Wave Accounting in Canada: Enough for GST/HST and Your T2?

Is Wave free, and is a free accounting app enough for the CRA?

The CRA tests the records, not the brand: it does not suggest any type of book or set of books, and it may review a business's systems to check that they meet its record-keeping rules (CRA: business records; CRA: audit trails). A free app can meet that test only if it does what the sections below set out. Whether a given plan is free, and what it includes, is set by the vendor and changes; no government source covers it, so this page does not state it. Read the vendor's current plan page before relying on it, and again at each renewal.

The question is usually simpler for a sole proprietor with no GST/HST registration and no staff. It is not simple once there is a GST/HST registration, payroll, a corporation, US-dollar sales, money moving between you and a corporation, or returns not yet filed. It is also not simple if the app's balances do not agree with your bank statements, its GST/HST report does not agree with the return you filed, or a corporation's year end is close: that is a bookkeeping question, not an app setting. Gather your GST/HST number and reporting period, your province, bank and card statements, receipts, payroll status and the prior accountant's year-end files before you judge the file.

What does the CRA require of my books, whatever app I use?

Records must be kept in Canada, stay readable, show an audit trail and be kept for at least six years. Using an app does not change any of this.

• Retention: keep records for at least six years from the end of the last tax year they relate to. The tax year is the fiscal period for a corporation and the calendar year for everyone else (CRA: IC78-10R5). Some records are kept longer, for example six years from the day a late income tax return is filed. GST/HST sales and purchase invoices follow 6 years (CRA: GST/HST records).
• Kept in Canada: records belong at your place of business or residence in Canada. Records kept outside Canada and accessed electronically from Canada are not considered kept in Canada. The CRA may accept a copy of records held abroad (a true copy, readable in Canada, with enough detail to support your returns), or give written permission to keep them elsewhere (CRA: where to keep records; IC05-1). Ask where the app stores your data, and keep your own full export in Canada.
• Readable: records created electronically must be kept in an electronic readable format, even if you print them. Backups must be restorable into a form the CRA can use (CRA: acceptable format).
• Audit trail: electronic records must show an audit trail from supporting documents to the summarized accounts. The trail must include sufficient detail to support the summarized figures, so a year-end summary report alone does not show it (CRA: audit trails; IC05-1).
• The duty stays with you: using a third party to keep or process records does not relieve you of the record-keeping, readability, retention and access responsibilities (CRA: IC78-10R5).

Does the app handle my GST/HST: registration, tax codes and reporting period?

An app calculates only what it is told. Set the registration, the tax codes and the reporting period from your own CRA or Revenu Québec records, not from the app's defaults.

Registration. Start the app's GST/HST on your registration's effective date, not the date you opened the app. Whether and when you must register is in When to register for GST/HST.

Tax codes. The app needs a code for each kind of sale: GST only, HST at the rate of the province, GST plus a provincial tax, and zero-rated sales, which are taxable at a rate of zero (CRA: which rate to charge). Keep exempt sales separate from zero-rated ones: a registrant generally cannot claim input tax credits on purchases made to provide exempt supplies (CRA: RC4022). With mixed activities, check how the app limits purchase credits; see exempt, zero-rated and out-of-scope sales. Rates by province, and which province's rate applies to a sale to a customer elsewhere, are in GST/HST, PST and QST by province. Whether a sale to a customer outside Canada is zero-rated is in Charging GST/HST to US customers.

Reporting period. Take your period from your CRA or Revenu Québec account, not from the app's default, and run the app's tax report for exactly that period's dates; see GST/HST reporting period and fiscal year.

Input tax credits. Registrants recover the GST/HST paid on purchases used in their commercial activities by claiming input tax credits on line 106 of the return (CRA: input tax credits). Keep the tax on each purchase apart from the expense so the credits total ties to the return. Entries are in Recording GST/HST in your books; the Quick Method records differently. How far back a missed credit can be claimed is in Correcting a filed GST/HST return.

How do I set up sales tax in BC, Saskatchewan, Manitoba or Quebec?

In these four provinces GST is charged together with a separate provincial tax, so each needs its own tax code on invoices and its own liability account in the books. In BC, Saskatchewan and Manitoba the two are reported to different places.

