Setting Up Books for a New Canadian Business: GST/HST, Year End

What do I have to keep from day one, and does the CRA require a particular system?

The law requires records of every transaction that support your income and expense claims, but the CRA does not require any particular system. It does not issue record books or suggest a set of books, and computerized records are acceptable if they are clear and easy to read (CRA: business records). The Income Tax Act asks for books and records in a form that lets the tax payable be determined (section 230).

Start these on the first day:

• Every invoice you issue and every receipt for money you spend, in any clear system.
• Statements for each bank account and card the business uses.
• Registration dates and, for a corporation, the incorporation papers.
• Anything paid before the first sale, with its receipt.

A sole proprietor keeps separate records for each business they run.

A start is not simple if you invoiced or sold before the books existed, charged GST/HST (or did not) without a clear start date, ran business money through a personal account, or are unsure of your year-end. A corporation also needs its own accounts, share capital and a shareholder loan account. For books already behind, see catching up on overdue books.

Sole proprietor or corporation: what is set up differently?

A sole proprietor reports business income on Form T2125 with the personal return. A corporation files its own T2 return for every tax year, even if no tax is payable (CRA: T2 guide).

Sources: CRA: due dates for individuals; CRA: T2 guide, before you start; CRA: GIFI guide. The CRA administers provincial corporate income tax everywhere except Alberta and Quebec (CRA: provincial and territorial corporation tax). A corporation with a permanent establishment in Alberta also files an Alberta return (AT1) unless it is exempt, due six months after year-end; Alberta tax has its own balance-due rules (Alberta: corporate income tax). Quebec has its own corporate return. For the move from one to the other, see books after incorporating a sole proprietorship.

What year-end do I pick, and can I choose?

A sole proprietor generally uses December 31. A new corporation may choose any year-end, as long as its first tax year is no longer than 53 weeks from incorporation.

• Sole proprietor: an eligible individual may use another fiscal period, but only by electing on Form T1139, sent with the return that includes the first day of the business's first fiscal period, by that return's due date. Otherwise December 31 applies. The form is then filed every year, and a cancelled election cannot be made again (CRA: Form T1139; Income Tax Act, section 249.1). A first period can be shorter than twelve months because the business started partway through (CRA: T4002).
• Corporation: the tax year is the fiscal period. Changing it later generally needs the CRA's approval by letter to the tax services office, with a short list of exceptions (CRA: T2 guide, chapter 1). An acquisition of control, or the corporation becoming or ceasing to be a CCPC, also ends the tax year early (Income Tax Act, section 249; see deemed year-end on acquisition of control).

A new corporation's choice sets the T2 due date, and a year-end soon after incorporation means a short first tax year. Settle it before the first return. See choosing or changing a year-end and cash or accrual accounting.

When must I register for GST/HST, and should I register earlier?

A business must register once its taxable sales pass the small-supplier limit of $30,000, over four consecutive calendar quarters or in a single calendar quarter. Below that limit it is a small supplier and registration is voluntary, except that a taxi or commercial ride-sharing business must register even as a small supplier (CRA: when to register).

Passing the limit in a single quarter ends small-supplier status on the sale that took you over. Passing it only across several quarters ends it at the end of the month after that quarter. The count has its own rules for associated businesses, sales outside Canada and exclusions: see when to register for GST/HST.

Register within 29 days of the effective date. A voluntary registration is usually effective the day you apply, or up to 30 days earlier. Outside Quebec, register through the CRA's online service; if you have no business number, you get one with the GST/HST account (CRA: register for a GST/HST account). If the physical location of your business is in Quebec, contact Revenu Québec, which generally administers the GST/HST there (CRA: RC4022).

Registering before you must is a trade-off. Once registered, you charge GST/HST on taxable sales, file returns and remit what you collect, and you can claim input tax credits, a credit for the GST/HST paid on business costs. A small supplier who does not register does not charge GST/HST (other than on certain real property supplies) and cannot claim input tax credits (CRA: RC4022). Tax on services supplied to you before you registered earns no credit, even if you pay it after registering. Tax payable before registration on services supplied after it can be claimed, and capital property and inventory on hand at registration may qualify under separate rules (CRA: input tax credits). See claiming GST/HST paid before registering and, for the registration test itself, when to register for GST/HST. Corporations also need their CRA accounts: see after you incorporate.

