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I am a salaried individual but I am
self-employed/I am a freelancer/I have a business that I run on the side. Do I
need to register for a GST/HST account?
So long as your gross income from freelancing or self-employment or from the business remains below $30,000 during any 12-month period (be it a calendar year or otherwise), registering for a GST/HST account is optional. Only if the $30,000 threshold is exceeded does it become mandatory to register for a GST/HST account. Keep in mind a couple of things here:
• The gross income refers to income prior to deduction of any business expense and includes worldwide income from your freelancing/self-employment/business. Thus, even if all of your clients are non-Canadian (and therefore you are charging them 0% sales taxes), crossing $30,000 in gross income makes it mandatory for you to register for a GST/HST account. Charging a 0% GST/HST to your clients is different from not charging any GST/HST. But the effect of not charging GST/HST and charging 0% GST/HST is pretty much the same from a layman’s perspective; so, you will often hear Canadian businesses saying that they do not charge any sales taxes to their non-Canadian clients. Search for zero-rated supplies here!
• In computing the $30,000 gross income, you would exclude income that is not from freelancing/self-employment/business as well as revenues made from selling ‘exempt supplies’.
• Prior to crossing $30,000 in gross income, if you voluntarily register for GST/HST account, you will be required to start charging GST/HST on your invoices. Again, keep in mind you are going to charge 0% GST/HST from non-Canadian clients.
Why would any business not exceeding or
not expecting to exceed $30,000 in gross income register for GST/HST
voluntarily? Especially given that it then requires extra work such as filing
GST/HST returns, etc.
It is true that registration for GST/HST leads to additional work in terms of charging GST/HST, collecting it from clients/customers, saving this amount aside, filing GST/HST returns with the CRA, and remitting net sales taxes (if the GST/HST collected exceeds the GST/HST paid). However, there are a couple of benefits that the registration comes with:
• Not registering for GST/HST means that your invoice does not have a GST/HST registration number. This tells your clients that your gross income is below $30,000. How much you make becomes an easy guess. Besides, it might also give potential clients an impression that your business isn’t doing great or that you are relatively inexperienced, and this could make them consider doing business with someone else who comes across as a much bigger, well-established business. It might then be a good idea to register for GST/HST and (mandatorily) put your GST/HST number on your invoices. Your clients will be under the impression that you are making well above $30,000 in gross income and your business is well-established. (It is still possible that they may be aware or may be able to determine, via several means, that your business is a newly set up business.)
• Registration gives your business the right to claim a refund of GST/HST that your business paid to its suppliers while spending on business expenses. Without registering for GST/HST account, it is not possible to claim back the GST/HST paid to suppliers. Registration for GST/HST is beneficial for Canadian businesses that have only non-Canadian clients because the Canadian business would effectively have collected $0 in GST/HST from non-Canadian clients but will have likely paid some GST/HST while incurring business expenses in Canada. So, instead of remitting a net amount of collected sales taxes, the Canadian business would be able to claim a refund of the sales taxes paid.
It still does not make sense to pay
GST/HST when I am not expecting to exceed $30,000 in gross income. Don’t you
think it is a bad idea to go for voluntarily registration then?
Well, you do not ‘pay’. You instead ‘remit’ GST/HST. There is a difference between paying and remitting. In paying, you would be taking your own money out of the pocket. In remitting, you are only passing along to the government the amount that you had collected from your customers/clients as GST/HST when you invoiced them. As long as you are not delaying in your obligations to the CRA, the worse that could happen is that you do not claim any refund of GST/HST and you end up ‘remitting’ all of the GST/HST that you had collected from your customers/clients. Otherwise, you remit only the net collected amount i.e., the difference between the collected sales taxes and paid sales taxes, and that this amount could become a refund if the paid sales taxes exceed the collected sales taxes. A refund would be the best outcome. Imagine all your clients are non-Canadian and therefore effectively you have collected $0 in GST/HST from them. However, in the course of running your business, you incurred expenses in Canada and paid GST/HST to your suppliers. Here, GST/HST collected is zero but there is some GST/HST paid. This amount becomes your refund! The bottom line is – you will never have to pay your own money out of the pocket while making timely remittances of GST/HST and if you are lucky, you might as well get a refund.