Sales Tax 101 for Canadian Businesses
Guest blog by Ryan N. Lazanis, CPA, CA of Xen Accounting, Montreal
Whether you like it or not, reporting your sales taxes accurately is critical. Make a mistake and your precious business could pay dearly in interest and penalties. So it’s super important to make sure you’re setting up your sales taxes correctly in Xero and recording and reporting the correct figures.
Sales tax accounting is enough to give most people a headache. It’s one of the most complicated areas of accounting and it’s easy for things to get messy quickly.
However, if you follow the steps outlined below and create some systems to make sure you’re entering your data correctly into Xero, there’s no reason why you can’t have things run smoothly.
During your initial Xero setup, Xero will ask you to provide details of your sales tax situation in “financial settings.” There will be a field that says “sales tax” and under it there are a few things to choose from and fill out.
First, Xero asks whether we want to report sales tax on the cash or accrual basis. If you’re an incorporated business, then you should select the accrual basis, which means that you need to remit sales tax based on your invoice date, not on the date you actually receive the cash. Not fair, I know, but that’s just the way it works in Canada!
Next, enter your tax ID number that the Canada Revenue Agency issued to you and the tax name that you want to appear on your invoice (you can simply write “GST” or “HST” for example).
Lastly, you need to select the reporting period which is essentially how often you have to remit your sales tax reports to the government. In Canada, this could either be monthly, quarterly or annually. When you registered for sales tax, a reporting period was assigned to you, so look on “Check Registration Papers”.
Multiple tax rates
Within the initial setup of your Xero account, further on you will be prompted to enter tax rates that apply to your business. If you sell goods or services to multiple provinces across Canada, then you will likely need to add multiple tax rates – one for each province. I say likely, because this can sometimes be a tricky situation depending on the nature of your business, the types of goods/services you sell and a multitude of other factors. If you have sales across Canada, the best bet is to consult with a professional accountant or tax expert to determine which provinces you need to remit taxes to in order to avoid any problems down the road. You don’t want to start remitting taxes to provinces that you don’t need to remit to in the first place.
By default, you will have four locked tax rates set up that you can edit (but not delete), so 99% of the time I am editing the “Tax on Purchases” and “Tax on Sales” default tax rates in Xero. Once you click on one of them, you can rename the tax rate to what you want. I prefer to rename them to the particular province the tax rate applies to. Example: Tax on Sales – Quebec.
If your province has two tax components(ie. a federal and a provincial tax rate), then you’ll will need to add a component. The first component will always either be named GST or HST (depending on your province) and then you can click “Add a Component” to add the provincial tax rate for all non-participating HST provinces. If you’re in Ontario, you would only have one tax component, HST. If you’re in Quebec, you will have two tax components, GST and PST. Make sure the tax components are set to non compounding.
Tax rate name: Tax on Sales – Quebec
Component 1: GST – 5%
Component 2: QST – 9.975%
Tax rate name: Tax on Sales – Ontario
Component 1: HST – 13%
You would need to do the same for each and every province that you need to remit taxes to.
If you have already completed your initial Xero setup and want to add more tax rates, don’t fret. You can do this by simply going to “Settings” ? “General settings” ? “Tax rates”. Adding tax rates is just as easy as during the initial account setup, outlined above.
Tax numbers on invoices
If you are charging sales tax to your customers, then you need to show your sales tax numbers on your invoices. You can modify your invoices in Xero to show your tax numbers by going into “General Settings” and then “Invoice Settings”. You can then edit Xero’s default invoice.
Xero only allows you to show one sales tax number on your invoice as part of their default invoice. This isn’t a problem if you are only charging HST to your customers, as you will only have one sales tax number. If this is the case, then you can check the box that says “show tax number”.
If you are charging two sales tax numbers, you can use a bit of a work-around. Uncheck the “Show tax number” box and in the “Terms and payment advice” field, you can manually write in your tax numbers there.
Whatever method you choose, make sure your tax numbers are showing on sales invoices you send out.
Sales Tax 101 for Canadian Businesses – Part two, will go live tomorrow