By Ryan N. Lazanis, CPA, CA, Xen Accounting, Montreal
This is part two of Ryan N. Lazanis blog on Canadian sales tax. View part one here.
As you record your sales and expenses into Xero throughout the year, you should also be recording the appropriate amount of taxes on each transaction by selecting the correct sales tax rates for each individual transaction.
When it is time to remit your taxes to the government, you will be able to retrieve the figures to report through Xero’s sales tax report. You will need to select the appropriate reporting period. If you have sales in various provinces, and if you have followed my steps above to segregate tax rates by province, then this should be rather simple to do. All the sales taxes collected and paid will be separated by province and you can fill in the reports you need to with the information available in Xero’s sales tax report. Easy peasy!
Sales tax instalments
If your business has an annual reporting period (ie. you only have to send in one sales tax report per year), and if your sales tax payable in the preceding year exceeded $3,000, then you will need to make quarterly instalment payments in the upcoming year which are normally equal to a quarter of the total sales tax payable in the preceding year.
As you make these instalments, how do you record them?
The first step is to create a new account in your chart of accounts. You can create a current asset account and label it something along the lines of “Sales tax instalments.” Every time this money is taken from your bank, you can create a new spend money transaction and code the transaction to the new account we just created. At the end of the year the balance in your “sales tax instalments” account will be in a receivable/debit position.
Compare the balance in this account with the balance in your sales tax account (don’t forget to keep recording sales tax on invoices/expenses throughout the year even though you’re remitting sales tax instalments) and the difference is either an amount you owe or are owed. Make sure that all four instalment payments are correctly accounted for in your account when doing this comparison.
At year-end, a manual journal entry should be made to net your “Sales Tax Instalments” account against your “Sales Tax Payable” account. If you are not comfortable or authorized to do this, have your accountant do so in order to make sure the journal entry is done properly and to ensure that the sales tax accounts are properly reconciled.
Meals and entertainment expenses
As a rule in Canada, you are only allowed to claim 50% of sales tax for eligible meals and entertainment business expenses. So if you take your clients out for a fancy dinner and there is $100 of HST on the bill, then only $50 of that HST would be able to be claimed for sales tax purposes. The other $50 will need to be added back to the meals and entertainment expense account. There are a few ways to do this, but one of the ways is through a manual journal. Xero talks about this in its help centre and I would urge you to take a read or have your accountant help you out with this.
Use lock periods!
The last piece of advice can really apply to any business in the world and it has to do with locking periods for which you have already remitted sales tax for. The last thing you want to do is submit your sales tax report to the government and then go in and start entering things into Xero, which affect prior periods by error and throw off your entire previous sales tax reports.
Be safe and lock your periods under “Financial Settings” in “General Settings”. If you remitted your sales tax report for the quarter January 1 2013 – March 31 2013, then set your lock period as March 31 2013 so that you can’t alter the sales tax report you just sent in. Again, this is something your accountant can help you out with if you’re comfortable or not authorized.
Accounting for sales taxes are enough to give most people a headache. They’re usually one of the more complicated areas of accounting and it’s easy for things to get messy quickly.
However, if you follow a few of the steps outlined above 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 running smoothly. Maybe you have a different way to account for sales taxes and maybe you have some cool tricks. If you do, I’d love to hear about it, so feel free to chime in below with your comments.
Good general comments on sales tax in Xero. What we really need is for Xero to have an option to have sales tax on purchases point to the expense account, as in the case of provincial sales tax. It would make it so much simpler when filing PST and eliminate the need for complicated journals.
Would agree with Greg’s comment above. We need the sales tax issue resolved for Canada as soon as possible. Compliance with Provincial and Federal sales taxes is critical and great care needs to be taken at this point to ensure all tax collections and tax credits can be supported from Xero’s reporting.
Maybe there’s something I don’t understand, but when it comes to filing a tax report to the Canadian government, Xero doesn’t provide us with all the info we need, unless we’re ready to make manual calculations of course. My problem is that when we file our government form, we have the provide sales tax collected and paid as 2 separate values, whereas xero seems to compile those two values into a single one. In the end, the xero report probably works fine, but it doesn’t help in filling in our government forms.
Also: isn’t there a way to display the total income in the report summary? That’s another piece of info we need to provide when filing tax reports.
What province are you in?
I personally use the sales tax report to fill out sales tax returns? Sometimes there is a bit of manual calculations, but these calculations are using quite simple. For all revenues you should be using the sales tax account, “tax on sales” and for all purchases you should be using the sales tax account, “tax on purchases.” Then when you go to the sales tax report, check the box, “show by tax component.” This will separate the taxes into what’s been collected and what’s been paid so you can easily do the sales tax remittance to the government with very few calculations, if any at all.
For the total income you need for your report, click on the “sales tax audit report” tab and then click “wide view”. You will be able to see all revenues/expenses for that particular sales tax report, just look at the total revenues of course.
Let me know if you have any questions!
Ryan Lazanis, CPA, CA
Good article Ryan. I agree with Moira and Greg that an improved way of separating PST on purchases and getting it into an expense account would be a big improvement for companies operating in Canadian two tax provinces. Even still, setting up the tax rates properly will allow you to get the information you need to file GST,PST and HST returns, and make any manual journal entries that may be necessary.
Thanks a lot Ryan. This brings me to another question though: currently in my Xero, I have about 6 tax codes entered (one for Quebec sales, one for Ontario, international, etc.), since I need different tax rates depending on who’s buying. In top of those tax codes, I have ‘Tax on purchase 0%’ and ‘Tax on sales 0%’. Are you saying that if I want a tax to appear in my tax report, I need to use the ‘Tax on sales/puchase’ codes instead of the ones I added manually? I hope not since this would mean I’d have to go back in tame and change numerous transactions.
@ Mike: Thanks!
@ David: Any time you had a new tax rate in Xero and you utilize this tax rate for expenses/income, it will appear in the sales tax report. The ones you added manually will appear in the sales tax report for all transactions that you coded to those sales tax rates.
I’m also not sure why some would like the PST portion to be expensed. The PST portion is either payable or receivable and as such should be put to the sales tax liability account, unless you are keeping track of sales tax in another fashion…
Ryan Lazanis, CPA, CA
This is an area where Xero could take a page from QuickBooks … their sales tax report works very well. It is formatted for Canadian taxes, and you can enter your data directly from the report either onto the government forms, or into the online submission.
@Stuart We are looking at tuning tax setup and flexibility to allow a better fit for varying tax environments. Works well now, but we’ll look to polish it and make it even better in the future.
Agreed with you on that one Stuart, good suggestion.
I’m also agreed on Stuart, much better to hire a tax accountant in Montreal to fix the problem for good,.
I agree that being able to point a tax item to expenses is essential. I always set up a tax code for 50% HST on meals in QB and can’t find a way to do this in Xero. I’m confused as to why they wouldn’t have this as surely the same applies to HST on meals in NZ
The best way to manage entertainment tax is to create a special tax rate and apply a specific workflow methodology when entering expense claims. To have the amounts properly included in your sales tax report demands a special calculated rate (ie: you cannot use 50% of tax rate as this will artificially inflate your tax amount). Our methodology eliminates the need for manual journal entries all together and allows you to use the out of the box sales tax reports by component to file your sales tax.
Feel free to drop us an email to learn more.
I personally interested at your xero sales tax report. Other methodology are just in written form but this is interesting. This would be a helping hand to handle tax records.
We must remit taxes as we receive our compensation so that we can release directly to the company and avoid delayed and additional payed taxes.
The last piece of advice can really apply to any business.
Good general post to obtain the results.