Sales Tax 101 for Canadian Businesses – Part Two
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.