Why should my business charge and collect HST if it doesn’t have too? ITC Input Tax Credits

If you run your own business in Canada (self-employed or corporation), you are not required to charge and collect HST unless you make more than $30,000.

So assuming you are under the $30,000 limit, the question becomes whether you should voluntarily register for an HST number and then charge and collect it. Let’s look at the pros and cons of each.

The argument for why you would not register for HST and would not charge or collect it, is obviously that you can save your customers 13%. If your services cost $100 then you would charge your customers $100 with no tax and that is all they would pay. On the flip side, if you do register for HST number then you must charge and collect it, so the same $100 service now costs your customer an additional 13% for a total of $113 instead of $100. If you are selling smaller priced products or services, this may not be much of an issue, but as the price increases, not charging HST could be an advantage over competitors.

Now you might be wondering if there is even an argument as to why you would want to voluntarily register for HST and charge and collect it. Absolutely there is, and the reason has to do with being able to claim back the HST you pay on all your expenses related to your business. When you do not charge or collect HST, then you can not claim back the HST you paid on your expenses as an ITC (Input Tax Credit) refund.

The easiest way to explain this is to show you an example for each scenario. We will use a business that generates $25,000 in income and has $10,000 in expenses, and we will assume 13% for HST and will assume an income tax rate of 30%. Remember that even if you do not charge or collect HST, you are stil required to pay HST on all your business expenses.

FIRST EXAMPLE
NOT REGISTERED FOR HST and DO NOT CHARGE or COLLECT HST:

Gross Income = $25,000
HST collected on Income = $0.00

Business Expenses = $10,000
HST paid on Business Expenses = $1,300

Net Income = Gross Income less Business Expenses less HST paid on Business Expenses
= $25,000 – $10,000 – $1,300
= $13,700

ITC Refund (HST paid on expenses) = $0 (not allowed to claim an ITC Refund in this example)

After Tax Income = Net Income less 30% Income Tax Rate
= $13,700 – $4,110
= $9,590

Left over income you get to spend = After Tax Income plus ITC Refund
= $9,590 + $0
= $9,590

SECOND EXAMPLE
REGISTERED FOR HST and DO CHARGE and COLLECT HST:

Gross Income = $25,000
HST collected on Income = $3,250 (you just collect it and pass it on to the Government)

Business Expenses = $10,000
HST paid on Business Expenses = $1,300

Net Income = Gross Income less Business Expenses (not including HST paid)
= $25,000 – $10,000
= $15,000

ITC Refund (HST paid on expenses) = $1,300

After Tax Income = Net Income less 30% Income Tax Rate
= $15,000 – $4,500
= $10,500

Left over income you get to spend = After Tax Income plus ITC Refund less HST Paid On Expenses
= $10,500 + $1,300 – $1,300
= $10,500

FINAL OUTCOME
So when we look at the two examples above, we see that in the Second Example, by registering for an HST number and charging and collecting HST, we can then claim back an ITC Refund of the HST we paid on our expenses, which gives us $10,500 left over to spend versus only $9,590 left to spend in the First Example where we did not charge or collect HST. That’s an additional $910 in your pocket.

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