With the so-called “quick method of accounting”, business owners who registered for GST/HST can charge and collect the GST/HST on taxable goods and services they supply to their customers in the usual manner. But they calculate the net GST/HST to remit in a different way.
According to the CRA, the remittance rates depend on the following factors:
- whether you are in the service, retail, or manufacturing business;
- the province in which your permanent establishment is located; and
- the province where your supplies are made or your services are provided.
For example, in Ontario businesses supplying services or intangibles mostly (at least 90%) within that province should use the new remittance rate of 8.8%. If an Ontario business sells goods only in Ontario, the quick method remittance rate is 4.4%.
Note that the quick method is not available for everyone. For example, accountants, bookkeepers, lawyers, and financial consultants are not allowed to use it.
Currently most small businesses wanting to use the quick method of accounting can elect to do so if their taxable sales for a fiscal period do not exceed $200,000. This threshold will be increasing to $400,000 in 2013.
So is the quick method good for your business? It depends. In the next example we will try to show you that for some businesses the quick method can contribute to the bottom line. That is because businesses using quick method collect GST/HST as usual but remit a reduced amount of the tax collected. As a rule of thumb, this method is good for businesses who have a small amount of taxable expenses since there would be very few ITCs (Input Tax Credits) to forgo. IT professionals would be a good example.
Let’s say James Geek is an IT consultant working in Toronto, Ontario. Assuming his total annual sales are $113,000, the HST collected are $13,000 ($113, 000/113 X 13). We will also assume he spent $20,000 on taxable expenses (items on which HST was charged). From our experience this amount is normally even less – unless you pay fees to subcontractors who are GST/HST registrants.
1. First we will apply the regular method of GST/HST calculations:
Line 101: $100,000 (Sales and other revenue)
Line 105: $13,000 (Total GST/HST collected)
Line 108: $2,300 (Total ITCs – $20,000/113 X 13)
Line 115: $10,700 (HST to be remitted to the CRA)
Therefore, using the regular method of accounting James will remit $10,700 in HST.
2. Now let’s calculate the HST owing using the Quick Method of accounting:
Line 101: $113,000 (Sales and other revenue including GST/HST collected)
Line 105: $9,944 (Total GST/HST collected – $113,000 X 8.8%)
Line 106: $65 (ITCs paid in respect of capital assets used for business. We assume that James spent $565 on new assets: $565/113 X 13 = $65)
Line 107: $300 (1% of the first $30,000 of tax-included revenue for the year).
Line 108: $365 (Total ITCs and adjustments, Line 106 + Line 107)
Line 115: $9,579 (HST to be remitted to the CRA)
Using the quick method of accounting James will remit $9,579 HST. The difference in this example is $1,121. So by simply switching to the quick method James will add $1,121 to his bottom line. But you should note that the part that is not remitted under this method is reported as income on your income tax return.
So it is always a good idea to check your average sales and expenses numbers before making a decision to switch to the quick method. Then, if your business is not already using the quick method it must elect to do so. Annual filers must make the election by the first day of their second quarter. If you file HST returns more frequently, you can make an election to use the quick method as late as the due date of the month or quarter you started using the quick method. According to recent changes published by the CRA you can now electronically elect to use the quick method of accounting for GST/HST filings.
You can always CONTACT US to discuss your particular situation.