GST/HST Audit & Trust Examination
The most common audit type is the GST/HST audit of small and medium sized businesses. In fact, the bulk of CRA employees are employed in ensuring that businesses have met their obligations remitting the correct amount of GST/HST.
This type of audit is otherwise known as a trust examination, which seeks to audit only the GST/HST or payroll deductions and remittances of your corporation. It is called a ‘trust examination’ as it is an examination of your ‘trust funds’. Trust funds are GST/HST and payroll funds, as you are said to have collected these funds ‘in trust’ for the government.
With respect to GST/HST, the CRA has shifted its focus from a generalized to a specialized GST/HST compliance approach. Previously smaller businesses with annual sales less than $4 million were subject to a combined income tax and GST/HST audit. This is no longer the case. Currently, an employer can be audited either for income tax or GST/HST compliance. Since being compliant with one tax does not necessarily mean that one is compliant with all tax, each type of tax presents its own risk assessment and can be subject to a separate audit.
A trust examination or GST/HST audit should be distinguished from a pre-assessment review, which most commonly takes place when a GST/HST refund is requested. These requests are reviewed to identity errors or evidence of non-compliance. An audit, however, is triggered when an employer is selected for a GST/HST audit or examination either randomly or based on risk assessment after an assessment has been issued. These audits focus on GST/HST filing errors and omissions.
To avoid an audit based on risk assessment, the employer must know what his responsibilities are with respect to remitting GST/HST. The following article will look at these responsibilities; conditions that allow the employer to reclaim GST/HST, or a portion thereof, with input tax credits (ITCs); and what can happen if the employer fails to meet his/her obligations.
Do all businesses have to charge GST/HST?
Only ‘large’ businesses are required to charge GST/HST. A large business is one thatexceed $30,000 in sales over the previous 4 quarters. Consequently, this is often not a ‘large’ business at all. There has been some talk on the legislative level to increase the rules to reflect the true difference between a small and large business, however for now the threshold remains at $30,000. A business that earns less than $30,000 in a year is known as a ‘small supplier’ and need not register nor collect GST/HST.
Most property and services supplied in or imported into Canada are subject to GST/HST.
It is important to note that not all goods and services are subject to GST/HST however. There are ‘zero-rated’ supplies which means the effective tax rate is zero. In addition, there are also exempt supplies which means there is no GST/HST tax rate whatsoever. While the net effect between zero-rated and exempt supplies are the same (the recipient pays no tax), the distinction is important for the eligibility of ITCs.
Type of Supplies: taxable, zero-rated, and tax exempt
Taxable supplies (GST/HST is charged) include:
- Sales of new housing (certain sales of new housing may be subject to a previous rate of GST/HST)
- Sales and rentals of commercial real property
- Sales and leases of automobiles
- Car repairs
- Soft drinks, candies, and potato chips
- Clothing and footwear
- Advertising (unless provided to a non-resident of Canada who is not registered for the GST/HST)
- Taxi or commercial ride-sharing services
- Legal and accounting services
- Hotel accommodation
- Barber and hairstylist services
- Almost all goods and services, unless it is specifically exempt
Zero-rated supplies are supplies of property and services that are taxable at the rate of 0%. This means there is no GST/HST charged on these supplies. Examples of zero-rated supplies are:
- Basic groceries such as milk, bread, and vegetables
- Agricultural products such as grain, raw wool, and dried tobacco leaves
- Most farm livestock
- Most fishery products such as fish for human consumption
- Prescription drugs and drug-dispensing services
- Certain medical devices such as hearing aids and artificial teeth
- Feminine hygiene products
- Exports (most goods and services for which you charge and collect the GST/HST in Canada are zero-rated when exported)
- Many transportation services where the origin or destination is outside of Canada
GST/HST Exempt Supplies
Some supplies are exempt from the GST/HST altogether. GST/HST does not apply to these supplies.
- A sale of housing that was last used by an individual as a place of residence;
- Long term rentals of residential accommodation of one month or more and residential condominium fees (residential rent);
- Most health, medical, and dental services performed by licensed physicians or dentists for medical reasons
- Child care services, where the primary purpose is to provide care and supervision to children 14 years of age or under for periods of less than 24 hours per day
- Most domestic ferry services
- Legal aid services
- Many education services such as:
- Courses supplies by a vocational school leading to a certificate or a diploma that certifies the ability of individuals to practice or perform a trade or a vocation
- Tutoring services made to an individual in a course that follows a curriculum designation by a school authority
- Music lessons
- Most services provided by financial institutions such as lending money or operating deposit accounts
- The issuance of insurance policies by an insurer and the arranging for the issuance of insurance policies by insurance agents
- Most property and services provided by charities and public institutions
- Certain property and services provided by governments, non-profits, municipalities, and other public service bodies including municipal transit services and standard residential services such as water distribution
Where was the supply made?
The rate of GST/HST that a business charges depends on the province where the supply was made: the current rates are:
- 5% (GST) in Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and Yukon
- 13% (HST) in Ontario
- 15% (HST) in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island
Input tax credit (ITC)
A business may be eligible to claim input tax credits (ITC) to recover GST/HST paid or payable. Input tax credit means a credit that GST/HST registrants can claim to recover the GST/HST paid or payable for property or services they acquired, imported into Canada, or brought into a participating province for use, consumption, or supply in the course of their commercial activities.
If you do not charge or collect the GST/HST, you generally cannot claim ITCs to recover GST/HST paid or payable. However, if you are a registrant that collects GST/HST and then makes a zero-rated supply, you are still entitled to the ITC.
