Is GST/HST Collected Income? Gross or Net on T2125 and T2

Is the GST/HST I collect my income?

For a registered business on the regular method, no. The business collects the tax for the government and holds it in trust until it remits it (Excise Tax Act, section 221; section 222; CRA Guide RC4022). If a corporation does not remit, its directors can be personally liable with it unless they used reasonable care, and the CRA has two years after a person stops being a director to assess (section 323; see catching up on unfiled corporate returns). What the business owes the CRA is the tax charged less the input tax credits (ITCs) it claims, which the CRA calls net tax. The tax is charged on each taxable sale; it is not a tax on gross income.

On the income tax return, that gives three patterns:

A case is not simple when:

• Your sales on the income tax return and your GST/HST returns disagree, or earlier returns included the tax. Income may be overstated for each of those years, and the time to ask for a change runs out year by year.
• You use the Quick Method, where part of the tax is income.
• You registered part-way through a year, or charged tax before you had a number.
• You bought equipment or a vehicle.
• Some purchases are exempt, zero-rated or only partly creditable.
• You are a corporation, where the CRA's published T2 guidance is thin (see below).

If the first bullet applies, the years usually have to be reconciled against the GST/HST returns before anything is changed; see "Different for you?" below.

GST/HST is charged on sales, not on wages. A T4 employee has no GST/HST to include or report; the Excise Tax Act leaves services supplied to an employer out of "service" (section 123). Only self-employment sales are covered here.

Gather the GST/HST return for each period, a sales list that shows the tax separately, the ITC claims with the invoices behind them, and the income tax return as filed.

Do I include GST/HST in revenue on my T2125, or report sales net?

Report sales net. Line 8000, adjusted gross sales, is your sales without GST/HST or provincial sales tax. Part 3A of Form T2125 builds it in steps (CRA: Form T2125; CRA Guide T4002, Chapter 2):

1. Amount 3A is gross sales, commissions or fees, including the GST/HST collected or collectible.
2. Amount 3B is the GST/HST and provincial sales tax included in 3A, plus returns, allowances, discounts and GST/HST adjustments.
3. Amount 3C is 3A minus 3B: your sales without the tax and without those returns, allowances and discounts. Add the Quick Method amount if you use it (below); the total is adjusted gross sales (amount 3G), and it goes on line 8000.

"Collected or collectible" covers tax on invoices you have issued, whether or not the customer has paid yet. A professional reports fees through Part 3B of the form instead (amounts 3H to 3N); the tax comes out the same way, and amount 3N goes on line 8000.

If you only know what reached the bank, the deposit includes the tax. Take it out first; tax-included prices shows how.

Are sales on the corporate return (T2) shown without GST/HST?

The CRA does not say in terms whether a corporation's sales include the GST/HST, but its guidance points to net. Sales go on the income statement as GIFI code 8000, trade sales of goods and services (GIFI is the CRA's standard list of codes for a corporation's financial statements), and the tax it holds belongs in taxes payable, code 2680. The position rests on three points:

• The trust rule applies to any person who collects the tax, and "person" includes a corporation (Excise Tax Act, section 123; section 222).
• The GIFI list shows GST/HST inside balance sheet items: taxes payable (code 2680) and taxes receivable (code 1066). Revenue and expenses sit on the income statement (CRA Guide RC4088).
• On the Quick Method, only the part of the tax that is not remitted is reported as income on the income tax return (CRA Guide RC4022), so the part remitted is not income.

Read together, collected tax sits in a payable, credits reduce it, and revenue shows the price without tax. That is a reading of the sources, not a CRA instruction; a corporation should confirm it against its own year-end statements before filing. The chart of accounts for GIFI and year-end financial statements show where each figure lands.

Do I deduct the GST/HST I paid on expenses, or only the net amount?

A registrant deducts only the net amount: the expense with its GST/HST, less the ITC claimed. The CRA says the deductible expenses include the GST/HST incurred, minus the credit claimed, and to reduce the expense by the credit when the tax was paid or became payable, whichever is earlier; a credit claimed late has its own income tax timing rule, covered below (CRA Guide T4002, Chapter 3; CRA: Form T2125 expenses).

Tax you cannot claim stays in the expense:

Purchases used to make exempt sales carry no credit, and shared costs need an allocation (Excise Tax Act, section 169); the tax you cannot recover stays in the cost. The meals share is from Guide RC4022. For the full list of partial and no-credit costs, see expenses with no or partial ITC.

