I often find myself sitting down with business owners and asking them if they have considered the Quick Method for reporting HST. The usual response I receive is: “The what method? Quick? I’ve never heard of it”.
The Quick Method for HST is just that – quick. It is more quickly administered, easier to track and can result in the business owing less in HST which, at the end of the day, leaves more money in your pocket.
Let’s take a look at what the Quick Method entails and see if it’s a good fit:
- First off, the program is available only to small businesses which the CRA classifies as any business that has worldwide taxable revenues of under $400,000. You also have to be up to date with your HST filings – I know some businesses have difficulty staying current so if you are looking to make the switch, this is one more reason to get your records up to date.
- Bookkeeping is simplified. Your business will continue to charge HST however the bookkeeper doesn’t need to break out HST collected, rather the total invoice is lumped in as revenue (for the time being). The same goes for most expenses, HST paid to other businesses is not broken out, rather the total amount paid is put to office expense or repairs & maintenance, whatever the case may be. Once it’s time to file your HST return, a simple calculation is done to figure out how much HST needs to be remitted . See the illustration below.
- In most cases you will end up remitting less in HST than you would have using the Normal Method, which is (HST collected) – (HST paid on expenses) = HST payable to the Receiver General. It’s important to note that the ‘savings’ is included in income and is therefore taxable but you still end up ahead as I illustrate next.
Scenario: Car repair shop grosses $250,000 in revenues, spends $100,000 on wages and labour (no HST) and another $50,000 on oil, car parts and office supplies. Now let’s run the numbers:
As previously mentioned, the normal way to calculate HST remittance is HST paid on expenses subtracted from HST collected on revenues. In this case it’s $32,500 less $6,500 = $26,000 payable to the government. The taxable income of the company is $100,000 resulting taxes owing of $15,500 (15.5%). Your business has a net cash flow of $84,500 after paying for HST and income taxes.
With this method we keep all HST included in revenue and expense amounts so that total revenues reads $282,500 ($250,000 + HST) and total expenses reads $156,500 ($100,000 + [50,000 + HST]) so that before any calculations, net income is $126,000.
Now we need to use the Quick Method to extract HST payable to the government. First we take 8.8% of total sales which = $282,500 x 8.8% = $24,860. Now you may be wondering ‘Don’t I get a credit for HST paid?’, well, as you can see you are remitting less than you would with the Normal Method but the government does grant a nominal credit of 1% on the first $30,000 of revenues which equates to a whopping $300. In any manner, $24,860 less $300 = $24,560 payable to the government for HST. Now as I said earlier, the HST payable (in this case $24,560) is deducted from revenues so that after the Quick Method calculation above net income is $101,440 which is slightly higher than the $100,000 net income using the Normal Method. Income taxes payable = $15,723 ($101,440 x 15.5%). Your business has a net cash flow of $85,717 after paying for HST and income taxes.
In this example, using the Quick Method generates $1,217 of additional cash for the business. Initially the method sounds a little complicated which is why I recommend consulting a professional accountant to assist with the calculation and see if you can benefit from the change in method. It’s also worth noting that HST paid on capital expenditure is tracked separately and fully claimed on the HST return. For more information on using the Quick Method, follow this link to the CRA guide RC4058 Quick Method of Accounting for GST/HST.
This blog post was written by Geoff Smethurst, CPA, CGA, LPA