Voluntary GST/HST Registration

A Harmonized Sales Tax (GST/HST) account only needs to be registered when a business reaches $30,000 in sales either in one quarter or over four consecutive quarters. If you are below this threshold, you do not need to register, but if you have voluntarily registered for GST/HST and your sales are below $30,000 you still need to file your returns.

Many individuals make the mistake of not collecting GST/HST and filing returns once they are below $30,000 again. Others stop using their self-employed business and therefore have not collected any GST/HST, but still are required to file nil returns for the period that the GST/HST account was in existence.

Another common scenario is when a self-employed business owner stopped operating a business and kept the GST/HST account active and years later receives a new source of self-employed income that may be well below the GST/HST threshold. However, since the GST/HST account is still active he or she is presumed to have collected the tax anyways!

Here is an example:

THE SCENARIO

Joe has a plumbing business with $50,000 sales a year. He is registered for GST/HST and files an annual return each year.

Joe then joins a plumbing company and works for them as an employee for a number of years and ceases any independent sales. Therefore his only income is employment income.

Joe then gets into teaching guitar on the side and makes $10,000 as a self-employed business. GST/HST does not even cross his mind.

THE DISCUSSION

What Joe should have done is deregister the GST/HST account once he stopped being self-employed. Alternatively, he could have kept the account and filed nil returns each year if he thought he may go into business again.

Joe was not required to collect GST/HST on his guitar lessons because his sales were low. But because he has an active GST/HST account, he was supposed to be collecting 13% GST/HST from his customers. Now when Joe does his personal tax return, his accountant will take the GST/HST off the top as if he properly collected it.

If you have ever opened up a GST/HST account, make sure you are up to date with your filings. If you know you have reported your personal income and GST incorrectly, contact a Chartered Accountant to help resolve your tax matters.

Stealing From Your Own Business

Many people fail to realize that a corporation is a separate entity, essentially a separate person from the individual who owns the company. And while it is the owner who makes the business decisions, manages the cash flow, etc, the money in the company cannot be freely taken out of the business without any repercussions.

There are several ways to take money out of the business, but each one needs to be planned in order to avoid the government accusing you of stealing money from your own business.

There is an account that is often referred to as “Shareholder Loan” or “Shareholder Advance” that tracks the money put into and taken out of the business by the shareholder. It is essentially a loan that the shareholder has with the business. When the company owes the owner money, there is no issue. However, when the shareholder owes the company money, it CAN turn into an issue because you have essentially taken out money without paying tax on it.

If the Canada Revenue Agency discovers that you have taken out this money from your company, they will hit you with severe penalties. Usually they will deny the deduction from the company and add the benefit to the shareholder’s personal return, resulting in double taxation.

One way to properly take money out of the business as the owner it to pay yourself a salary. This means setting up a payroll account, paying the proper source deductions and issuing a T4 slip for employment income. An advantage to this method is that taking a salary from your business helps build your RRSP room. A salary is also included as a business expense on the income statement, which helps to reduce the bottom line and therefore the tax paid by the corporation.

Another method is to issue a dividend. This method will reduce the retained earnings in the business. When you get a dividend, it means that instead of a T4 slip, you will issue a T5 slip to declare the dividend income on your personal tax return.

Another mistake shareholder’s often make is to move out investments held in the company to be held personally. Again, this is viewed as a shareholder taking an asset (the investments) from the company and enjoying a personal benefit as now the individual shareholder holds the investments that were previously company property.

If you want to move the investments to a personal account, that is fine as long as it is done properly and with all the tax implications of it considered.