Preparing your GST / HST Returns – How Hard Can It Be?

Goods and services tax (GST) returns are not as simple as you think to complete. Your GST returns require you to report several main items, with a few adjustments and exceptions:

• Total sales
• GST / HST collected or that became collectible
• GST / HST that you paid or owe on qualifying expenses

When you electronically file these, the Canada Revenue Agency (CRA) now asks you to identify whether your income is from exempt supplies and / or zero-rated supplies and asks for sales from your associated group.

This is a welcome addition to the electronic reporting, as it eliminates some of the automatic assumptions made by the vast number of algorithms employed by CRA's ever expanding computing system. For example, being automatically bumped into a more frequent filing frequency, or being screened for audit because the tax collected is not at least 5 percent of the total sales.

As a result of these new line items being added to the electronic filing of the returns, it is more important than ever that all of the line items have the correct information.

It is not enough to pay the correct tax, you must also show the total sales, the total tax collected and the total tax paid. With that said, we have encountered many CRA audits where the only adjustment is to line 101 – Total Sales. The reason the CRA wants this information to be correct, even though it does not have an impact on the taxes, is that this line is used to screen for variances in reporting over time. 

Of course, there are other line items on the return to report recovery of bad debt or other adjustments, purchase of real property, self assessment of GST, rebates etc. The working copy of the return is still one page, however, there is a great deal of information that is included.

Many accounting software programs will calculate your GST return for you. This can be a great tool; however, it is important you understand what information is going into the software program to generate the numbers. You get what you put into something or perhaps the more familiar saying is "Garbage In, Garbage Out;" you cannot depend on the software alone to ensure your GST return is fully completed.

The expectation is your return will be in Canadian dollars, unless you have requested permission from the CRA to keep your records in a different currency. There also is an expectation your total sales have been reported, your tax collected and, of course, tax paid. It is not enough to just report the correct net income number.

You are required to report your sales and tax collected each fiscal period and then there is generally a four- year period to claim your input tax credits. In this way, there is not the same "matching" principle in GST as there is in income tax. You may have incurred a large amount of expenses in the start-up phase and then your revenue comes in the next phase.

In this case, if you are a monthly filer your first few returns may result in a refund and then the next few will result in taxes to be remitted. If your input tax credits are netted against your collectible and the CRA were to audit that, they would just think you have underreported your tax collected as you would still have the four-year period to claim your input tax credits. This can be a big surprise if that four-year period starts falling off the table.

With respect to the computer programs that can generate a GST report for you, it is very important to be able to get to the details that make up the numbers on the returns. For example:

• Are you able to pull out a listing of sales for the period?
• Are you able to separately show the GST / HST collected and also track this by province to reconcile that your program is collecting the correct rate of tax based on the place of supply rules?
• Are you able to show separately the GST / HST you have paid on expenses and ensure it does not include any other sales taxes that may have been paid, such as Quebec sales tax, B.C. provincial sales tax, etc.?

In a recent review project MNP was involved in, we found the program the clients were using was just calculating a net number for purposes of filing the GST return. Once we unravelled everything, we realized most of the information was in a different currency and other provincial sales taxes were being lumped together with the actual GST / HST collected and paid.

This was a new GST filer, so, by being involved at the beginning and before the CRA had a chance to do an audit, we were able to provide them with some tools to use on a go-forward basis in tracking their information and filing their returns.

Computer programs are great, in that they can simplify a number of routine tasks and also quickly complete many complex calculations; however, it is important to understand what the expected outcome is and what information needs to be input into the computer program to get the right result.

For more information, contact Heather Weber, at 250.979.2575 or [email protected] or your local MNP Tax Advisor.