Changes to The GST “Quick Method” July 1, 2006

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If you are a registered business that charge Goods and Services Tax (GST) on your sales or services .. you already know that this is TRUST money, and that you are only collecting these taxes on behalf of the government. You also probably know that when you can collect GST … you are allowed to deduct most or all of the GST that your business has paid, called “input tax credits” (ITC)s. I’ve discussed previously of ways to help make sure that all your GST ITC’s are recorded in your accounting system or by your accountant. For eligible businesses, you don’t have to worry about all this meticulous calculations because there is this thing called .. “THE QUICK METHOD” that Canada Revenue Agency has created. It’s been eligible for years .. but you have to ELECT (or apply) to use this method, then you would always use this method.

The Quick Method for Calculating GST

Prior to July 1, 2006

* If your total annual sales, including GST, is under $200,000 .. you may be eligible for the Quick Method
* If you are a retailer or wholesaler business with goods for resale .. the rate is 2.5%
* If you are a service business .. the rate is 5%
* You are NOT eligible .. if your business is one of the following types of businesses:

    accountants or bookkeepers; financial consultants; lawyers (or law offices); actuaries; notaries public; listed financial institutions; audit services; tax return preparation services or tax consultants; municipalities, or local authorities designated as municipalities; public colleges, school authorities, or universities, established and operated otherwise than for profit; hospital authorities; charities; and non-profit organizations with at least 40% government funding in the year (i.e., qualifying non-profit organizations).

As you can see from the above exclusions, because I am an accountant/consultant and do tax return preparation .. I’m not eligible to use The Quick Method.

RATE CHANGES BEGINNING JULY 1, 2006

* For businesses that have products for resale, the rate is reduced from 2.5% to 2.2% … (generally speaking)

Eligible businesses would be like … antique dealers; grocery and convenience stores; art and craft shops; boutiques and novelty stores; and service stations (gas) .. as well as carpenters who purchase materials and goods for use in their construction.

* For businesses that provide services, the rate is reduced from 5% to 4.3% … (generally speaking)

Eligible businesses would be like .. delivery services; dry cleaners; auto repair shops; quick-service food outlets; house-cleaning services; campgrounds; caterers; delicatessens; painting contractors; photographers; and taxi drivers.

Don’t Forget The Adjustments!

If you elect to use The Quick Method .. there are two things you should remember (besides to re-read your information booklets you receive periodically and the CRA website) ..

* You are entitled to deduct up to 1% of $30,000 sales (including GST) per year limit as a credit against your payment. If you are filing monthly or quarterly, and your sales do not exceed this $30,000 – only take up to 1% of the gross sales (and GST). When you reach $30,000 sales, there is no more credit for the rest of the year. $300 is $300 … don’t forget to claim it.

* The Quick Method means that you can’t decide to claim any Input Tax Credit (ITC) payments on your purchases to reduce your GST remittance even more. However, you can still deduct GST ITC on capital assets that you acquire (use the actual GST paid)

Which Is Better? Should You Use The Quick Method?

* After July 1, 2006 examples …

Suppose: BUSINESS “A” – buys a product for $100 + GST = $106.00 and sells it for $150 + gst = $159.00
Suppose: BUSINESS “B” – buys a product for $100 + GST = $106.00 and sells it for $200 + gst = $212.00

Using the REAL method of reporting GST:

Business A: collects $9 paid $6 >> $3.00 GST is due
Business B: collects $12 paid $6 >> $6.00 GST is due

Using The QUICK METHOD of reporting GST:

Business A: $159 x 2.2% = $3.50 GST is due
Business B: $212 x 2.2% = $4.66 GST is due

In each case above, I’ve ignored the 1% credit on the gross sales, although this is only $300 in question. But, you can see that while the Quick Method might appear to be more beneficial for those companies with a higher gross profits .. (retailers who just double their selling price from their costs) .. for more realistic businesses that I have seen, it is much better to just calculate the GST what you actually collect – and deduct the GST that you actually paid. Of course, just not having to do bookkeeping and all the work to calculate the ‘real’ GST might be worth using this Quick Method and paying a little more.

And, if you are using the GST QUICK METHOD .. remember that if you EXCEED the $200,000 sales including GST threshhold, you have to switch to the REAL system anyway. I should note, that you can’t just calculate both ways, and switch back and forth to select the best option for you with the lowest remittance due.

It’s up to you, and your accountant I suppose! You can research this more online at Canada Revenue Agency’s site .. HERE .. or HERE and if you are from Quebec .. HERE

Comments

Michael Kwan says:

Thanks for this guide. This was very helpful, because I just registered for GST (I’m a freelance writer) and it is a whirlwind of confusing information. Theoretically, I have an infinite % markup (service business with no physical goods to sell), so based on your information, I should opt for the Quick Method? I have virtually no expenses other than my internet access, stationery, etc.

Michael .. besides being registered, you also have to file the election to be able to use the Quick Method. If you call CRA 1-800-959-5525 they should be able to help and provide more detailed information. You can also check out their website CRA – RC4058. Also, a few other things. You are to use the percentage for “service businesses”. Also, in case you aren’t allowed to elect to use the Quick Method until 2008, it would be worth determining if for sure it is better or not. For instance, as a freelance writer .. you may be paying more GST ITC’s than you think, once the year has gone by.

Take care.

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