How do I set up GST/HST in the books: rates, zero-rated and exempt sales, PST and QST?

The rate follows the place of supply, the province or territory where a sale is considered to be made, which is not always where the business is based. The CRA's example is a laptop delivered in Nova Scotia, which is supplied in Nova Scotia. Keep PST or QST apart from GST/HST. Special rules apply, so a sale to a customer in another province needs a check (CRA: which rate to charge; CRA: rates).

British Columbia, Manitoba and Saskatchewan also have PST, and Quebec has QST. Each is a separate tax that the CRA lists apart from GST/HST and leaves to the province, so book each in its own account. In Quebec, Revenu Québec generally administers the GST/HST, and a business located there files its returns with it. See PST by province.

Two kinds of sale charge no tax, and they are not the same. A zero-rated sale, such as basic groceries, is taxable at 0%, so related purchases can still earn input tax credits. An exempt sale is not subject to GST/HST, and purchases made to provide exempt sales generally earn no credits (CRA: rates; CRA: input tax credits).

In the books, open a GST/HST collected account, a GST/HST paid-on-purchases account, separate PST or QST accounts, and one tax code per treatment: taxable at the place-of-supply rate, zero-rated, and exempt. The steps for each entry are in recording GST/HST in your books.

GST/HST you collect is held in trust for the Crown until you remit it (Excise Tax Act, section 222). If a corporation does not remit its net tax, its directors at that time are jointly liable with it once collection against the corporation has failed or it is in bankruptcy, liquidation or dissolution. They can be assessed within two years after they last ceased to be directors, unless they took the care a reasonably prudent person would have taken to prevent the failure (section 323).

What must a receipt show so I can claim input tax credits, and how long do I have?

A receipt or invoice must carry the details for its size, and credits must be claimed within a time limit (below) (CRA: input tax credits).

The usual time limit is four years after the end of the reporting period the credit relates to: a credit must be claimed by the due date of the return for the last reporting period that ends within that window (Excise Tax Act, section 225). The purchase must be for your commercial activities, and the CRA expects you to hold sufficient evidence before you claim. Personal purchases earn no credit, and some costs, such as meals, allow only part. See expenses with no or partial credits. If a supplier's receipt lacks the registration number or other details, see receipt details for input tax credits; if there is no receipt, see business expenses without receipts.

How often will I file GST/HST, and when is it due?

The CRA assigns a reporting period by annual taxable supplies, and a registrant may choose a more frequent one by election, on Form GST20 or in the CRA's online service (CRA: RC4022). A new registrant can elect a period that starts on its registration date by filing with its application; a later election takes effect on the first day of a fiscal year and is generally filed within two months after that day (Excise Tax Act, section 250).

A monthly or quarterly return and payment are due 1 month after the period ends; for most businesses, an annual return and final payment are due 3 months after the fiscal year-end. An annual filer who is an individual with a business, has a December 31 fiscal year-end and had business income for tax purposes that year pays by April 30 and files by June 15; one who does not meet all three conditions follows the annual dates above (CRA: reporting deadlines). To line the period up with the fiscal year, see GST/HST reporting period and fiscal year.

Which accounts do I open so the T2125 or the corporate return is easy?

Open an account for each thing the business holds, owes, earns and spends, and name each so it lands on one line of the return. Add more only when a real cost or sale needs its own.

• Sole proprietor: the line for each cost is in T2125 expense lines.
• Corporation: the return reports a balance sheet on Schedule 100 and an income statement on Schedule 125, each item with a GIFI code. A new corporation's first return also needs Schedule 101, the opening balance sheet. Keep working papers showing the accounts behind each reported item, and do not send them with the return (CRA: GIFI guide).

The GIFI guide assumes you prepare the codes from your own financial statements, so account names can be your own if each maps to a code. See a chart of accounts that maps to GIFI, and choosing accounting software.

How do I keep owner money apart from business money?

Keep every dollar in or out of the business labelled as business, drawing, pay or loan. The CRA's business-records page for sole proprietors does not require a separate bank account, but a separate account and card for the business make each entry clearly one or the other.

