What are My Options for GST/HST Prior to Registration with the Canada Revenue Agency?
It seems to be understood that in order for a business to claim GST/HST paid as an Input Tax Credit (ITC) against GST/HST collected, GST/HST registration with the Canada Revenue Agency (CRA) is required.
GST/HST paid and collected is not always this straight forward for a business in the startup stage. Sometimes a business will pay GST/HST or even collect GST/HST from its clients prior to registration with the CRA. The questions we hear often are typically “our business collected GST/HST prior to registration, what do we do?” or “our business paid GST/HST prior to registration, can we claim it”? Unfortunately, these questions do not always result in “yes or no” type answers.
Background on GST/HST Business Registration
A for-profit business is considered a small supplier unless their taxable sales exceed $30,000 over any 12 month period (this is increased to $50,000 for not-for-profit organizations). Once a business exceeds this threshold, they are require to register for GST/HST with the CRA. This is considered “involuntary” registration, as there are rules within the Excise Tax Act (ETA) that require the registration based on these small supplier rules. A business can chose to “voluntarily” register for GST/HST, which can be done at any point after a business incorporates or commencement of business activities for those businesses not incorporated.
Was registration overlooked in the start-up phase?
A business may decide to voluntarily register for GST/HST with the CRA in order to claim GST/HST ITCs on startup costs. This is typically advised for businesses with expensive startup phases and can be a good plan to assist with cash flow, as long as, the business understands that they are required to charge and collect GST/HST on all of their taxable revenue. The startup business has essentially forgone the small supplier exemption. Businesses that do not have expensive startups may prefer to take advantage of the small supplier threshold and not have to worry about collecting/remitting and filing GST/HST returns with the CRA.
GST/HST registration with the CRA may be overlooked at the startup phase and businesses sometimes begin to charge and collect GST/HST before they are registered with the CRA. We are often asked what the responsibilities are, once this occurs. If a business has collected GST/HST on revenue prior to registration with the CRA, they are legally required to remit that GST/HST to the CRA and have involuntarily registered for GST/HST. The CRA will collect the GST/HST from the business and provide the business with a GST/HST number to use moving forward.
Has GST/HST been collected for a longer period?
A business may have been collecting GST/HST without CRA registration for a lengthy period of time before it is addressed. Under these circumstances, a business is able to request a back dated registration with the CRA. The CRA will request the three earliest invoices that included GST/HST charged and will back date the GST/HST registration to the date of the earliest invoice. This will provide the business with the ability to claim any GST/HST ITCs back to this date and the ITCs can be used to offset any GST/HST collected.
GST/HST paid prior to registration
Business owners are often left wondering what their options are with respect to GST/HST paid prior to registration with the CRA. Assuming the business has not been collecting GST/HST, they aren’t considered a GST/HST registrant and therefore aren’t able to file GST/HST returns.
A business is still required to register for GST/HST to claim ITCs, however the ETA does provide some relief and allows business to claim ITCs on certain expenditures that occurred prior to the registration date. This relief is limited to assets classified as inventory, prepaid expenses or capital assets and the ITC calculation is based on the fair market value of the asset at the time of registration.
If you need assistance in navigating through the complex rules of GST/HST claims, one of our Commodity Tax Professionals would be happy to assist you in these matters.