personality, financial journalist and social change advocate. She founded Primary Financial and The New School Of Finance.