Introduction – Background of HST Registration
In 1991 parliament passed amendments to the Excise Tax Act to create the Goods and Services Tax ("GST"). The GST operates as a value added tax and in general the final liability rests with the "end-user" of a good or service. Some provinces such as Ontario have harmonized their provincial sales tax with the GST to create the Harmonized Sales Tax ("HST"); these harmonized provinces have delegated the administration of the HST to the Canada Revenue Agency ("CRA") and the general rules of application are now identical. For the sake of simplicity we will refer to GST or HST, but readers should be advised that any reference or analysis related to HST includes the GST in those provinces which have not yet harmonized their system with the federal GST. Most commercial concerns in Canada regardless of province are required to have a valid HST registration to conduct business.
What is the threshold for HST Registration?
Anyone in Canada that carries on a commercial activity may undertake an HST registration. However, for most businesses HST registration is a legal requirement; the Excise Tax Act requires anyone undertaking a commercial activity to register for HST, however there is a significant exception. Under the Excise Tax Act's rules, certain businesses can be deemed to be "small suppliers" provided their taxable sales fall below $30,000 per annum as calculated using the most recent four quarters of commercial activity. If so, a business is considered a small supplier and thus exempted from the need to undertake HST registration. Small suppliers may appreciate the simplicity this provides, but on the downside they will be unable to claim full reimbursement for Input Tax Credits on HST that they pay on their materials and inputs. determine if this is the right strategy for your small business, a consultation with our experienced Canadian GST/HST lawyers can help.
There are also other small exceptions to the HST registration requirement, such as for businesses in the medical profession that are "exempt" from HST, though a complete list of such exceptions is beyond the scope of this article.
What Happens if You Fail to Undertake HST Registration?
When a business undertakes a taxable commercial activity and exceeds the small supplier threshold, the Excise Tax Act deems the business to be a "registrant" and required to collect and remit HST on its sales. However, this does not mean that a registrant has actually properly registered for GST and obtained a business number from the CRA.
In the absence of actually formally undertaking HST registration with the CRA, the registrant will be unable to claim back ITCs on its expenses, and will incur large tax GST penalties related to the failure to file GST returns when required by tax law.
Generally speaking this will mean that when the CRA undertakes a GST tax audit of your business, it will open a business number unilaterally and issue HST assessments and apply tax penalties. Generally they will also deny all available Input Tax Credits ("ITCs") and place the burden of claiming them on the new registrant, either by filing GST returns or a notice of objection to dispute the GST tax amounts assessed. These penalties for failure to file and a complete denial of ITCs can create massive debts which the CRA will collect aggressively and could jeopardize the health or life of your business. Furthermore, having your Canadian GST lawyer file a notice of objection to a GST assessment does not halt CRA collection activities by CRA collections officers.
How can a Taxpayer Undertake HST Registration Retroactively?
To avoid penalties and interest, and to ensure that the registrant can claim all available ITCs in order to offset the HST payable, our experienced Canadian tax lawyers will normally advise a new client to consider retaining us to file a Voluntary Disclosure Application. If undertaken properly with effective tax legal advice, we can provide that those who failed to undertake HST registration and file returns can pay the least amount of interest, penalties and net tax. Normally, as a part of the disclosure process the CRA will be willing to assign the HST registration number retroactively to the date of the earliest registration period being disclosed. Taxpayers should know going in that the penalties and interest can only be forgiven for a ten calendar year period, so careful planning and analysis is advised – taxpayers should not be undertaking this on their own without the help and advice of an experienced Canadian GST tax lawyer.
On the other hand, a lot of businesses find that they operate at an overall loss for the first few periods of operation. In many cases, if they do not ensure HST registration, they may be leaving money on the table in the form of ITCs that would otherwise be refundable. In this circumstance, the taxpayer would not be able to take advantage of the Voluntary Disclosures Program as one of the requirements for that program would be a net-tax owing.
However, the CRA can create an HST registration number retroactively provided that the potential registrant can provide evidence that they had a properly operating commercial activity. Normally, the potential registrant should approach the relevant CRA tax services office and provide proof of commercial activity including but not limited to proof of payment, bank statements or credit card transactions showing funds being paid for expenses, and proof that the invoiced goods or service being claimed as an ITC is sufficiently described under the Input Tax Credit Regulations.
Under this second method, the potential HST registrant should be aware that ITCs are only refundable within a four-year period. This means that any ITCs older than four years old are not available to be paid back upon HST registration. On the other hand, these ITCs can be used as a credit to offset any HST payable in order to lower the ultimate amount owing by the registrant in any prior reporting period.
Tax Tips – Retroactive HST Registration
As with income taxes, taxpayers that undertake a commercial activity in Canada are expected to "self-report" and undertake HST registration if required. The above analysis has touched upon two of the strategies that a potential registrant could undertake to correct their failure to properly register for an official HST number with the CRA. However, as noted the GST tax audit risk in this scenario is large, and so undertaking a retroactive HST registration without sound professional advice from experienced Canadian tax lawyers is not advised. If you failed to undertake your HST registration on a timely basis, book a consultation with one of our Canadian tax lawyers to determine the best strategy for coming forward and claiming back all taxes that you are owed or avoiding future GST tax penalties.