The net tax you send the CRA is not an expense either. It settles what you held for the CRA, less credits, so do not deduct the payment as well.

A corporation that is a registrant is generally expected to do the same, but the CRA's T2 guide states the rule only for capital cost. Where ordinary expenses sit on the T2 is a point to settle before filing.

I am not registered (under the small-supplier limit): is anything different?

Yes. A small supplier that has not registered generally does not charge GST/HST and cannot claim ITCs (CRA Guide RC4022; CRA Memorandum 2-2). Taxi and commercial ride-sharing drivers must register whatever their sales, so they follow the registered rows above. The same no-credit result applies if all your sales are exempt, such as certain health, child-care or residential rental services: credits exist only for purchases used in commercial activities, so the tax you pay stays in each cost (Excise Tax Act, section 169; exempt, zero-rated and out-of-scope).

For the T2125:

• Sales: line 8000 is sales earned in the fiscal period, including unpaid invoices, after returns, allowances and discounts. Not registering does not give you cash accounting; most self-employed income is reported when earned (CRA: Accounting for your earnings; cash or accrual). If no GST/HST was charged, there is none to remove at amount 3B. This assumes you charged no GST/HST. If customers paid tax you added without a number, it is not ordinary sales; see charged GST/HST before registering before you fill in line 8000.
• Expenses: the GST/HST you paid is part of each expense, because no credit is claimed to reduce it.
• Equipment: the tax is part of the capital cost (next section).

The small-supplier limit is $30,000 of taxable sales in a single calendar quarter or over four consecutive calendar quarters. Passing it is a registration question: see when to register. If you paid tax on setup costs before registering, see claiming GST/HST paid before registering.

What do I do with the GST/HST I paid on equipment I will depreciate?

A registrant subtracts the ITC from the property's capital cost before claiming capital cost allowance (CCA); a business with no credit has nothing to subtract, so the tax stays in the cost (CRA Guide T4002, Chapter 4).

One trap for individuals and partnerships: for a passenger vehicle used 90% or more for business, the credit comes off the vehicle's cost. Below that level, the CRA says to leave the cost alone and subtract any credit from the opening undepreciated capital cost the following year (CRA Guide T4002, Chapter 4; Excise Tax Act, section 202; Income Tax Act, s. 248(17)). The cost used for CCA is also capped at the passenger-vehicle limit. A corporation is tested differently; see buying a car through your business.

A corporation subtracts the credit on Schedule 8, the corporate CCA schedule: the capital cost is reduced by the GST/HST ITC claimed or entitled to be claimed, or the rebate received or entitled to be received, in the year (CRA Guide T4012). A Quick Method filer still claims credits on certain capital purchases, such as computers and vehicles, so the same subtraction applies (CRA Guide RC4058). For the claim itself, see capital cost allowance.

Under the Quick Method, what part of the tax I collect is income?

The part you do not remit is income (CRA Guide RC4022). On the T2125 worksheet, the tax collected on eligible sales (amount 3D) less what you remit on them (amount 3E, the tax-included sales times your remittance rate) is amount 3F, which joins your sales in adjusted gross sales on line 8000 (CRA Guide T4002, Chapter 2).

Operating costs and inventory carry no ITC on this method, so deduct them at the full price including tax (CRA Guide RC4058; CRA: Calculate your net GST/HST). The kept amount is income for a corporation too, but the CRA's published guidance does not name a T2 line for it. Entries, rates, the first-sales credit and where each figure goes are in Quick Method in the books and business income; whether to elect is in the Quick Method guide.

What do I do with ITCs I can't attach to a particular expense?

Report them on T2125 line 8230, Other income, as a last resort. The CRA treats ITCs as government assistance. It says to include a credit in income only when you cannot apply it to reduce a particular expense or an asset's capital cost (CRA Guide T4002, Chapter 2; Chapter 3).

If a credit simply matches an expense, reduce that expense; do not report the credit as income. The Income Tax Act treats a credit you claim as government assistance on the expense or asset it relates to, for individuals and corporations alike (Income Tax Act, s. 248(16)). It is treated as received when the tax was paid or became payable if that falls in the reporting period of the claim. A credit claimed late for an earlier year's expense is treated as received at the end of the reporting period of the claim for most small businesses (those under the Excise Tax Act threshold amount the Act sets), and by a different rule for larger ones, so it can land in a different year from the expense. How a late credit shows in a given year is worth confirming before you file.

