There are two methods for calculating the GST/HST for your business. They are referred to as the regular and quick method. If you have a service-based business with annual sales between $30,000 and $400,000, you should consider making an election to use the quick method to report GST/HST. In certain situations, where expenses are low in relation to revenue (relatively common graphic designers, IT consultants, website developers, interior designers, business consultants, etc.), using the quick method can result in increased cash retention for your business compared with reporting GST/HST using the regular method.
Here’s a simple example of a service-based business operating in Ontario with annual sales of $200,000 (HST collected on sales = $26,000) and expenses of $40,000 (HST paid on expenses = $5,200).
Under the regular method of GST/HST:
Line 101: $200,000 (Sales and other revenue)
Line 105: $26,000 (Total GST/HST collected)
Line 108: $5,200 (Total ITCs)
Line 115: $20,800 (HST to be remitted to the CRA)
Therefore, using the regular method the GST/HST owing is $20,800.
Using the quick method of accounting for GST/HST:
Line 101: $226,000 (Sales and other revenue including GST/HST collected)
Line 105: $19,888 (Total GST/HST collected – $226,000 X 8.8%)
Line 106: $260 (ITCs paid in respect of capital assets used for business. We assume that $2,260 was spent on new assets)
Line 107: $300 (1% of the first $30,000 of tax-included revenue for the year).
Line 108: $560 (Total ITCs and adjustments, Line 106 + Line 107)
Line 115: $19,328 (HST to be remitted to the CRA)
Using the quick method the GST/HST owing is $19,328. So by switching to the quick method the business added $1,472 to it’s cash retention and bottom line.
Note: that the portion of GST/HST that is not remitted is reported as income.
To use the quick method, you must complete Form GST74, and file it with the CRA. If you file annual GST/HST returns, you have to make the election by the first day of your second fiscal quarter. Prior to making the election, it’s important to determine your business’s level of ITCs to evaluate whether the regular or quick method is more beneficial for you. Want help with this? Get in touch.