Registering for the GST RetroactivelyBrian Jang ON September 14, 2020
As a small business owner, or self-employed individual, you are probably aware that once your sales reach 30K, you need to register for the GST/ HST.
Back in 1991, the GST was added to the Excise Tax Act, replacing the manufacturer’s sales tax (MST). At the time of its introduction, it was 7%, but in the time since, it has been lowered to 5%. Some provinces, such as Ontario, have combined the GST with their provincial sales tax, resulting in the Harmonized Sales Tax, or HST.
Unless your business can be classified as a “small supplier” with less than $30,000 in sales, you are required to register for the GST/ HST. While these small suppliers may save on the GST/HST, they are unable to claim reimbursement for Input Tax Credits. Many small businesses fall into the small supplier category initially, but when their sales surpass $30k, they fail to register, unknowingly depriving themselves of ITCs for which they are now eligible.
As a small business owner, you may not have reached $30k yet, and you may not even anticipate reaching that level for some time. While that is certainly not a problem, keep in mind the real benefit of registering for sales tax: the ability to claim back 100% of GST/HST paid on business-related expenses.
Once your business reaches the $30k mark, it will be considered a registrant under the Excise Tax Act, and will be required to collect and pay GST/HST on your sales. To do so, you will need to register your business to receive a business number from the Canadian Revenue Agency (CRA). Without this number, you will be unable to claim back ITCs on your expenses. Worse than that, you will begin to accrue significant tax penalties for not having filed GST/HST returns as required by law.
If your business should happen to be audited and the CRA determines that you are not collecting the GST/HST but are required to, they will assign a business number, but will also issue assessments and tax penalties. Further, all available ITCs will be denied, including office expenses, utilities and phone, rent, and car expenses. To be able to claim them, you will need to file your GST/HST returns, or a notice of objection if you wish to dispute the amount assesses. Not filing and the associated denial of ITCs can result in considerable debts and you can count on the CRA to come collect on them.
So how can you register retroactively?
Just as with the filing of several years’ worth of personal tax returns, you will need to file a Voluntary Disclosure Application. This was created by the CRA for those who have fallen behind on reporting their taxes.
Along with the application, you will provide proof of your business activities. This will include bank statements, contracts, receipts and invoices, and credit card transactions demonstrating payments made for expenses, along with proof that those expenses are eligible to claim as ITCs.
In most cases, the CRA can assign a retroactive GST/HST number starting at the date of the first customer invoice created. Interest and other penalties will only be forgiven for a period of ten calendar years. The latest you can send your GST/HST return in order to claim ITCs is four years after the due date of the first return in which the ITC could be claimed, though you may use ITCs older than four years to offset the GST/HST payable. This allows you to lower the amount you owe for prior reporting periods.
Under the Voluntary Disclosure Program, GST/HST applications will be examined on a case-by-case basis to determine under which category they will be processed:
- Wash Transaction Program. These transactions are for suppliers who have not charged and collected GST/HST from a business that is entitled to a full income tax credit. Registrants that have unintentionally committed errors make use of this program.
- General Program. This is for business owners that need to correct errors made unintentionally. Provided your application is accepted, penalties will not be charged, and you may additionally be granted partial interest relief of 50% of the applicable interest rate on the years disclosed.
- Limited Program. Under this program, as the name implies, the amount of relief for business owners who knowingly avoided their tax obligations is limited. You will avoid criminal prosecution in respect to the information you disclose, and you will not face a gross negligence penalty. There are a number of factors that determine if your application is accepted, such as whether the GST/HST was accepted but not remitted, if attempts to avoid detection were made, whether you disclosed the facts only after being contacted by the CRA, and whether your conduct was deliberate or due to carelessness.
Although you may not need to register at this point in time, remember that upon reaching $30,000 in a 12-month period, you are required to obtain a GST/HST number and begin charging your clients and customers. If you should already be charging, but have somehow overlooked it, act now to avoid unfortunate consequences.
For questions about retroactively registering for GST, contact BCJ Group.