Understanding GST and HST for Small Businesses

For any small business in Canada, understanding taxes is essential. A key part of this is the Goods and Services Tax (GST)—a 5% federal sales tax on most goods and services. It’s a value-added tax that businesses collect for the government at each step of the supply chain.

To streamline tax collection, some provinces have adopted the Harmonized Sales Tax (HST), which blends the federal GST with the provincial sales tax (PST) into a single rate. These participating provinces are:

• Ontario

• New Brunswick

• Nova Scotia

• Prince Edward Island

• Newfoundland and Labrador

The key difference for your business is the rate. While the federal GST is a flat 5%, HST rates vary by province from 13% to 15%. The correct tax to charge depends on “place of supply” rules, which consider both your business location and where your goods or services are delivered.

Who Needs to Register for GST?

Not every small business needs to register for a GST/HST account immediately. The Canada Revenue Agency (CRA) uses the ‘small supplier‘ rule to determine who must register—a threshold based entirely on your business’s total revenue from taxable goods and services.

The threshold is $30,000 in worldwide taxable sales over any four consecutive calendar quarters. The moment your revenue surpasses this figure, you lose your ‘small supplier’ status and have 29 days to register for GST/HST. You must begin charging the tax on the exact sale that tips you over the limit.

If your revenue is below the $30,000 limit, registration remains optional. Still, many businesses register voluntarily to claim Input Tax Credits (ITC’s), recovering the GST/HST paid on expenses to improve cash flow. Once you register, however, you are obligated to collect and remit the tax on all taxable sales.

Small Supplier Rule — What You Need to Know

Crossing the $30,000 threshold starts a 29-day countdown to register for a GST/HST account. You must begin charging the tax on the very sale that pushed you over the limit, requiring an immediate update to your invoicing and pricing to stay compliant with the CRA.

Even if your revenue is well below the threshold, voluntary registration is an option. The primary motivation? Claiming Input Tax Credits (ITC’s). Registering allows you to recover the GST/HST paid on business expenses—from inventory and equipment to rent and professional services. For startups with heavy initial costs, this can provide a significant cash flow boost by converting tax expenses into refunds.

Steps to Register for a GST/HST Number

Once you’ve determined you need to register, the process is straightforward. The first prerequisite is a Business Number (BN) from the CRA—a unique nine-digit identifier for all your federal government accounts, including GST/HST, payroll, and corporate income tax. If you don’t have a BN yet, you must obtain one before you can open a GST/HST account.

The most efficient way to register is online, but other options are available:

• Online: Use the CRA’s Business Registration Online (BRO) service.

• By Phone: Call the CRA’s business inquiries line.

• By Mail or Fax: Submit the required forms, though this method is significantly slower.

To ensure a smooth registration, have the following information ready:

• Your Business Number (BN)

• The effective date of registration (the date you crossed the $30,000 threshold or your chosen voluntary date)

• Your fiscal year-end

• An estimate of your total annual worldwide taxable sales

Once your registration is processed, the CRA will issue a specific GST/HST account number (your BN followed by “RT0001”). You must include this full number on all invoices for taxable sales.

Filing GST Returns — A Step—by—Step Guide

Once registered, your primary ongoing responsibility is filing regular GST/HST returns. In this process, you report the total tax collected from customers and claim credits for the tax paid on business expenses. The final calculation determines whether you owe the CRA, are due a refund, or have a zero balance.

Your first step is to calculate your net tax using a straightforward formula: simply subtract your eligible Input Tax Credits (ITC’s) from the total GST/HST you collected. If the collected tax exceeds your ITC’s, you remit the difference. If your ITC’s are greater, you’ll receive a refund from the CRA.

Based on your business’s revenue, the CRA will assign you a reporting period: annually, quarterly, or monthly. A return is mandatory for every period, even if you had no business activity. To complete it, you’ll need your total sales figures, the total GST/HST collected, and the total value of your ITC’s.

For reporting periods beginning in 2024 or later, all GST/HST returns must be filed electronically. The CRA offers several methods:

• My Business Account: This secure CRA portal is the most comprehensive tool for managing your business taxes online, including filing your GST/HST return.

• GST/HST NETTLE: A simple, web-based service that allows you to file your return directly without logging into a full account.

• Third-Party Software: Many accounting software programs are certified by the CRA and allow you to file your return directly from the application.

Every reporting period has a strict filing deadline. Missing it can trigger penalties and interest charges, so tracking these dates and submitting returns promptly is essential to stay compliant.

Remitting GST Payments to the CRA

If your return shows a balance owing, you must remit the payment by the filing deadline, as paying on time is essential to avoid penalties.

The CRA’s recommended payment methods are electronic:

• Online Banking: Pay through your financial institution’s website by adding the CRA as a payee.

• My Payment: Use the CRA’s online service to pay with a debit card.

• Pre-authorized Debit (PAD): Authorize the CRA to withdraw the amount from your bank account via your My Business Account.

While electronic payments are recommended for their speed and tracking, you can also pay in person at a Canadian financial institution or by mail.

Claiming Input Tax Credits (ITC’s)

One of the most significant benefits of GST/HST registration is the ability to claim Input Tax Credits (ITC’s), allowing you to recover the tax paid on legitimate business expenses. Subtracting these ITC’s from the tax you’ve collected directly reduces your net tax payable and can substantially improve your cash flow.

To qualify for an ITC, the expense must be directly related to your commercial activities. Common eligible costs include:

• Office supplies and equipment

• Commercial rent and utilities

• Professional services, such as accounting and legal fees

• Marketing and advertising costs

• Business-related travel expenses

Meticulous record-keeping is essential for supporting ITC claims. You must retain invoices or receipts that clearly show the GST/HST paid and the supplier’s registration number. Without proper documentation, the CRA can disallow your claims during an audit, forcing you to repay the credits with interest and penalties.

Common Penalties for GST Non—Compliance

Financial penalties typically arise from three main issues:

• Failing to register on time

• Filing returns late

• Remitting tax payments late

The CRA imposes a penalty for late filing, even if you owe no tax or are due a refund. For late payments, interest is charged and compounded daily on the overdue amount, which can quickly increase the amount you owe.

A history of late filings or payments can also increase the likelihood of a CRA audit. Should an audit uncover discrepancies, you could face additional tax assessments, interest, and harsher penalties.

To avoid these penalties, stay organized. Use accounting software, set calendar reminders, or work with a bookkeeper to ensure you register, file, and pay on time, every time.

GST Considerations for Startups

For startups, deciding whether to register for GST/HST voluntarily before it’s mandatory is a key early financial decision.

You don’t have to wait to hit the $30,000 threshold; many startups choose to register voluntarily from day one. The primary advantage is claiming Input Tax Credits (ITC’s) on significant initial expenses like equipment, software, and rent. Registering early allows you to recover the GST/HST paid on these purchases, providing a much-needed cash flow boost.

Whether you register early for the cash flow benefits or wait until it’s mandatory, establishing strong compliance habits from day one is essential for your business’s long-term financial health.