Simplified accounting for small business
While the claiming of ITCs is relatively simple in concept, it can become complex in application and, in any event, the requirements for record-keeping and documentation of claims can be onerous. In recognition of that reality, the CRA provides small businesses with two alternate methods of calculating and claiming ITCs and the amount of net GST/HST to be remitted to the CRA, each with its own advantages and disadvantages.
Before commencing use of such a method, a cost/benefit analysis is suggested. And this does not mean just the dollars and cents. Certainly, an analysis of the tax cost position, and whether accounting for actual taxes is better or worse than using the special methods, is fundamental. But, the result of this analysis should be balanced with a cost/benefit analysis of the administrative costs. This refers to the length of time required to manage the various optional processes, as well as the level of expertise required. The costs associated with the use of staff should be compared with the benefits of the processes. Hence, even if the use of a simplified method results in a loss of tax dollars, that may be justified by the administrative cost reductions found through saved staff time. The cost/benefit analysis should be reconsidered over time, whether annually or otherwise, since the results may change with changes in the organization or the tax regimes.
The quick method
The easiest way to calculate the amount of net GST/HST which must be remitted to the federal government is the “Quick Method”, which is generally available to small businesses with worldwide taxable annual supplies totaling $400,000 or less. Businesses which use the Quick Method collect GST or HST from their customers or clients at the applicable rate. Basically, the Quick method permits the business the option of remitting an amount of tax that is a percentage (known as the “remittance rate”) of its gross sales. The rate is determined by the CRA with reference to certain items, including the extent of goods or the extent of services supplied by the registrant, and whether the supply was made through a permanent establishment of the registrant in a participating or non-participating province. Since the rates differ among the harmonized provinces, the prescribed rates for streamlined accounting also differ. The remittance rates are provided in tables. An additional table, with unique prescribed rates is provided for registrants which sell items subject to provincial point-of-sale rebates. There’s no need, when using the Quick Method, to itemize or document GST/HST paid on supplies. The “rough justice” approach of the Quick Method would suit business owners who do not want to spend the time and effort required to track and document ITC claims on an ongoing basis. For some businesses (for example service businesses) which require relatively little in the way of supplies, and therefore incur relatively low business-related GST costs, use of the Quick Method can produce a better result than itemization. More information on the Quick Method is available in the CRA publication – RC4058, Quick Method of Accounting, available on the CRA Web site at www.cra-arc.gc.ca/E/pub/gp/rc4058/README.html. This guide and the Streamlined Accounting (GST/HST) Regulations have been updated in respect of Harmonization 2010.
The simplified method
Larger “small” businesses (those having up to $1 million in supplies in the previous fiscal year and in the previous quarters of the current fiscal year and taxable purchases of less than $4 million in the immediately preceding fiscal year) are eligible to use the “Simplified input tax credit method” when calculating and remitting GST/HST. Using this method, the business adds together all taxable purchases, including GST/HST, provincial sales tax, tips, and penalty and interest charges on late payments. For GST-only purchases, the total is multiplied by 5 and the result divided by 105 to arrive at the ITC amount claimable. The total of purchases on which HST was paid is multiplied by the appropriate HST ratio (12/112, 13/113, or 15/115) to arrive at the ITC amount. As with the Quick Method, the advantage of the Simplified Method is a reduction in the amount of record-keeping and documentation required of the small business owner.
The specific steps involved in using the simplified method are outlined in greater detail on the CRA’s Web site at www.cra-arc.gc.ca/tx/bsnss/tpcs/gsttps/bspsbch/rtrns/clcltng-eng.html. The Streamlined Accounting (GST/HST) Regulations have been updated in respect of Harmonization 2010.
This sounds very simple, but there are restrictions on who can make the election, and detailed rules on the application of the tax ratio. It is important to note that the thresholds refer to the totals for the electing entity and its associates. The ratio cannot be applied to real property purchases or purchases which were not subject to the tax (such as exempt supplies).
The availability of this election highlights a separate point, which is that without the election, a business is not entitled to use the ratios for ITC calculations. That may sound simple, but many businesses, regardless of size, continue to simply apply a ratio to calculate ITCs. They should not be surprised when this method leads to an assessment. If streamlined ITC calculations were available to everyone, an election wouldn’t be required, or there would not be qualification requirements to make the election.
The articles posted here provide information of a general nature. These articles should not be considered specific advice; as each vistor’s personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in these articles.
Content provided by CCH Wolters Kluwer
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