Should you register for GST/HST and QST and What it Means to Be Zero Rated
When starting your new Canadian small business or launching into self employment, it is essential to determine whether you are required to register for GST/HST (and QST if you have a started a business in Quebec). The simple answer is that if you anticipate that your annual gross revenues (total sales) are going to exceed $30,000 and your products or services do not qualify as Exempt or Zero rated (explained below) , then you are required to register for GST/HST and collect sales taxes from your Canadian customers and clients. The $30,000 limit applies to the last 4 quarters of revenues. If you decide not to register for sales tax upon the inception of your business/self employment, then you must monitor your sales revenues over a rolling 4 quarter period and register once you are close.
Note that very similar rules have been established by Revenue Quebec for Quebec Sales Tax (QST) and as such most of the guidance applies to QST.
If you are located outside of Quebec and are not sure whether to register for QST, please check my blog post on whether you are required to register if you are located in a different province or country.
To learn more about sales tax, read my article on Frequently Asked Questions (FAQ) on GST/HST
What does it mean to be Zero-Rated?
As the name suggests products and services on which you are not required to charge GST/HST and QST are referred to as zero rated. Included in this category are prescription drugs, groceries that are not for immediate consumption and exports outside of Canada including services provided to American (US) and international customers i.e. you are not required to charge GST/HST to customers outside of Canada. Small business and self employed people whose goods or services have been designated as zero rated, can still register for GST/HST and QST as they are allowed to claim the input tax credits i.e. sales taxes paid for supplies and expenses. For example, if you provide services to clients internationally e.g. the United States , you are not required to charge GST/HST and QST in most cases, however you may still claim back any GST/HST and QST paid on business expenses. This can be a substantial benefit for businesses and freelancers.
How is Zero Rated Different from Exempt ?
While zero rated goods and services allow businesses to claim sales taxes paid on expenses, goods and services that are exempt mean that businesses cannot claim sales taxes on expenses paid. For example, Doctors and daycares do not charge GST/HST and may also not claim sales taxes paid on their expenses. As such, businesses such as healthcare providers, education services and financial services may not even register for GST/HST. There are however situations where both taxable and exempt products/services are sold by a business in which case you would register, charge sales tax to customers on taxable services (e.g. a music lesson provider might also sell online courses) and be able to recover taxes paid on expenses relating only to the sales that are taxed.
If you anticipate less than $30,000 in sales, should you register anyway?
Even if you do not meet the threshold of $30k for mandatory registration or if you are providing Zero rated goods or services, it might still make sense to register depending on certain factors which are discussed below:
Reasons to NOT Register for GST/HST
For those that have started a side or hobby business such as selling goods on ebay or providing web development services, in their spare time and don’t expect their businesses to scale, at least for the foreseeable future.
You are primarily providing goods or services to individuals/businesses who are not registered for GST/HST which allows the total price you have to charge to be lower since your customer does not have to pay sales taxes. This could make you more competitive,
Business owners/self employed workers who want to do as little administration as possible and not have to worry about tracking sales taxes and potentially paying penalties and interest for late filings
If you are still in the testing stage and not sure about the viability of your business idea
Reasons to Register for GST/HST (for businesses that have sales less than $30k)
The primary benefit of registering for sales tax is that it allows your business to claim back 100% of GST/HST and QST that you have incurred on business related expenses. This is particularly helpful to startups and businesses that have high up front costs such as computers and equipment as well as rent, office expenses, travel etc.. Many such businesses have no sales in the beginning and the recovery of sales taxes can be particularly helpful to cash flow.
Not being registered for sales can communicate to your clients that you are small and by extension might imply a lack of professionalism.
If you expect that your sales will exceed the threshold of $30,000 in the future, you will be required to register which will result in up to a 15% increase in the price of your goods or services. This can be a significant increase and might have an impact on sales.
Since clients/customers expect to pay sales taxes anyway, it is rarely a deal breaker. Also, if your customers are primarily businesses, it has no real impact on their bottom line as they are able to claim back their businesses related sales taxes as well.
Businesses have the option to register for the Quick Method of reporting GST/HST (and QST) which allows them to simplify their method of calculating GST/HST collected (rather than having to track each individual sale and expense). The remittance to the government is at a lower rate than what is actually charged to the customer . the tradeoff is that you are not permitted to claim tax paid on expenses. For example if you are a service based business that charges 5% GST, you only have to remit 3.6% of this back to the government. This can increase your profit and cash flow for businesses who have low expenses.
Deciding whether to register for GST/HST and QST is a determination that should be made based both on the tax requirements as well as business considerations. If you do not decide to register right away, you can always do so in the future. However, keep in mind that you might lose the ability to claim tax paid on expenses which can add up particularly for businesses that have high start up costs,
How to Set Up Sales Taxes (GST/HST and QST) In QuickBooks Online:
Below is a video tutorial on setting up your sales tax for the first time in QuickBooks Online and how it works in practice using the example of a sales invoice:
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