Voluntary Registration for GST/HST as a Small Supplier

Introduction

Section 165 of Canada's Excise Tax Act imposes Goods and Services Tax (GST) or Harmonized Sales Tax (HST) on "every recipient of a taxable supply made in Canada." This ensures that businesses collect GST/HST on most commercial transactions, including sales of goods, services, barter transactions, and leasing arrangements.

For businesses operating in Canada, GST/HST compliance is essential. A registered supplier can recover the GST/HST paid on inputs through Input Tax Credits (ITCs). However, businesses with annual revenues below $30,000 are generally considered small suppliers and are not required to register for GST/HST under paragraph 240(1)(a) of the Excise Tax Act. Despite this, small suppliers have the option to voluntarily register for GST/HST. This article explores the benefits and implications of voluntary registration for small suppliers and offers tax tips for those considering this option.

GST/HST Remittance and Filing Requirements for Voluntary Registrants

Once a small supplier voluntarily registers for GST/HST, several obligations arise:

1. Charge and Collect GST/HST:
   • The business must start charging and collecting GST/HST on taxable sales and services.
2. File GST/HST Returns:
   • Even if no revenue is earned during a reporting period, the registered business must file GST/HST returns. These returns determine the amount of net GST/HST payable to the Canada Revenue Agency (CRA).

The frequency of filing depends on the business's annual revenue during the last fiscal year:

• Monthly Reporting Period: Due by the end of the following month.
• Quarterly Reporting Period: Due one month after the end of the quarter.
• Annual Reporting Period:
  • Corporations must file by three months after fiscal year-end.
  • Sole proprietors must file by June 15 of the following year, with payment due by April 30.

For businesses that earn more than $1.5 million in annual revenue, quarterly or monthly reporting periods are required.

Voluntary Registration and Input Tax Credits (ITCs)

The primary advantage of voluntarily registering for GST/HST is the ability to claim Input Tax Credits (ITCs). This allows a small supplier to recover GST/HST paid to vendors for business-related purchases.

Two Methods for Calculating ITCs

1. Regular Method:
   • Under this method, businesses must track the GST/HST paid on each individual purchase and record the relevant details.
2. Simplified Method:
   • This method is available to small suppliers who meet certain criteria, including:
     • Annual worldwide revenue from taxable supplies (and those of its associates) under $1 million.
     • Taxable purchases in Canada not exceeding $4 million.
     • The simplified method allows businesses to calculate ITCs by applying a fixed rate to total business expenses, simplifying record-keeping.

For both methods, suppliers must meet documentation requirements and keep records that include:

• Supplier's name and GST/HST number.
• Total amount paid or payable, along with the GST/HST paid.
• Date of payment or when GST/HST became payable.

Implications of Voluntary GST/HST Registration

While the ability to claim ITCs is a significant benefit, voluntary GST/HST registration comes with certain responsibilities and potential risks:

1. Increased Administrative Burden:
   • Voluntary registrants must file regular returns, track GST/HST on sales and purchases, and ensure that all documentation is accurate and complete.
2. Personal Liability for Directors:
   • For incorporated businesses, directors may be held personally liable for any unremitted GST/HST, as per subsection 323(1) of the Excise Tax Act. This is a critical consideration for small businesses contemplating voluntary registration, especially those with a single owner or a few directors.
3. GST/HST Audits:
   • The CRA may audit the business to verify compliance with registration and ITC claims. If the business is found to have discrepancies or errors, penalties and interest may apply.
4. Cash Flow Impact:
   • Although small suppliers can recover GST/HST on their business expenses, the requirement to remit GST/HST on sales can create a cash flow challenge, particularly for those with significant expenses and slow-paying clients.

Corporate Small Suppliers and Directors' Liability for Unremitted GST/HST

In the case of corporate small suppliers, directors may be personally liable for unremitted GST/HST under subsection 323(1) of the Excise Tax Act. Even if the business fails to remit GST/HST, directors could be held responsible for paying the debt.

This makes it crucial for directors of incorporated businesses to be vigilant in ensuring that GST/HST is correctly collected, remitted, and reported. Businesses considering voluntary registration must weigh the potential personal liability risks against the benefits of reclaiming ITCs.

Pro Tax Tips: Protecting Your ITCs and Avoiding CRA Scrutiny

1. Verify Supplier Registration:
   • Always verify the validity of a supplier’s GST/HST registration number before making purchases for which you intend to claim ITCs. The CRA may deny ITCs if the supplier’s registration number is invalid or has been cancelled.
2. Keep Detailed Records:
   • Proper documentation is crucial for ITC claims. Ensure invoices are correct and include the supplier’s GST/HST number, the amount of tax paid, and the date of payment.
3. Consult with a Tax Professional:
   • Given the complexity of GST/HST rules, including the nuances of voluntary registration, working with an experienced tax lawyer or advisor can help prevent mistakes and ensure compliance with the Excise Tax Act.
4. Plan for Cash Flow:
   • Consider the impact of GST/HST remittances on your business's cash flow. Ensure that you maintain adequate reserves to cover your tax obligations.

Conclusion

Voluntary registration for GST/HST offers small suppliers several advantages, most notably the ability to claim Input Tax Credits, which can reduce the amount of tax payable to the CRA. However, it also comes with significant responsibilities, including filing returns, tracking GST/HST on purchases and sales, and ensuring that documentation is accurate and complete.

Before deciding whether to register voluntarily, small suppliers should carefully consider their business’s administrative capacity, potential risks, and long-term financial goals. Seeking professional tax advice is essential to navigating the complexities of GST/HST registration and ensuring that your business remains compliant while maximizing available tax benefits.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

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