Are you a small or medium sized business that receives payment online through services such as Stripe or Square?
Are you a small or medium sized business that receives payment online through services such as Stripe or Square? Many private company owners think that the online payment processers “have their backs” when it comes to collecting GST / HST (or PST), however most of them are simply processing payments which should include all the applicable taxes that their customers have presumably charged correctly via their invoicing system. It is the business owner that is registered for these sales taxes, that is required to get the taxes timely, properly, and accurately reported and remitted as they are effectively the sales tax collectors for the respective federal or provincial government.
As such, the Canada Revenue Agency (“CRA”) and other provincial sales tax authorities are always pursuing potential GST/HST reporting and remittance problems. When they find out that the government may be getting short-changed, they can target these situations, whereby sales taxes charged to customers by businesses is not the same amount being reported and remitted. In this article we discuss how this can happen when businesses only use their bank deposit information to calculate the GST/HST owing to the CRA on your periodic returns. Even though this can happen for businesses required to collect and remit PST, we have kept our discussion to GST/HST, but the same concept applies.
Although most payment processing apps do not generally calculate and show the sales tax on invoices and receipts provided to your customers, a sales tax calculation issue can arise when you, your bookkeeper or accountant (internal or external) only use bank deposits from these companies, to record the revenue and GST/HST in your accounting systems such as XERO, QuickBooks, Sage One, etc.
Let’s take an example of Joe’s Shoeshine, where we show you the problem and the ensuing risk to your business. Joe lives in Halifax and uses Square on his phone to allow his customers to pay for their shoeshine with their credit card. If a customer wants an invoice/receipt, Joe can have Square email it to them and it will show the actual tax that Joe collected when Square charged the credit card. However, Joe takes his monthly bank deposits from Square and enters them into his XERO accounting software and then determines the HST at 15%that is included in the deposit. Joe does his own bookkeeping and determines the HST to remit to CRA by multiplying the deposit by a fraction of 15/115.
Let’s assume Joe had a great first quarter of 2022and had $25,000 of total Square payments deposited in his bank account. Joe determines that the total HST he must report and remit to the CRA is $3,260.87 which is $25,000 X 15/115. However, what Joe has not taken into account, is that Square charges him a commission fee of 3.5% on all transactions, which is deducted after the payment for the shoeshine and HST is calculated and paid by the customer via Square.
Therefore, Joe’s actual gross shoeshine revenue and HST is higher than what Square deposited in Joe’s bank account. Let’s take the example of one customer that actually paid $20 plus $3 of HST for their shoeshine totaling $323 at 15%. Square deducts the 3.5% commission fee from the $23, resulting in Joe getting $22.20 deposited in his bank. However, Joe charged the customer $3 of HST, which is what he must report and remit to CRA on his GST/HST return. If Joe were simply to determine the HST ($2.90) in the $22.20 bank deposit from Square, he would under-report HST by 10 cents.
Now that’s not a big deal, but after several months or years, it would add up over time. Let’s assume Joe consistently made $25,000 per quarter over a period of four years for a total of $400,000 and didn’t learn about this error until he reads this article. If Joe were to be audited by CRA and they uncovered this issue, Joe would likely be assessed for $2,100 of HST plus penalties and interest. Now that Joe knows about this issue, he can correct it. “Don’t be a Joe!”
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