5 Things You Need to Know About GST/HST If You're An Unincorporated Consultant

We sometimes hear from individuals who are earning income from business activity but have yet to incorporate a business. These folks are usually working as some type of consultant – IT, marketing, HR, etc. They may be holding down a full-time T4 job while doing their consulting work on the side, or their consulting work may be their sole source of income.

Because they haven’t incorporated, they don’t have to worry about filing a T2, the corporate tax return. They just need to report their business income to the CRA on their personal tax return, their T1. But, depending on their sales from their business activities, they may have to deal with GST/HST, and here they have the same questions: Do I need to register? How does it work? What happens if I forget to charge it?

Although unincorporated businesses aren’t our target market, I’ve pulled together information from our team (and Government of Canada sources) to post this list of common things unincorporated consultants need to know about GST/HST.

(And if you are an unincorporated consultant and you ever do incorporate, don’t forget to check out our simple CPA corporate tax service. It streamlines the whole record keeping and corporate tax process for incorporated one person service businesses.)

1. You need to register for GST/HST if you earn over $30,000.

If your total revenue from your consulting work (before expenses) is less than $30,000 in any 12-month period, you’re considered a small supplier and don’t need to register for GST/HST. That means you can’t charge GST/HST on your invoices, and you don’t have to file GST/HST returns.

But once your revenue crosses $30,000 in any rolling 12-month period or if you exceed the $30,000 threshold in a single quarter, you must register for a GST/HST account with the CRA. And you need to start charging GST/HST on the sale that puts you over the limit.

Even if you’re under the $30,000 threshold, it might make sense to voluntarily register for GST/HST. Why? Because then you can claim Input Tax Credits (ITCs) to recover the GST/HST you pay on business expenses. I cover ITCs in more detail in item 4 of this list.

Source: When to register for and start charging the GST/HST

2. You need to charge the right GST/HST rate.

The GST/HST rates you charge depend on where your client is located, not where you are. Here’s a quick breakdown:

HST provinces: Ontario, Nova Scotia, New Brunswick, PEI, Newfoundland and Labrador. These provinces combine GST with a provincial sales tax. The GST/HST rate ranges from 13% in Ontario to 15% in the Maritimes.
GST-only provinces: Alberta, Saskatchewan, Manitoba, BC, Quebec, Northwest Territories, Nunavut, and Yukon. For customers in these provinces and territories, you only need to charge the 5% GST rate.
Non-resident clients (outside Canada): Generally, you don’t charge GST/HST if your customer is outside Canada. But the rules get a little tricky.

If you’re in Toronto but consulting for a BC-based client, you charge 5% GST, not Ontario’s 13% HST. Always check the place of supply rules to make sure you’re invoicing correctly.

Source: CRA - GST/HST Place of Supply Rules

3. If you forget to charge GST/HST, you still owe it.

Unfortunately, the CRA doesn’t care whether you billed your client correctly for GST/HST or you forgot — once you cross the revenue threshold, you still owe the tax on the amounts above.

That leaves you with two options:

Pay it out of your own pocket. Depending on your total consulting revenue and your financial situation, this unplanned for tax expense may be a hard pill to swallow. Which leaves the second alternative.
Go back to your client and ask them to pay the GST/HST on your previous invoices. Most well-run businesses will keep GST/HST payments that they receive in a separate bank account from the ones they use to cover their operating expenses. Paying you the GST/HST on an old invoice will create an ITC for your client that will reduce the amount they have to pay to the CRA by the same amount. Pay you or pay the CRA: it shouldn’t be an issue for their cash management or their profit and loss. It may create headaches for their bookkeeping and GST filing, though, and they may not be happy with dealing with that.

You can avoid this trouble by registering when you should and setting up your invoicing system to automatically apply the correct GST/HST as required.

4. You can claim Input Tax Credits (ITCs) to lower your GST/HST bill.

You will charge GST/HST when you invoice your clients. As they pay you, you will collect GST/HST, and you will report your GST/HST collected when you file your GST/HST return. But the amount you collect will likely be different from the amount you will remit to the CRA.

This is because you can deduct the GST/HST you pay on your purchases and expenses related to your business activities. These deductions are called Input Tax Credits (ITCs). They reduce the amount of GST/HST you have to remit to the CRA. You can claim ITCs on things like:

Software subscriptions (QuickBooks, Zoom, Adobe)
Office supplies and equipment
Professional fees (legal, accounting)
Business meals (50% of the GST/HST is recoverable)
Travel expenses

When you claim ITCs, make sure to keep your receipts and ensure they show the GST/HST paid. If you don’t have proper records, the CRA can deny your claim.

Source: CRA - Input Tax Credits

5. Filing and paying GST/HST late comes with penalties.

Once you’re registered, you need to file your GST/HST returns on time — even if you didn’t collect any tax. The CRA can charge late-filing penalties and interest if you miss the deadline and you owe on GST/HST.

You’re most likely going to be filing your GST/HST return once a year. If you’re an annual filer and you owed more than $3,000 in your most recent filing, the CRA will require you to make quarterly installment payments toward your next GST/HST return.

Set up automatic reminders or use accounting software to track GST/HST deadlines. If you can, pay a little extra into a savings account every time you collect GST/HST. Remember, the GST/HST you collect is not your money. You’re effectively holding it in trust for the CRA. Keeping a separate bank account for your tax obligations will make tax time a lot easier.

Sources:

Please remember that for specific guidance related to your situation, always consult a CPA or contact the CRA directly.