GST/HST and Imported Goods
The owner or importer of record is responsible for paying the GST/HST on imported goods. Most goods imported into Canada are subject to the federal GST, which is calculated at the rate of 5% of the duty-paid value of the shipment. This tax must be paid at time of entry and is collected at the border, unless the goods are going directly to a bonded warehouse. In this case, the GST is collected when the goods leave the warehouse and become eligible for sale in Canada.
Several provinces have combined the GST with their provincial sales taxes on various categories of goods, thus creating a Harmonized Sales Tax (HST). On most commercial imports, however, only the federal (GST) portion of the HST is applied to the sale.
If you charge GST/HST and you are the importer (the person who caused the goods to be imported into Canada), you may claim an input tax credit (ITC) for the tax you paid on the imported goods, as long as you meet the requirement for claiming ITCs.
How to calculate GST/HST
If you know your place of supply and type of supply, you can use the GST/HST calculator to calculate the amount of GST/HST to charge.
Receipts and Invoices
You must let your customers know if the GST/HST is being applied to their purchases and what that rate is. You have to either show the amount paid or payable for the supply separately from the amount of GST/HST payable on the supply or show that the total amount paid or payable for a supply includes the GST/HST. You must also note your GST/HST number.
You have to give customers who are GST/HST registrants specific information on the invoices, receipts, contracts, or other business papers that you use when you supply taxable goods and services. They need this information to support their claims for input tax credits (ITCs) or rebates for the GST/HST you charged. This invoice must also include your GST/HST number.
Date of invoice for reporting periods
The date of the invoice will determine when you need to report and remit (pay) the GST/HST you charge. For the reporting period that includes the date of the invoice, your return should include the GST/HST you have charged, whether or not you have received payment.
What to do with collected GST/HST
You are responsible to hold the GST/HST in trust until you send it to the CRA. This includes the collectible tax that you charged and have not collected yet. At the end of each reporting period, you need to: complete and file a GST/HST Return and remit the net amount of GST/HST.
The GST/HST return (Form GST34-2) will show your due date at the top of the form. The due date of your return is determined by your reporting period. The CRA will charge penalties and interest on any returns or amounts we have not received by the due date. The CRA has the ability to hold any GST/HST refund or rebate you are entitled to, until it receive all outstanding returns and amounts.
GST/HST penalties and interest
You can be charged a penalty for failure to file, late filing and failure to accurately report information. Interest will be charged if you make late or insufficient payments. Arrears interest is charged on the outstanding GST/HST that is owing. The interest rates on overdue and overpaid remittance is 6% compounded daily, and charged quarterly.
Interest on the part of any installment payment that was not paid or that was paid late will be charged at the end of the fiscal year.
The CRA administers legislation that gives the Minister of National Revenue discretion to cancel or waive penalties or interest. This legislation is commonly called the taxpayer relief provisions.
GST/HST remittance for Taxable benefits
In addition to the GST/HST that employers must collect on goods and services, they must also remit the GST/HST on taxable benefits provided to their employees.
Some examples of common taxable benefits subject to the GST/HST are the use of passenger vehicles or aircraft, subsidized residential accommodation, subsidized meals, payment of membership dues, trips, vacations, and gifts over $500. Under the Income Tax Act (ITA), the GST/HST is added to the value of the taxable benefit so that the person receiving the benefit is treated as if he or she purchased it in the marketplace.
As discussed above, the first step is to determine if the benefit is a taxable benefit. There are some instances where the benefit is not subject to GST/HST. These include benefits that are zero-rated or tax exempt; benefits that do not allow you to reclaim the input tax credit (see ITC restrictions), or if the benefit was supplied outside of Canada.
The amount of the GST/HST you collect on a taxable benefit is based on a percentage of the value of the benefit for GST/HST purposes. The percentage that you pay depends on the province or territory where the employee reports to work (see rate above), if you are a large business, or if the benefit is an automobile benefit.
For example, in Ontario the GST/HST rate is 13%. However, if the benefit is an automobile operating expense then the GST/HST remittance is 9% or 8.4% if you are a large business on December 31, 2018, for the purpose of the recapture of input tax credits for the provincial part of the HST
Include the amount of the GST/HST due on your GST/HST return and send your remittance, if applicable, with your GST/HST return for the reporting period that includes the last day of February 2019.
ITCs for Employee Benefits
For employee benefits, you can usually claim an ITC for the GST/HST paid or payable on property and services you supply to your employees or their relatives as a benefit, if it is related to your commercial activities.
However, in some situations, you will not be able to claim an ITC for the GST/HST paid or payable for taxable benefits you provide your employees. For information on these situations, see ITC restrictions.
The requirements around GST/HST are so complex that it is easy to make a mistake. The rules governing what is taxable, what isn’t, what is exempt, and which benefits you can claim an ITC for are subject to copious rules and exceptions. There are different rules for charities, governments and diplomats, indigenous people, and not for profits. That is why the CRA has devoted a large share of its operations and resources in determining if businesses have made errors and omissions by conducting trust examinations.
The article above just touched on a few aspects. If you are a business or corporation, be sure that you are in good standing with your GST/HST obligations prior to an audit/trust examination. And if your business is audited for its GST/HST compliance, it is advisable that you contact a qualified tax lawyer to ensure that you receive a robust and thorough defense from a lawyer thoroughly knowledgeable in all aspects of trust examinations.
Are you being audited for GST/HST compliance? Do you want to ensure that you’ve met your GST/HST obligations so that you remain in good standing with the CRA? Contact Kalfa Law to help you deal with the CRA. Our expert tax professionals are ready to build a robust defense so that you do not pay more tax than you have to.
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-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2019