GST/HST Quick Method in Your Books: Expenses and T2125 Income

How does the GST/HST Quick Method work: what do I remit and what do I keep?

Under the Quick Method you still charge customers the full GST or HST. You then remit your tax-included sales multiplied by a CRA remittance rate that is lower than the tax you charged, and you claim no input tax credits (ITCs) on most purchases, because the rate already allows for them (CRA Guide RC4058). What you collected and do not remit stays with you, and it is income (CRA Guide RC4022). On the T2125 the part you keep joins adjusted gross sales (your sales with the tax taken out and the part you keep added) on line 8000, and the first-sales credit goes on line 8230.

The part you keep has two pieces:

• The difference: the tax collected on eligible sales, less the amount from applying the rate to those sales.
• The first-sales credit: a credit of 1% on the first $30,000 of eligible tax-included sales in each fiscal year, to a maximum of $300 (CRA Guide T4002).

The rate depends on the province of your permanent establishment (a fixed place of business, such as an office or a workshop), on the GST/HST rate charged on each sale, and on whether goods you bought for resale, or to make goods for sale, in your previous fiscal year cost at least 40% of your taxable revenue, with GST/HST counted on both sides. If so, the goods rates apply; otherwise the services rates do. A business that began the Quick Method in the current fiscal year tests four of the previous five quarters instead (CRA Guide RC4058). Rates, the goods-test exclusions, eligibility and how to elect are in the Quick Method guide. This page starts after the election. A business located in Quebec files its GST/HST returns with Revenu Québec, which this page does not cover.

A case is not simple when:

• Your program only calculates the regular method, so the Quick Method figures are worked out outside it and entered by hand.
• The income on your T2125 or T2 does not match the GST/HST returns you filed.
• You sold at more than one GST/HST rate, for example to customers in other provinces.
• Some sales sit outside the calculation, such as zero-rated sales, exempt sales or sales of capital property.
• You buy equipment or property. Those purchases may still earn credits, if the usual use tests are met, and change the cost you claim capital cost allowance on.
• The election took effect part-way through a fiscal year. The first-sales credit applies only if the election was in effect at the start of the fiscal year or, for a new registrant, on the day of registration.
• The filer is a corporation or a partnership.

Gather the GST74 election date, your filed returns, sales including tax by period and invoices for capital purchases.

How do I record a sale under the Quick Method?

Record the sale at its price before tax in sales, and the GST/HST charged in a GST/HST payable account, exactly as you would on the regular method. The invoice does not change: the customer pays the full tax and the invoice shows it.

The Quick Method acts at the end of each reporting period, not sale by sale. Keep sales including GST/HST by period: the total of eligible sales with the GST/HST included, and any provincial sales tax left out, is the figure for line 101 of the GST/HST return, rounded to the nearest dollar (CRA Guide RC4058). The CRA's sample sales record keeps the GST and PST charged in their own columns, apart from sales (CRA Guide T4002, Chapter 1). Keep sales outside the calculation (listed under "Which sales sit outside the Quick Method calculation?") in separate accounts or tax codes so line 101 is not overstated.

Bad debts and credit notes work differently here. A bad debt on a sale eligible for the Quick Method does not reduce net tax, though one on a sale outside the calculation still can. A credit, refund or rebate that reduces the price of an eligible sale comes off the revenue for line 101, in the period you credit or pay it (CRA Guide RC4058).

Do I include the GST/HST in my expenses under the Quick Method?

Yes, for operating costs and inventory: keep the full price you paid in the cost, tax included, because you claim no ITC on them. The CRA's rule is that deductible expenses include the GST/HST you incur less any ITC you claimed (CRA Guide T4002, Chapter 3). With no ITC, nothing is subtracted, and the T2125 says quick-method filers include the GST/HST paid or payable when they calculate the cost of goods sold and expenses (CRA Form T2125).

The list comes from Guide RC4058, which allows only the credits you are entitled to and a few narrower cases, such as goods an agent or auctioneer sells for you. The regular use tests still apply: capital personal property, such as a computer, earns a full ITC only when used above 50% in commercial activities (CRA Guide RC4022). For real property and the rest, see filing GST/HST and input tax credits.

For depreciable property, the CRA says to subtract the ITC from the property's capital cost before entering it for capital cost allowance (CRA Guide T4002, Chapter 4). See capital cost allowance for the claim itself. A passenger vehicle has its own rule: an individual or partnership gets a full ITC only at 90% or more commercial use, and otherwise a credit worked from each year's capital cost allowance, while a corporation needs commercial use above 50% (CRA Guide RC4022; Excise Tax Act, section 202). On the T2125, a vehicle used less than 90% of the time for business is the exception to the capital-cost rule: the CRA says to make no adjustment in the year the credit is claimed and to subtract the credit from the next year's opening undepreciated capital cost instead (CRA Guide T4002, Chapter 4). A corporation reduces the capital cost in column 3 of Schedule 8 by the ITC claimed or entitled to be claimed (CRA Guide T4012). If an ITC cannot be applied to reduce an expense or an asset's cost, the CRA says to include it as income on T2125 line 8230.

