When running a small business in Canada, most entrepreneurs are savvy enough to know that when revenues (for taxable supplies) exceed $30,000 in any four consecutive quarters, it is time to register for and collect GST/HST. This also means that you’ll need to file GST/HST returns annually, quarterly or monthly, depending on your specific scenario and selection.
These are some common areas that we find small business owners who try to prepare or file their sales tax returns on their own make mistakes that can be costly:
Meals and Entertainment
A very common error that can occur is related to expenses and input tax credits (ITCs) related to meals and entertainment. For tax purposes, the allowable portion of the tax deduction for meals and entertainment expenses is 50% of the expense. Similarly, it is important to note that the ITC that can be claimed must follow suit, and only 50% of the GST/HST paid on meals and entertainment expenses are eligible to be claimed as ITCs.
Secondly, in relation to meals and entertainment expenses, when a tip is left for the server, there is no ITC related to the tip, and it is important to ensure that the ITC claim matches the actual allowable portion of the GST/HST paid.
As many business owners know, when using a personal vehicle for business purposes, the prorated portion of any business-related expenses can be deducted against income. This would include items such as fuel and maintenance. However, a common oversight is that the ITC claim is not prorated by the respective business use portion as well. It is important to track this closely and ensure consistency between the prorated amount used for the tax deduction claim and the ITC claim.
Inter-Corporate Revenues and Expenses
There are often scenarios where a parent company or holding company will charge fees to a subsidiary (or operating company), for taxable supplies such as, for example, rent or management fees. It is common to forget that this is, after all, a commercial transaction, and there should be an agreement or invoice generated, and sales tax must be charged and paid (except for those companies that are eligible and have elected out of GST/HST in such transactions).
Summary and Recommendations
Software is available (such as QuickBooks Online and Xero) that can assist with calculating GST/HST collected and the ITCs to be claimed when filing. However, it is important to note that the software is not perfect and may not catch issues such as those noted above. It is always recommended to consult a professional accountant prior to filing anything with the Canada Revenue Agency to ensure that your risk of errors is minimized as much as possible. If you need any assistance with corporate tax or GST/HST filings please contact us.