Voluntary GST/HST registration: pros and cons

What voluntary registration means

Most businesses must register once they pass the small-supplier threshold, which the CRA describes as $30,000 in taxable sales over four consecutive calendar quarters, or in a single calendar quarter. Below that line you are a small supplier and do not have to register or charge tax. The CRA is clear, though, that you may choose to register if you make taxable sales, leases or other supplies in Canada.

A person who has not yet started selling can also qualify, if they can show a clear intention to carry on a commercial activity. The CRA’s memorandum lists the kind of evidence it looks at, such as the planned start date, proposed contracts, a place of business, proof of incorporation or other steps taken to develop the business. If your only activity is making exempt supplies, you generally cannot register at all. Whether you are required to register is a separate question, covered in our guide to registration questions and the registration checker.

The main advantage: input tax credits

A registrant can generally claim input tax credits for the GST/HST paid on purchases used in its commercial activities. A small supplier who is not registered cannot, so the tax on equipment, software, rent, advertising and professional fees simply becomes a cost.

Here is a round, illustrative example. Suppose a new consultant spends $10,000 on business purchases during the first year after registering and pays 13% HST on them, which is $1,300. Registered, the consultant can claim that tax back, assuming the purchases qualify and the paperwork is in order. Not registered, the $1,300 is part of the cost of doing business. The more you spend relative to what you sell, the more this matters, which is why a start-up with heavy set-up costs may look at voluntary registration earlier than a low-cost freelancer.

The cost: charging tax to your customers

Once registered, you must charge GST/HST on your taxable supplies, which means 13% HST on Ontario sales. Customers who are registrants usually recover that tax through their own input tax credits, so it costs them little. Customers who are not registrants, including most consumers, pay it as a real price increase.

So the question becomes who you sell to. If most customers are businesses, charging tax is usually close to neutral for them and registration often costs little in competitiveness. If you sell to the public and compete on price against small suppliers who do not charge tax, a 13% difference can be noticeable. You can absorb the tax by keeping prices unchanged, but then your margin falls by the tax you must remit.

The workload: returns, records and cash

Registrants file GST/HST returns for each reporting period, even when there is nothing to remit. For most businesses that file monthly or quarterly, the filing and payment deadline is one month after the period ends. For most that file annually, it is three months after the fiscal year-end. Keep the filing frequency in mind when you plan your cash.

Records matter as well. To support a credit, you need invoices or receipts that carry the details the CRA requires, and you should make sure the supplier’s GST/HST registration number appears on them. You also need accurate sales records so the tax you collect is reported correctly. If you are not already using bookkeeping software, add the time or cost of tax coding to your comparison. For how tax collected should be handled in your cash planning, see the article on why collected tax is not spending money.

What you can and cannot claim from before registration

Registering later does not recover everything you spent earlier. The CRA explains that a new registrant who was a small supplier is treated as having bought certain property it held on the registration date, such as capital property, real property and inventory, for use in its commercial activities. You may be able to claim credits on that tax, to the extent the property is used in commercial activities.

You can also claim tax payable before registration on services that will be supplied after you register, and on prepaid rent for periods after your registration date. You cannot claim tax on services supplied before you registered, or on rent for periods before that date, even if you paid after registering. The date of registration therefore affects how much you can recover, so ask which date will apply before you apply.

Effective date and the one-year commitment

For a voluntary registration made while you are still a small supplier, the CRA says the effective date is usually the date of your request, and it may start up to 30 days before. The effective date decides which purchases and sales fall inside registration.

The commitment matters just as much. When you register voluntarily, you may need to remain registered for at least one year before you can cancel. The CRA’s cancellation memorandum states that a small supplier requesting cancellation generally must have been registered for at least that long, with the cancellation date typically after the end of the fiscal year, although other dates may be agreed. A request goes through the CRA, and cancelling can trigger an adjustment if you claimed credits on items you no longer use in commercial activities. If you plan to stop operating, different rules apply.

A simple way to decide

List the purchases you expect over the next twelve months and estimate the HST on them. Compare that with how your customers would react to a 13% price increase, and with the time registration adds. If the credits are modest and your customers are consumers who cannot recover tax, staying unregistered is often simpler. If the credits are large or your customers are mostly registrants, registering early may pay for itself.

Revisit the decision as sales grow. If you are approaching the threshold anyway, registering a little early can simplify the transition. If you are comparing the regular method with the quick method, read our article on the quick method.

What to bring to an accountant

Bring a forecast of sales by customer type, a list of planned purchases with the tax paid, your intended start date and any associated businesses, since associates’ sales can count toward the threshold. Ask which effective date makes sense, how your invoicing software should be configured, which filing frequency applies and what the exit plan would be if you later wanted to cancel. A short conversation before applying costs less than reversing a registration you did not need.