A program set to the regular method may separate tax on every purchase, which would show credits the Quick Method does not allow on operating costs. Check that operating and inventory purchases carry no separated tax. Use a credit-bearing tax code only for an ITC you are entitled to claim, such as a qualifying capital or real property purchase, or one of the pre-election and agent cases in the table above.

Where does the HST I keep go on my T2125?

It goes into adjusted gross sales on line 8000, so it is part of your business income. The CRA works it out in Part 3A of the T2125 and introduces the steps with the words "calculate government assistance as follows" (CRA Guide T4002, Chapter 2).

1. Amount 3A is your gross sales including the GST/HST collected or collectible. Amount 3B takes out the GST/HST, provincial sales tax, returns and similar items included in 3A.
2. Amount 3D is the GST/HST collected or collectible on sales eligible for the Quick Method.
3. Amount 3E is those eligible sales plus the tax, multiplied by the remittance rate. If you charged more than one GST/HST rate, work out 3D and 3E for each rate and add them. This is the amount that goes on return line 103 for eligible sales.
4. Amount 3F is 3D minus 3E. This is the difference you keep.
5. Amount 3G, adjusted gross sales, is amount 3C (the result once 3B is taken out of 3A) plus amount 3F. Enter it on line 8000.

If you report professional fees in Part 3B, the same steps run through amounts 3K to 3N, and amount 3N goes on line 8000 (CRA Form T2125, Part 3).

Where does the Quick Method credit go?

It goes on T2125 line 8230, Other income. The CRA says to report the credit, up to $300, that you claimed on line 107 of the GST/HST return (CRA Guide T4002, Chapter 2).

The credit is separate from amount 3F. The total you keep is 3F plus the credit. A goods business with a nil remittance rate on some sales also claims a separate credit for them on line 106 (CRA Guide RC4058). This page's entries and examples leave that case out.

The credit covers the first $30,000 of eligible tax-included sales across all your returns for the fiscal year (CRA Guide RC4058). Who qualifies, and the nil-rate case, are in the Quick Method guide.

How do I manually adjust the GST/HST remittance for the Quick Method?

Post a manual journal entry to the GST/HST payable account at the end of each period, so the account ends at the amount the return says to pay. If your program only calculates the regular method, the Quick Method figures are worked out outside it and entered by hand. One way to keep the books tied to the return:

1. Record the period as usual. Sales go in at the pre-tax price with the tax in GST/HST payable. Operating costs go in at the full price with no tax separated. Post any ITC you are entitled to claim, such as on a capital purchase, to GST/HST payable.
2. Work out the return. Line 101 is the total of eligible sales with the GST/HST included and any provincial sales tax left out, rounded to the nearest dollar. Line 103 is line 101 times the rate, plus the tax collected on sales outside the calculation. Line 109 is net tax, after the ITCs and the first-sales credit. It is not yet the payment.
3. Post the adjusting entry in the table below. Keep the two income accounts separate so the books tie to T2125 line 8000 and line 8230. Handle any other adjustments on lines 104 and 107, and any nil-rate credit on line 106, separately. For a corporation, where these accounts sit on the T2 is the open point described below.
4. Pay the CRA. The payment is the balance on line 113C, which also reflects instalments, rebates and self-assessed tax (see the return lines below). Debit GST/HST payable for the net tax and credit the bank for the payment. Clear instalments, rebates and self-assessed tax through their own accounts, so the payable account returns to zero.

The Example shows these entries with figures. If the payable account does not end at zero, see reconciling GST/HST payable to the CRA.

Which lines of the GST/HST return do I fill in?

Lines 101 to 110, with the Quick Method changing what goes on lines 101, 103, 106 and 107 (CRA Guide RC4058).

Lines 105 and 108 are the totals of those pairs. The balance on line 113C is line 109 less lines 110 and 111, plus tax on line 205 (certain real property purchases) and line 405 (other self-assessed tax); a positive balance is the payment on line 115 (CRA return working copy). For filing steps and regular ITCs, see filing GST/HST and input tax credits. If line 101 does not match your profit and loss, see why the return does not match the books.

Which sales sit outside the Quick Method calculation?

Sales on which the customer pays no tax, sales of real property and capital assets, and a few special supplies sit outside it. The tax on them is not run through the remittance rate (CRA Guide RC4058).

• Zero-rated supplies, supplies made outside Canada, and certain supplies to Indians (the CRA's term, which has legal meaning under the Indian Act).
• Exempt supplies, which are not included in line 101 at all.
• Sales of real property and sales of capital assets.
• Supplies you made as an agent or auctioneer for which you must account for the tax.
• Certain supplies to an employee or shareholder, and certain self-assessed supplies.

Report the tax charged on these in line 103 in the regular way.

Does a corporation or partnership report the same difference, and where?