Some goods and services carry a different rate or none; set any exception from the province's own page.

Sources: BC, Saskatchewan, Manitoba, and the CRA rate table, which sends readers to each province's site for PST rules.

• BC, Saskatchewan, Manitoba: the provincial tax is paid to the province, not on the GST/HST return. BC says a registered business must report and pay all the PST it has charged (BC: reporting and paying PST). Saskatchewan requires businesses operating there to be licensed or registered with its Ministry of Finance for PST.
• Quebec: Revenu Québec generally administers the GST/HST in Quebec, and a business located there generally files its returns with Revenu Québec, not the CRA (CRA: RC4022). QST is its own tax, so it needs its own code and account even though both are reported to Revenu Québec.
• Manitoba: RST is calculated on the selling price before GST is applied. A tax code that charges RST on a price that already includes GST gives the wrong total.
• BC scope: PST applies when taxable goods, software or services are acquired in BC. The planned expansion to accounting, architectural, engineering, geoscience, non-residential real estate and security services is paused (BC: PST). See BC PST on services.

Before relying on any app, enter one test invoice and check by hand that GST and the provincial tax appear as separate lines, at the right rates, and post to separate accounts. Whether you must register and charge a provincial tax at all is covered in Provincial sales tax.

Are receipts captured in the app enough to claim input tax credits?

A captured receipt supports a credit only if the image shows the details the CRA requires for that purchase amount. The app's category and tax fields do not replace them, and the evidence must be in hand before the claim is made (CRA: input tax credits).

The details required rise at $100 and again at $500; from $100 they include the supplier's GST/HST registration number and the GST/HST charged. What each level needs is in GST/HST receipt details for input tax credits.

An image must be an accurate reproduction, with the significant details not obscured by poor resolution (CRA: acceptable format). Check each captured supplier number and tax amount against the image when the receipt is entered, not at year end. Whether you may then discard the paper depends on the CRA's imaging rules: see Scanned receipts for the CRA.

If I pay myself or staff, can the app's payroll do what the CRA needs?

Whatever a payroll tool calculates, the duty to deduct, remit and report sits with the employer. The CRA's employer guide tells the employer to deduct CPP contributions, EI premiums and income tax, and to remit them with the employer's own share of CPP and EI (CRA: T4001).

• Remitting: a regular remitter's deductions must reach the CRA by the 15th day of the month after payment. Accelerated and quarterly schedules differ.
• Records: keep the hours worked by each employee, the amounts withheld, each employee's TD1, and every slip and return filed (CRA: GST/HST and payroll records).
• Quebec: employers send the QPP, QPIP and Quebec income tax deductions to Revenu Québec (CRA: T4001). Confirm the app's payroll supports Quebec before using it there.
• Paying yourself, corporation: salary a corporation pays its owner is generally employment income, so the same duties generally apply. Employment is not insurable for EI if you control more than 40% of the corporation's voting shares, and it can also be non-insurable when employer and employee are related and not dealing at arm's length (CRA: pensionable and insurable employment). Check the plan page for whether payroll is offered in your province and who files and remits.
• Paying yourself, sole proprietor: salaries or drawings paid to a sole proprietor are not deductible (CRA: business expenses), so record what you take out as an owner's draw, not as wages or an expense.

Running payroll is covered in Running payroll; booking a run is in Payroll journal entry.

What does my accountant need at year end for a T2 or T2125?

A sole proprietor needs a full calendar year of income and expenses; a corporation needs a balance sheet and income statement for its fiscal period. A report is only as good as the entries behind it.

A corporation's return is due six months after its tax year ends (CRA: when to file). Tax owing is generally due sooner than the return (CRA: balance-due day). An app does not decide year-end entries for you: owner withdrawals versus expenses, the shareholder loan, depreciation, accruals, and GST/HST and payroll balances that agree with the CRA's records.

Does your file tie out? Check these before the year end:

If a row fails and you cannot see why, that is the point to bring the file to a professional. Separately, test that the app produces usable statements: export the balance sheet, income statement and transaction ledger for a closed month now and ask your accountant if they can work from it. See Chart of accounts for GIFI, Year-end financial statements for a corporation and What to give your accountant as a sole proprietor.

How do I get my records out if I switch apps?

