Are you wondering if your business needs to register for GST/HST?
If you don’t get registered in time, your company runs the risk of the Canada Revenue Agency (CRA) deeming you to have collected GST or HST from your customers, even if you haven’t, and taking that deemed amount right out of your sales collected in some cases, potentially adding the tax to your taxable sales. In other cases, you may risk not being able to claim GST or HST paid on operating and capital inputs prior to being registered.
If the company is part of a group of companies that are already registered for GST/HST purposes, it may need to be registered upon incorporation and prior to making its first sale.
This is because the $30,000 small supplier registration threshold is “shared” amongst companies that are “associated” to each other. Failure to register one or more companies in an associated group can have multiple adverse GST/HST impacts.
Alternatively, your business may have revenue from “zero-rated” supplies, such as optometrists, denturists, certain dental professionals, other health care professionals and sellers of certain medical devices designed for individuals’ use. In this case, revenues are subject to GST/HST at zero percent, but such companies can register and claim GST/HST refunds on tax paid on some, or all their business inputs. Failure to register for GST/HST, even though there may be no obligation to collect the tax, could leave GST/HST refunds on the table since such registered businesses can generally claim GST/HST on certain capital and operating expenses.
What is the “small supplier” threshold?
Broadly, if a company isn’t associated to other companies who are registered for GST/HST purposes, it must register and start charging GST/HST on its sales when it hits $30,000 in taxable sales in any four rolling calendar quarters. Companies don’t need to wait to hit the $30,000 in taxable sales to register. In fact, they may want to register earlier to claim GST/HST back on capital and operating expenses before hitting $30,000 in taxable sales. This applies to both incorporated companies and partnerships/proprietorships.
What are associated companies?
Determining if companies are associated with each other can be complex. Any companies that are owned and controlled within a family group, or via common ownership with control through marriage or blood relationships, or if they’re owned by the same person or group of persons, may be associated for GST/HST purposes. For help in determining if your company is associated with other companies, please reach out to us.
What are the implications of not registering?
For companies with revenues subject to GST/HST (i.e., not exempt), they must charge, report, and remit the tax on a regular basis (I.e. monthly, quarterly, annually) if they’re registered, or are required to be registered. If a company in an associated group of companies that are already registered for GST/HST and the company is earning taxable revenues and does not register under the belief that it must exceed the $30,000 taxable sales threshold for example, is at risk of the CRA deeming them to have collected GST/HST. That is, the company associated to the other registered group of associated entities must have been registered and collected GST/HST at the time of its first taxable sale, regardless of the value.
Let’s take an example of Jill who owns and controls 51% of a new start-up company called JillCo based in Vancouver. Jill’s sister Kate owns the other 49%. Jill doesn’t take a salary or dividends out of JillCo in the first year but charges a $25K management fee to JillCo at the end of the year. Jill’s sister does take a salary and she also charges a small management fee of $10K per year. JillCo is registered for GST/HST and able to claim input tax credits (“ITCs”) on most of its operational inputs to the business. Jill and her sister are not registered personally for GST/HST as they are under the $30K threshold, or so they thought.
For Kate’s $10K annual management fee she charges to JillCo with no GST/HST applied, she is not required to be registered because she is not “associated” (i.e., she doesn’t control the company) to JillCo and remains under the $30K small supplier threshold. However, Jill is “associated” to JillCo (i.e., she controls the company) and she shares the $30K taxable supplies registration threshold with JillCo. As such, Jill should be registered for GST/HST and her annual management fee charged to JillCo should have had GST applied at 5%.
Now these are small numbers of course but imagine in your group of companies and their corporate or individual shareholders and owners, how this might play out with bigger numbers over a long period of time. In Jill’s case, she had only been doing this in the company’s first year of operation before she got advice from her CPA friend and registered herself for GST/HST and began charging JillCo GST on the management fee. Alternatively, Jill could stop charging the annual fee and take a salary and/or dividends to reduce her GST compliance. As an aside, Jill and JillCo cannot utilize the “so-called” closely related election since it cannot apply to individuals, which is still a common misconception.