A corporation has the same income question, but the T2125 steps above are for an individual's form and do not carry over to the T2. The CRA says the part of the tax you do not remit "is reported as income on your income tax return" (CRA Guide RC4022), and that sentence is not limited to individuals. Where the amount sits in the corporation's revenue and how it ties to the T2 are points to settle before filing. Until then, post the difference and the first-sales credit to their own revenue accounts, as in the example below, so the amounts can be placed without rebuilding the books.

The T4002 worksheet calls the calculation government assistance, and paragraph 12(1)(x) of the Income Tax Act covers inducements and assistance received from a payer or a government. Whether it reaches the kept amount, which is tax collected from customers, is not settled.

A partnership is the GST/HST registrant and keeps the same entries. Its income and losses flow through to the partners, who report their shares (CRA Guide T4002, Chapter 1). Where the kept amount sits on the partnership's own return (the T5013) is a point to confirm before it is filed.

If a return under-remits, a partnership and each partner other than a limited partner are jointly and severally liable for its GST/HST (Excise Tax Act, section 272.1). A corporation's directors can be liable for net tax it fails to remit, with no assessment more than two years after the person last ceased to be a director (Excise Tax Act, section 323).

What records do I keep?

Keep your sales invoices, purchase invoices and related business records for 6 years from the end of the year to which they relate (CRA Guide RC4022). For the Quick Method, add:

• The GST74 election and the date it took effect (Form GST74).
• The province of your permanent establishment. The Quick Method requires one in Canada (Guide RC4058).
• A worksheet for each period showing line 101, the rate, line 103 and the credit.
• Sales including tax by period, and the list of sales outside the calculation.
• Invoices for capital purchases, with the ITC claimed on each.
• The year-end tie between amounts 3D to 3F and line 8230 on the T2125, or the matching entries in the corporation's books.

Example

These examples are illustrative. All amounts are in Canadian dollars (C$).

An Ontario designer on the services rate

A self-employed designer with a permanent establishment in Ontario bills Ontario customers C$50,000 plus 13% HST of C$6,500. The election has been in effect since the start of the fiscal year. Eligible sales including tax are C$56,500.

On the T2125: amount 3D is C$6,500, amount 3E is C$4,972, and amount 3F is C$1,528, which joins adjusted gross sales on line 8000. Sales before tax are C$50,000, so line 8000 shows C$50,000 plus C$1,528, which is C$51,528. The C$300 credit goes on line 8230. C$1,528 plus C$300 is the C$1,828 kept.

In the books, the period-end entry debits GST/HST payable C$1,828, credits the Quick Method difference account C$1,528 and credits the Quick Method credit account C$300. The payable then holds C$4,672, which is the payment.

A laptop and a software bill

The same designer buys a C$2,000 laptop plus C$260 HST and uses it only in the business. A computer is capital property used in commercial activities, so the C$260 is an ITC on line 106, and the laptop's capital cost for capital cost allowance is C$2,000.

The designer also pays C$1,000 for software plus C$130 HST. This is an operating cost, so no ITC applies and the expense is C$1,130.

If both purchases fall in the same period as the sales above, line 109 is C$4,972 less C$300 and C$260, which is C$4,412.

An Alberta reseller on the goods rate

A reseller in Alberta that meets the goods-purchase test for the goods rates sells C$30,000 of goods plus 5% GST of C$1,500, with the election in effect since the start of the fiscal year. Eligible sales including tax are C$31,500.

The rate is 1.8%, so line 103 is C$567. The first-sales credit is 1% of the first C$30,000, which is C$300, so line 109 is C$267. The reseller keeps C$1,500 less C$267, which is C$1,233. Amount 3F is C$933 and the C$300 credit goes on line 8230.

Different for you?

• Your software cannot produce the Quick Method figures, or the income on your T2125 or T2 does not tie to your GST/HST returns. The entries and return figures may need to be rebuilt from your sales by period. See bookkeeping.
• A corporation needs the kept amount placed on the T2. Where it sits in revenue and how it ties to the return are points to settle before filing. See bookkeeping.
• You moved onto or off the Quick Method part-way through a year, or your sales passed the $400,000 limit. Periods before and after follow different methods, so the entries and the ITCs on purchases change at the switch. The end dates are in the Quick Method guide. See also bookkeeping.
• You bought a vehicle, a building or other capital property, or some of your goods sales carry a nil remittance rate. The credit depends on business use and, for a vehicle, on who owns it, and the nil-rate credit sits outside this page's entries. See bookkeeping.
• You are not sure the Quick Method still pays, or you need to elect or revoke. That comparison depends on your purchases and your rate. See the Quick Method guide and bookkeeping.
• You are not on the Quick Method. Collected GST/HST is generally not income. See is the GST/HST I collect income.
• Your GST/HST accounts are not set up yet. See GST/HST in your books.
• Returns are unfiled, or the CRA has sent a notice. See unfiled GST/HST returns and estimated assessments. Several missed periods may mean each period's Quick Method figures are rebuilt from the sales records; see bookkeeping.