Switching does not end the duty to keep records. They must stay readable and accessible for six years, so export a full copy before closing the old account. IC78-10R5 lists software conversions among the third-party changes that do not relieve you of your responsibilities, and IC05-1 says the capability to access and retrieve data must be preserved (IC78-10R5; IC05-1).

1. Export transaction-level detail (the ledger or journal) for every year still inside the retention period, not only summary reports.
2. Export each year-end balance sheet and income statement, plus the GST/HST, PST or QST and payroll reports.
3. Download stored receipt images and attachments, and the customer and supplier lists.
4. Store the copy in Canada, with a backup, and open the files to confirm they are readable.
5. Match the new app's opening balances to the old app's closing balances before posting anything new.
6. Cancel the old account only after steps 1 to 5.

IC05-1 also says a change that would affect your ability to access and read your records must be reported to the CRA.

Wave vs QuickBooks or Xero: which app, and what are the low-cost alternatives?

The CRA does not rank accounting apps, so compare any two on the same checks: where the data is stored, whether you can export all of it, sales tax by province, payroll in your province, and fees outside the plan. For a side-by-side of the common choices, see QuickBooks, Xero or Wave in Canada. For a sole proprietor reporting on T2125, see Bookkeeping app for T2125.

When is a free app no longer enough?

An app records what you enter. It stops being enough when the decisions behind the entries matter more than the entries.

If several rows apply, or the file does not tie out, first decide whether to clean it up or rebuild it: see bookkeeping help. For typical bookkeeping fees, see Bookkeeping cost per month.

Example

These examples are illustrative. Amounts are in Canadian dollars.

Receipts without supplier numbers

An Ontario freelance designer earns C$55,000 and is registered for HST. The bank feed is on and every purchase is categorised. Several purchase receipts of C$100 or more do not show the supplier's GST/HST registration number, and C$900 of HST has been claimed on them. The books look complete, but if the CRA reviews the return, that C$900 is at risk of being denied because the required details are missing. The designer asks the suppliers for complete invoices, has the accountant review whether the C$900 claim needs to be corrected, and from now on checks the number and tax amount on each receipt when it is captured.

A combined sales tax code

A BC online shop sells C$40,000 of taxable goods to BC customers. Each sale carries GST at 5% and PST at 7%, so the year includes C$2,000 of GST and C$2,800 of PST. The GST goes on the GST/HST return; the PST is reported to the province. If the app uses one combined 12% code, the books show C$4,800 in a single sales tax account, and the split has to be rebuilt before either return can be filed.

Withdrawals booked as expenses

An Alberta corporation with a December year end has recorded C$25,000 of owner withdrawals as expenses. Expenses are overstated and profit understated by C$25,000. Before the T2, the accountant needs the entries moved out of expenses and into the shareholder loan account. The entry also matters to the shareholder: if the withdrawals are genuine loans to the shareholder, each may be included in the shareholder's income for the year it was made. Repayment within one year after the end of the corporation's tax year is an exception only if it is not part of a series of loans or other transactions and repayments, and other exceptions may apply (ITA s. 15(2) and 15(2.6)). If any of it was meant as salary or a dividend, that is a different correction; the shareholder loan guide covers the choices and when the rule applies.

Different for you?

• The app's file does not tie to the bank statements or the GST/HST return, or a year end is close (a corporation, or any GST/HST registrant): the question is whether the file can be cleaned up for the accountant or has to be rebuilt, and who keeps the monthly books. Take the export, the statements and the last return to bookkeeping help.
• Returns are unfiled or payroll is behind: start with unfiled GST/HST returns or catching up on overdue books, then get bookkeeping help with the records.
• A corporation has unremitted GST/HST or payroll deductions: directors may also be personally liable, subject to statutory collection conditions and a due-diligence defence (Excise Tax Act s. 323; Income Tax Act s. 227.1). The GST/HST assessment, or the income-tax recovery proceeding, is limited to two years after the person last ceased to be a director. See catching up on unfiled corporate returns.
• You sell into several provinces: see GST/HST, PST and QST by province.
• You are on the Quick Method: see Quick Method.
• You are deciding whether to keep the books yourself: see Doing your own books or hiring a bookkeeper.