Why a GST/HST return gets reassessed, and what to check before you file

Summary

GST (Goods and Services Tax) is a 5% federal sales tax on most of what a Canadian business sells. Five provinces merge it with their own sales tax into one HST (Harmonized Sales Tax) at a higher combined rate. The five are Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island, and our registration guide lists each rate. Once your corporation is registered, meaning signed up with the CRA to charge the tax, every GST/HST return it files is one subtraction. You report the tax you charged customers, then subtract the GST/HST your business paid on its own purchases, which comes back to you as an input tax credit.

The CRA checks those two halves differently. Tax you charged gets compared against the revenue on your corporate income tax return. Credits get checked against paperwork, meaning the CRA asks to see the invoices and receipts behind them.

In our view five things account for most of what gets reassessed.

1. A purchase document missing required information. Where the total on the document, tax included, is $100 or more, your supplier’s GST/HST registration number has to be on it. At $500 or more, add your own name, a description of what you bought, and the payment terms.¹
2. A supplier who wasn’t registered when tax became payable. Paying an amount called GST/HST in good faith doesn’t create an input tax credit.
3. Exempt sales treated as zero-rated. Zero-rated sales are taxed at 0% and you still recover the tax on the costs behind them. Exempt sales sit outside the tax and you recover nothing. Both look tax-free to a customer.
4. Tax reported when the money arrived rather than when the tax became payable. Tax is payable on the earlier of the day the customer pays and the day the amount becomes due, which for most invoices is the invoice date, so the sale belongs in the return covering that date.² Software set to book a sale when the cash lands puts it in the wrong period. A CRA auditor spots that by comparing your GST/HST sales against the revenue on your T2, your corporation’s income tax return.
5. Filing late, or not filing at all. The penalty for filing late is charged separately from interest, and a period you never filed stays open to reassessment forever.

In our view the credit side is a filing-cabinet problem more than a tax problem. We’d hold a credit back until the document carries what the CRA’s documentary rules ask for, which are listed further down. The cost of doing that is a credit unclaimed for a period or two. Our answer changes if your corporation makes any exempt sales, because you then have to split costs between the exempt and the taxable side too.

Tax you should have charged

Charging no tax doesn’t mean owing none, because a registered business collects the tax on the government’s behalf rather than for itself. Where you should have charged and didn’t, the agreement and the surrounding facts decide whether the quoted price already included tax. On a $100,000 Ontario sale assessed on a tax-extra basis, HST at 13% means $13,000 assessed on top of the $100,000 you already collected.³ You can bill the customer for it afterwards, though the assessment doesn’t wait. The $30,000 small-supplier threshold uses both a single-quarter and a rolling four-quarter test, with different collection start dates. Tax becomes owing when you must start collecting, which can precede opening the account but isn’t always the day you pass the threshold.⁴

Taxable, zero-rated and exempt sales

Your revenue sorts into three categories, and confusing the last two is the most expensive mistake available here.

• Taxable sales carry GST or HST at the rate of the province where your customer receives the work. That’s 5% where GST applies on its own, and more in the five HST provinces. Which province counts has rules of its own.
• Zero-rated sales are taxable at a rate of 0%: basic groceries, prescription drugs and most exports (e.g. parts a machine shop ships directly to a buyer outside Canada, keeping the shipping documents that prove the goods left). You charge nothing and still recover the tax you paid on the costs behind that sale.
• Exempt sales sit outside the tax altogether: long-term residential rent, most health and dental services, childcare. You charge nothing, and you recover nothing on the costs behind them.⁵

A landlord with shops on the ground floor and apartments above collects taxable rent from the shops and exempt rent from the apartments. A cost serving both, e.g. the building’s roof, gets divided in proportion, and only the tax on the taxable share comes back.

The paperwork behind an input tax credit

A credit has to pass two tests, and the second one does the damage. Test one is substance: your corporation was registered, the supplier actually charged you GST/HST, and you bought the thing for the business rather than for yourself. Test two is paper, because before filing the return that claims the credit you must already hold documents carrying specific information. Substance can be argued with a CRA auditor afterwards, paper can’t, and in our view that’s why the credit side is the exposed one.

The checklist scales with the purchase, measured by the total on the document with the tax included.¹

• Under $100. Your supplier’s business or trading name, the invoice date, and the total.
• $100 to $499.99. Add the supplier’s GST/HST registration number, and either the tax shown as its own amount or a statement that the price includes GST/HST.
• $500 or more. Add your own name, a brief description of what you bought, and the payment terms.

The information can be pieced together from several documents (e.g. an invoice, the contract behind it, and your ledger). A credit card statement is the usual failure, because a statement never carries the supplier’s registration number, so on its own it won’t support a claim above $100.

Two different problems get confused here. A number your supplier simply left off is fixable, because the supplier is obliged on request to give you the particulars your claim needs, and you can then claim in a later return.⁶ A supplier who wasn’t registered then is a different problem: paying them an amount called tax doesn’t establish entitlement to a credit. In a 2007 case called Systematix, the Federal Court of Appeal denied a buyer’s credits on exactly those facts.⁷ The practical first check is the CRA’s free GST/HST Registry (search “GST/HST Registry” on canada.ca), which wants the supplier’s number, their business name and the transaction date.

Credits also expire roughly four years after the end of the reporting period they arose in, meaning the month, quarter or year each return covers, which the CRA assigns from your annual sales and you can look up in My Business Account.⁸

Penalties, and how far back the CRA can go

A return is late from the day after its due date, which falls one month after the reporting period ends for a monthly or quarterly filer and three months after year-end for an incorporated annual filer. An annual filer also pays quarterly instalments through the year, one month after each fiscal quarter, once its net tax reaches $3,000 in both the previous and the current fiscal year.⁹ Filing late with a balance owing costs 1% of that balance, plus another 0.25% of it for each complete month the return stays outstanding, capped at twelve months. A $10,000 balance filed six months late is $100 plus $150, so $250.¹⁰ Interest runs on top at the CRA’s prescribed rate, which it resets every calendar quarter and compounds daily, and the current quarter’s figure is on our CRA interest rates page.¹¹ Neither the penalty nor the interest is deductible against your income.

The CRA has four years to reassess a return, counted from the later of its due date and the day you filed it. That limit disappears where there was a misrepresentation attributable to neglect, carelessness or wilful default, and carelessness is a low bar.¹² A period you never filed stays open indefinitely, because the clock only starts on filing.

How often this changes

Interest resets every quarter, which is why this page states no rate and links the page that carries the current one. The $100 and $500 document tiers, the four years you have to claim a credit, and the four years the CRA has to reassess have all been stable. What should make you revisit the whole answer is a change in your business rather than a change in the rules.

• You start making exempt sales at all, e.g. renting out a residential unit or adding an insurance commission line.
• You buy or sell real property, or change the way an existing property gets used. Both bring rules where you charge the tax to yourself, which this page doesn’t cover.

Closing thoughts

Almost everything assessed here was settled long before a CRA auditor arrived, in how a receipt got filed and how a sale got coded. GST/HST is the tax where the dull part decides the number. In our view the quick method, a simplified way of working out how much tax to send the CRA, deserves less of your attention than the filing cabinet does.

How we handle it

We file GST/HST returns and check the credits against the actual supplier invoices rather than against the transactions imported from your bank. Registration numbers for new suppliers get checked in the CRA’s registry once, with the result kept in the vendor file. Where a past period is wrong we’ll tell you whether it belongs on an amendment or on a later return, and we handle the CRA correspondence either way.