• Sole proprietor: the business and the owner are one taxpayer, so there is no salary to yourself. No deduction is allowed for personal or living expenses (Income Tax Act, section 18(1)(h)), so money you take out is a drawing, not an expense. See sole proprietor drawings.
• Corporation: a benefit the corporation gives a shareholder is generally included in the shareholder's income. A loan to a shareholder is also included unless it is repaid within one year after the end of the corporation's tax year in which it was made, and the repayment is not part of a series of loans and repayments; other exceptions exist (sections 15(1), 15(2) and 15(2.6)). Track money in and out in a shareholder loan account. See books for a new CCPC and, if personal costs were already paid from the corporation, corporation-paid personal expenses.

What do I keep, for how long, and where?

Keep records for six years from the end of the last tax year they relate to, at your place of business or residence in Canada (Income Tax Act, section 230; CRA: where to keep records).

Electronic records must be kept in a readable electronic format for the whole period. Records stored abroad and reached from Canada are not treated as kept in Canada unless the CRA gives permission.

Some records, such as long-term property records and the share register, are kept longer, and a late return, an objection, an appeal or a closing company changes the period. See how long to keep business records for the six-year start date and these exceptions.

What do I do with costs paid before the first sale?

Keep every receipt and record each cost with its date, because the start date decides how it is treated. The CRA says income is reported, and expenses can be deducted, from when the business starts, and a business starts when you begin some significant activity that is a regular part of it, such as buying enough goods for resale or equipment to start. Researching a possible business does not start it, and those research costs cannot be deducted (CRA: T4002). For a corporation, a cost paid personally before incorporation needs its own treatment, and GST/HST on services supplied before registration earns no credit (above). See startup costs before your first sale.

Example

These examples are illustrative. All amounts are in Canadian dollars.

An Ontario freelance designer starts January 15

Her sales by calendar quarter are C$9,000, C$12,000, C$14,000 and C$10,000, so C$45,000 for the year. Assume every sale is a taxable supply to an Ontario customer and she has no associated businesses. Her T2125 year is January 15 to December 31, and the return is due June 15 of the following year. After the third quarter her sales over the quarters so far are C$35,000, over the C$30,000 limit although no single quarter passed it. On those facts she would stop being a small supplier at the end of October, would charge Ontario HST from her effective date of registration (no later than her first sale after October 31), and would register within 29 days of that date. The registration test has exceptions.

An Alberta corporation incorporated March 10

It picks December 31. Its first tax year runs 297 days, inside the 371-day limit. The T2 is due six months after year-end, so June 30 of the next year. If it has a permanent establishment in Alberta, its AT1 has the same due date. Federal tax owing is due two months after year-end. The three-month date for certain CCPCs tests the previous tax year, which a first-year corporation lacks, so paying by the two-month date removes the question (Income Tax Act, subsection 248(1)). Alberta tax has its own balance-due rules. Once registered, it would charge GST at 5% on supplies made in Alberta, and Alberta has no PST.

An Ontario sole proprietor buys equipment

She pays C$2,260: C$2,000 plus C$260 HST, from a registrant. Because the total is over C$500, the invoice that supports the credit must show the supplier's name and registration number, the date, the total, the HST, her name, a brief description and the payment terms. If she is registered and bought it for use primarily in her business (more than 50% of its use), the full C$260 may be claimable as an input tax credit; if business use is 50% or less, none is (Excise Tax Act, section 199; CRA: percentages for capital personal property). If she bought it before registering, the equipment on hand at registration may qualify under the separate rules.

Different for you?

• You started trading before the books existed: if invoices went out without a clear GST/HST start date, money moved through a personal account, or the year-end is unsettled, the opening position (registration date, year-end, how to code what has already happened) depends on facts a professional should review. See catching up on overdue books, rebuilding books from bank statements and bookkeeping help.
• You charged GST/HST before you had a number, or passed the limit without registering: see charged GST/HST before registering and unfiled GST/HST returns, or bookkeeping help if the books behind those periods are not in order.
• You are a new corporation: the share capital, shareholder loan and first T2 need care. See books for a new CCPC and corporate tax help.
• You moved a sole proprietorship into a corporation: see books after incorporating a sole proprietorship.
• You sell in more than one province or in Quebec: see operating in more than one province.
• You are paid in US dollars or serve US clients: see a freelancer paid in USD and cross-border tax help.
• You have a business partner: see a general partnership's first year.