Businesses registered for the Harmonized Sales Tax (HST) in Canada must file returns. They also need to remit the tax they collect to the Canada Revenue Agency (CRA). Registrants have two primary options for reporting the HST collected. They can also claim the input tax credits (ITCs). The options are the Quick method and the Detailed (or regular) method. Choosing the right method can significantly impact a business’s cash flow and administrative workload. This article outlines the differences between the two methods and clarifies which businesses are eligible for each.
The Detailed Method: Standard HST Reporting
The Detailed method is the traditional way of reporting HST. Under this approach, businesses:
-Charge and collect HST on taxable sales.
-Track all HST paid on eligible business expenses (known as input tax credits).
-File a return calculating the net tax by subtracting total ITCs from the total HST collected.
-Remit or receive the difference.
This method provides the maximum ITCs because it is calculated. It is suitable for businesses that pay significant amounts of HST on expenses. This allows them to claim the full value of ITCs. But, it requires meticulous bookkeeping and detailed tracking of HST paid and collected. For many small businesses, this method can be time-consuming and burdensome unless they have an accounting system in place.
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The Quick Method: Simplified Reporting
The Quick method is another reporting choice that simplifies the process of remitting HST. Instead of calculating the exact amount of HST collected and deducting input tax credits on every buy, businesses using the quick method:
– Continue to charge HST at the applicable rate (e.g., 13% in Ontario).
– Remit a reduced percentage of their gross (HST-inclusive) sales as their net tax owing. This percentage varies by industry and province. The rates for remittance in Ontario are:
– 4.4% for businesses that purchase goods for resale (antique dealers, convenience stores.)
-8.8 % for businesses that provide services.
In addition, CRA allows a 1% credit on sale up to a maximum of $30,000 per fiscal year.
For example, a service business in Ontario remit only 8.8% of its HST-inclusive sales as net HST payable. If it charged $113,000 (including HST) for its services, it would remit 8.8% of that amount, or $9944 less a credit of $300 (1% of $30,000) which equals to $9644 , instead of calculating the exact amount collected and subtracting ITCs.
This method reduces administrative work. It is financially beneficial for businesses with low input costs. The remittance rate is often less than the full HST collected.
Who Is Eligible for the Quick Method?
To use the quick method, a business must meet all of the following criteria:
1. Annual Worldwide Revenues: The business (and its associates) must have less than $400,000 in worldwide taxable supplies (including zero-rated supplies but excluding financial services and sales of capital property) in the preceding fiscal year.
2. Registrant Type: Most businesses that provide goods and services are eligible, including sole proprietors, partnerships, and corporations.
3. Business Type: Certain types of businesses are excluded from using the quick method, including:
-Accountants and bookkeepers
-Financial consultants
-Lawyers (except notaries in Quebec)
-Actuaries
-Audit services
-Listed financial institutions
-Charities and public service bodies
4. Election Requirement: Eligible businesses must elect to use the quick method by filing Form GST74. This form is required for the Election and Revocation of the Quick Method . The election generally takes effect at the beginning of a reporting period.
5. Voluntary Revocation: A business can stop using the quick method by revoking the election. However, once revoked, it generally cannot re-elect for at least one year.
Which Method is Best?
The best method depends on the nature and structure of the business. Here are some general guidelines:
Use the Quick method if:
– the business incurs input costs that are relatively low.
– to reduce the time and complexity of calculating ITCs.
– the revenues are under $400,000
Use the Detailed method if :
– The business incurs significant HST on purchases and wants to maximize ITC claims.
– The business maintains detailed accounting records.
– The business is not eligible for the quick method due to the business type.
Choosing between the quick and detailed method of HST reporting is more than an administrative decision. It can affect cash flow and profitability. The detailed method allows for precise calculations. It also enables full ITC claims. The quick method offers a simpler approach. This is beneficial for service-based businesses with minimal expenses. Before making an election, consult a tax professional or accountant to decide which method best suits business needs and eligibility.