Sunday, April 5, 2015

Canadian Taxes A to Z (2015): G is for Goods and Service Tax (GST)

Today in the continuing Canadian Taxes A to Z saga, I present to you the letter G, representing Goods and Services Tax. Better known to its friends and foes alike as GST. Also sometimes going by the name Harmonized Sales Tax (HST) in provinces where it has merged with provincial sales taxes.

Since its introduction in 1991, the GST has become almost as much of a target for critics as the dating way back to 1917 income tax itself. Although GST replaced a higher (13%) hidden manufacturers sales tax with a 7% tax, and promised rebate credits to low and middle income Canadians, sticking an obvious consumption tax on top of pre-existing provincial sales taxes proved to be deeply unpopular among Canadians. I've got an undergrad background in economics, and the math remains far beyond me as to just how revenue neutral the GST really was, notwithstanding government claims at the time.

I can tell you that during the early years of its implementation, when I was responsible in Toronto for prosecuting offences under Part IX of the Excise Tax Act (the rather poorly named place where GST rules reside), we had folks do things like submit an input tax credit application for a rebate on the GST supposedly paid on the purchase of a 737 jetliner, notwithstanding the taxpayer was living in his mother's basement with no real business, and the government simply mailed him a gigantic cheque! Which he quickly spent.

Yes, he did go to jail. And no, you can't get away with this any more - the system and oversight of GST/HST rebates has been improved. But arguably the rules surrounding GST/HST remain more uncertain than those covering income tax.

Part of the uncertainly is that we have less than 25 years of GST history under our belts. Another part of the problem is that the relatively well developed principles of income tax law aren't all that relevant in the GST world.

I'm a tax lawyer, and I can tell you that I get stumped by far more GST questions than income tax questions. I'll eventually figure out the answer to the GST questions - that's my job - but they usually require more research and discussions with the CRA than would be required for even esoteric income tax questions.

The main things you need to know about the GST are:

1. you should always apply for personal credits, and let the CRA tell you no, rather than assuming you won't qualify;

2. even if your self-employment income is under $30,000 annually (the threshold where registration becomes mandatory), you should still consider registering for GST, as you'll be able to recover GST you pay for business supplies;

3. if you are GST registered, make sure you do your required filings (even if you have no business sales, you still need to file or deregister);

4. if you do collect GST from clients, keep careful track of all the GST you pay out (or use the simple method if permitted) to minimize the GST you need to remit to the CRA;

5. if you are obligated to remit GST, don't instead divert the funds to prop up your failing business; the CRA will find you, and GST audits are very easy from the CRA perspective compared to income tax audits, because there's very little room for grey areas.

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