Fable Friday: New Business Owner Does Not Understand HST

Jeremy started his general handyman business in the spring of this year. He had heard that it was a good idea to register to collect the Harmonized Sales Tax (HST) as soon as he got his business name from Joint Stocks, so he did.

He liked the idea of getting the HST he paid on the equipment he bought back from the government.

He had been pretty surprised when one of his buddies explained the tax to him. Imagine the government sending me money he thought, this is great.

Jeremy was not as busy as he had hoped he would be in his new business but he was working steadily and was writing up invoices for all his customers. His invoices showed his HST number. A couple of months had gone by before he had a customer by the name of Bob, ask him how come he did not charge HST.

“Hey Jeremy, I see you have an HST number on this invoice you gave me, but I don’t see the HST being charged. Is it included in your price?” Bob asks.

Jeremy replied “I am just getting started with my business and so far this year I have not billed $30,000. Until I get to that number I can’t charge the HST, so the sales amount on your invoice does not include any HST.”

“Too bad,” said Bob. “I don’t mind paying the HST for business expenses because I get it all back when I file my HST return. If you had HST included in the amount on this invoice, it would actually cost me less. I am not so sure that you are right about the $30,000 amount for charging HST. I think that if you have an HST number then you have to charge the HST.”

“That is not what I heard,” said Jeremy.

As the year came to a close, Jeremy received the HST return from Canada Revenue Agency (CRA) for him to fill in and efile. He was happy to do this because he was looking forward to the refund. So he filled it in with his $25,000 in sales, no HST charged and a HST paid of $3500. Jeremy had heard that it takes about three weeks to get his refund from CRA.

Jeremy started looking in his bank account every day to see if his refund had been deposited. After two weeks had gone by he was getting excited. Any day now he should be seeing that money show up in his account. Instead, he received a letter from CRA. The HST department wanted to know why he was showing sales of $25,000 and no HST charged. Just a routine question they said. Were his sales zero rated?

Jeremy did not know what zero rated meant but he thought CRA should be able to figure out why he had not charged HST. Could they not see that his sales were not $30,000? There was a name and a number on the letter that he was supposed to call — so he did.

After verifying with the CRA agent on the phone that he was indeed Jeremy. He was asked the following, “We need an explanation of the discrepancy between the amount of your sales and the HST charged. The sales would indicate that $3,750 should have been charged, if all your sales were in Nova Scotia.”

“I don’t have to charge HST until my sales reach $30,000 since I am a new business owner this year,” replied Jeremy.

The agent then said, “That is incorrect, sir. As soon as you register for HST you must start charging the tax. If you had not registered until you reached the $30,000 threshold then you would not be charging HST. However you registered and you must charge all of your customers.”

Jeremy replies, “That was not what I was told.”

“Be that as it may, sir. That is in fact the law. So we will be amending the HST return you submitted to add the $3,750 that you should have collected on your sales. This correction will mean that you need to send in $250,” said the agent.

“But that is not fair! I did not collect the tax so how can I send it in!” replied a very angry Jeremy.

“Perhaps you should contact your customers and let them know that you have to collect HST and that they need to pay that amount to you.”

“Oh man, that would be a lot of people to talk to, and some of them are not going to be too happy to hear that I need more money from them.”

“Well sir, those are your choices. You have to pay the HST, so it is up to you. If you don’t want to get it from your customers, that is your option, but you do have to send it to us.”

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I am a Canadian Chartered Accountant who is very interested in helping people make money and keep it away from the government without breaking any rules.

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Debi Peverill

Debi Peverill

I am a Canadian Chartered Accountant who is very interested in helping people make money and keep it away from the government without breaking any rules.

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