In such situations, the CRA could catch up with Jill if she hadn’t corrected the issue, and then audit and assess her if she hadn’t corrected the issue early on. CRA routinely reviews self-employed business income reported on personal tax returns and checks to see if the individual is registered for GST/HST. If not, the CRA will typically contact the person and ask why. They can also tell that an individual owns and controls a registered business like JillCo from specific schedules on the corporate tax return and may assess GST on Jill’s management fee and register her if they cannot contact her. Most GST/HST audit assessments also come with a late-filing penalty and interest on the GST/HST owing plus the penalties.
What about the GST/HST paid on operating and capital inputs before the company has revenues?
This can have a large monetary impact on new companies that fail to register for GST/HST as soon as incorporated or in the case of a partnership, when they’re first formed. What we tend to see are situations involving a new company that is associated with one or more other persons that are already registered and collectively, all the companies in the group exceed the $30K small supplier registration threshold. As such, all new companies that intend to make any amount of taxable supplies, should register as soon as they’re created. Otherwise, they won’t generally be entitled to claim GST/HST refunds later when they do register, subject to some unique situations.
Let’s look at another example, BigCo and its new wholly owned subsidiary SmallCo. BigCo is based in Ontario and is registered for GST/HST. BigCo incorporates SmallCo, whereby it will undertake research and development on a new product idea that it will then sell to third parties in a couple of years. Two years have passed and SmallCo incurs R&D costs of $2M dollars (excluding salaries) and has paid $260,000 in Ontario HST at 13% on all its inputs.
Since SmallCo didn’t have revenues for another two years, BigCo management didn’t think that SmallCo needed to register for GST/HST until such time as SmallCo beings to sell the new product. This isn’t an uncommon belief, because many businesses have been under the impression that SmallCo can claim all the GST/HST it has paid over time, at the time it does register. This is known by some as the “Small supplier ITCs” rule whereby all GST/HST paid in respect of all “property” on hand, can be claimed at the time of registration (two years later in this case).
In this case, SmallCo cannot claim the $260K in HST as ITCs on its first GST/HST return after getting registered. This is because SmallCo is “associated with” BigCo, so it’s not a small supplier at any time and cannot take advantage of the “small supplier ITCs” rule when it does register. As such, it will not be able to claim any of the $260,000 in HST paid when it eventually registers for GST/HST. We’ve witnessed this play out in real life too many times and in some cases, companies like SmallCo have paid alot of GST/HST (sometimes in the millions) that it, nor BigCo can ever claim.
In certain cases, we’ve been able to fix these issues and mitigate the otherwise lost GST/HST refunds, but that’s not always possible. If your business is in this scenario, please reach out to us right away so we can determine the best course of action for you before it’s too late.
If I make only zero-rated supplies and didn’t register, what can I do?
We’ve seen several examples of businesses that only make zero-rated sales and the rest are GST/HST-exempt. If the zero-rated sales do not exceed the $30K threshold (and they’re not associated to any other company that is registered) such companies typically don’t end up registering for GST/HST and simply pay the tax and don’t recover their GST/HST paid by way of a refund. Over time, this can add up to a lot of cash “left on the table”, especially in a higher rate HST province vs. GST only provinces, such as British Columbia, Alberta, etc.
Other businesses that make exclusively zero-rated supplies such as dentures, artificial teeth or most medical devices that are worn by an individual, tend not to register and incur a significant amount of GST/HST that they can otherwise never recover. If you discover this after reading this, you can immediately register for GST/HST to at least stop the “cash-bleed” going forward and CRA will allow you to backdate the effective date 30 days from the day you register. In some cases, we have been able to convince CRA to backdate the effective date even further and recover more GST/HST for prior periods.
Our views and takeaways
The core theme is that once a business is formed or incorporated (including sole proprietors) and will eventually be making taxable and/or zero-rated supplies at any point in the future, they should register for GST/HST effective the same day they “start their business” and begin to charge (if applicable) report and remit, GST/HST on those revenues, while also being eligible to claim ITCs on the same returns.
If you find yourself in any of the situations described above or similar, please reach out to us and hopefully we can assist you in solving these or other indirect tax issues.
At Achen Henderson, we can help you to take the complexity out of GST/HST and all your sales and indirect tax obligations. Call us today for help getting your sales tax collection and reporting right, so that you can rest easy by ensuring your business is not offside with these rules wherever you operate in Canada.