For the T2, the CRA's guidance gives no instruction on a credit that matches no expense. Settle where such a credit sits before filing.

Why do the sales on my tax return differ from line 101 of my GST/HST return?

On the regular method both figures are meant to exclude the tax, so a gap close to the tax rate (for Ontario sales, about 13% of the smaller figure) suggests one of them includes it. Line 101 is the revenue from supplies for the reporting period, including zero-rated and exempt supplies, plus other revenue. It leaves out provincial sales tax, GST, HST and amounts already reported on an earlier return (CRA Guide RC4022).

On the Quick Method, line 101 includes the tax on eligible sales but leaves out supplies that are not eligible and supplies on which no GST/HST was charged, such as zero-rated and exempt ones (CRA Guide RC4058). If the periods match and every sale is eligible, line 101 exceeds line 8000 by about amount 3E, the part you remit, before credits and other return adjustments. Reporting periods that differ from the fiscal year and other revenue also create gaps; reconcile each one separately.

The line-by-line tie-out is in why the return does not match the books.

What if I reported my sales with the GST/HST in them in earlier years?

Income for those years may be overstated by the tax, partly offset if expenses were also deducted with the tax in them while the credits were claimed on the GST/HST return. Work each year separately:

1. List the tax collected and the credits claimed on that year's GST/HST returns.
2. Compare them with the sales and expenses on the income tax return.
3. Work out the difference for the year.
4. Decide, with the figures in hand, whether a change request is warranted and for which years.

For an individual's return, a refund cannot be issued for an adjustment request made more than 10 calendar years after the end of the tax year (CRA: Changing a tax return). A corporation's T2 has its own time limits; see how far back the CRA can reassess. If the GST/HST returns are wrong too, see correcting a filed GST/HST return.

Example

All amounts are Canadian dollars (C$) and illustrative.

A registered consultant in Ontario

A consultant on the regular method bills C$10,000 plus C$1,300 HST. The client pays C$11,300. Line 8000 shows C$10,000. The C$1,300 is owed to the CRA, less credits.

The consultant also buys supplies for C$2,000 plus C$260 HST and claims the C$260 as an ITC. The expense on the T2125 is C$2,000. If these were the only transactions in the period, net tax is C$1,300 less C$260, which is C$1,040.

An unregistered designer buys a laptop

A designer with C$25,000 of sales is under the small-supplier limit and has not registered. No tax was charged, so line 8000 is C$25,000. The designer buys a laptop for C$1,000 plus C$130 HST. No credit is claimed, so the cost for CCA is C$1,130. A registered consultant buying the same laptop for business-only use would claim the C$130 and use C$1,000.

Three years of sales reported with the tax in them

A registered Ontario sole proprietor on the regular method reported sales with 13% HST included and deducted expenses with HST included, while claiming the credits on the GST/HST return.

Profit is overstated by the HST on sales less the HST on expenses: C$15,600 across the three years. Each year is corrected against its own GST/HST return, and which years can still be changed depends on the time limits above. This shows the size of the income difference only. Any change in tax depends on the tax assessed for each year, and some years may no longer be open to change.

Different for you?

• Your sales on the return do not match your GST/HST filings, your profit and loss does not match line 101, or earlier returns included the tax: the years are normally reconciled one by one against the GST/HST returns before a change is requested. See individual tax for a self-employed return, corporate tax for a T2, or bookkeeping if the books themselves need rebuilding. Why the figures differ: why the return does not match the books.
• Your books record the tax inside sales or expenses: the accounts need rebuilding from the GST/HST returns. See bookkeeping and GST/HST in your books.
• You are a corporation and unsure where the tax or the Quick Method amount sits on the T2: the CRA's published guidance does not state this in terms, so it is a judgment call. See corporate tax.
• You use the Quick Method: see Quick Method in the books and business income and whether to elect it. If you are not sure it is helping you, that is a question for individual tax or corporate tax.
• Some purchases give a partial credit or none: see expenses with no or partial ITC and exempt, zero-rated and out-of-scope.
• Your prices already include the tax: see tax-included prices.
• Some sales carry no tax or a platform collected it: sales to US customers still go in line 8000 at the full price; see charging GST/HST to US customers and when a marketplace collects GST/HST.
• You have not filed GST/HST returns or the books are months behind: see unfiled GST/HST returns and catching up on overdue books.
• You sell where provincial sales tax or Quebec rules apply: see provincial sales tax.