One of the complexities of operating in Canada is needing to know the ins and outs of taxation for your employees. The Canada Revenue Agency handles import and export fees, payroll taxes, and sales tax remittances from Canadian businesses and foreign businesses operating in Canada alike.
If you’re not Canadian, however, the idea of sales tax may be somewhat confusing. The CRA isn’t particularly clear on who needs an account to handle sales tax either. Many business owners and managers alike ask whether or not they need a GST account when they need to pay Canadian employees.
What Is GST/HST?
In Canada, the federal government levies a five percent sales tax on goods and services. This is known as the “general sales tax” or GST.
Most provinces (with the exception of Alberta) also have a sales tax. This is sometimes known as the “provincial sales tax” (PST). In provinces where the CRA is responsible for both, the tax is combined and is known as a “harmonized sales tax,” or HST.
Depending on which province you operate in, you may be required to collect PST in addition to the GST. Provincial rates vary. For example, in Ontario, the provincial portion of the tax is 8 percent. The HST rate is thus 13 percent.
When Is GST Charged?
GST is applied to most sales of goods and services. If you deliver a good or a service to a client on Canadian soil, you’ll likely need to charge them GST/HST on the purchase. There are some exceptions. For example, food products deemed “necessities” do not have GST/HST applied to them.
Foreign clients, such as those operating in the US, will not be charged GST/HST, since the service or good is deemed to have been delivered on foreign soil.
The other major exception is the size of your business operation. If your business earns under $30,000 Canadian per year, you are exempt from collecting HST/GST from your clients. If your business income exceeds $30,000 per year, you’ll be automatically registered and required to collect GST/HST.
Why Collect Sales Tax?
Some business owners opt to register for and collect HST/GST even if their revenue is under $30,000. At the end of the year, you can use any HST/GST you’ve paid out on your business expenses as “credits” against what you owe the CRA. As a result, you may not need to pay all of the HST/GST you’ve collected.
While you can still use HST/GST credits if you don’t collect HST/GST, having those funds sitting in an account earning interest is considered a wise business plan by some. It’s also a good idea if you suspect you may exceed the $30,000 limit.
Does It Affect Payroll?
The simple answer here is no. GST/HST is a sales tax, not a payroll or income tax. As a result, you do not need to register for a GST/HST account to pay your employees in Canada.
What you do need to do is register for a federal business number so you can remit payroll taxes to the CRA. The CRA uses this number to assign your business import, export, payroll, and GST/HST accounts. When you register for your federal business number, the CRA may automatically set up a GST/HST account for your business as well.
It’s important to remember you do not need to collect GST/HST unless you’re making more than $30,000 per year. If you are or suspect you will, go ahead and collect HST/GST from your clients. If you don’t, you don’t need to pay the CRA GST/HST, and you won’t need to use the account, even if they did create one.
It’s easy to see how the intricacies of the system can become confusing! If you’re still not sure, talk to a Canadian Employer of Record today. They can help you sort out what you need to do.