*If you registered for GST/HST, bookmark this page for the next time you have to file a GST/HST return.

When you earn self-employment income, your clients and customers only pay you once. So, why do you have to file two returns?

A common question we get is, “Is the government taxing me twice? How is that fair?”

Don’t worry–you are only getting taxed once for every dollar you earn, but yes, you are burdened with additional admin work since you are acting as a collection agent for the CRA and filing two separate returns. If only we got paid for acting as an agent for the CRA (wishful thinking!)

Isn’t HST/GST an additional tax I have to pay?

When you charge customers HST/GST, you are acting as a ‘middle person’ for the government and collecting tax on CRA’s behalf. HST/GST isn’t income you earned or taxes coming out of your pocket. It’s as if you're holding money that is not yours in your bank account until it’s time to remit it to the rightful owner (the CRA).

On the flip side, when you incur expenses to run your business, you may be paying HST/GST, referred to as input tax credits. The government allows you to deduct these input tax credits from the HST/GST you collected. Input tax credits can be a method of recovering the HST/GST paid out on your business activities from the CRA.

If the HST/GST you collected from your clients and customers is more than you paid out of pocket on your business expenses, you hold on to CRA’s money and remit it to them.

Again, this is not money coming out of your pocket since it is money you were just collecting on behalf of the government. If the HST/GST you collected from your clients and customers is less than the HST/GST you paid out of pocket on your business expenses, then that means you did have to pay out of pocket, so the government owes YOU money!

That’s why it’s so important to file an HST/GST return and to have adequate bookkeeping to decipher between your business income and expenses vs. HST/GST collected on CRA’s behalf or paid on business expenses. On your GST/HST return, you specify the amount of HST/GST collected and what the amount of HST/GST paid on business expenses is.

Then why is HST/GST included on my Income Tax Return?

On our Income Tax Return, it is important to report the income you earn from selling or providing goods and services, along with business expenses incurred to earn this income. That’s how your income tax is calculated.

But you may have noticed that on your T2125 Statement of Business or Professional Activities form, your gross income is reported and, therefore, needs to include the HST/GST you collected on CRA’s behalf.

Doesn’t this mean you are getting taxed on the HST/GST collected even though you file a separate HST/GST return?

No, because on your T2125 Statement of Business or Professional Activities form, there is another line for you to enter the amount of HST/GST you collected. That amount gets subtracted from your gross income to arrive at your income net of HST/GST. This income number net of HST/GST is the taxable income amount, not the gross income amount. You do not pay income tax on the HST/GST you collected on behalf of the CRA. Pfew!

This also applies to expenses–the expenses you report on the T2125 Statement of Business or Professional Activities form should be net of HST/GST. If you don’t have to pay tax on the HST/GST you collected, you can’t get an additional deduction on the HST/GST you paid on business expenses since the HST/GST you paid is deducted against the HST/GST you collected on your HST/GST return. Sounds fair to me!

How are your HST/GST return and Income Tax Return Connected?

On your HST/GST return, you have to state the amount of income you earned so that CRA can check to make sure the amount of HST/GST reported as collected on their behalf is reasonable.

For example, say you reported $100,000 of HST/GST taxable income but only reported $100 of HST/GST collected - this sets off red flags for the CRA.

If you didn’t report the $100,000, CRA wouldn’t be able to determine if the $100 of HST/GST collected is reasonable. The amount of income you report on the HST/GST return should match the amount you report on your Income Tax Return.

Similarly, the amount of HST/GST reported as collected on your HST/GST return should match the reported amount of HST/GST collected on your Income-tax return. This is so the CRA can verify that you didn’t over (or under) deduct HST/GST collected on your Income Tax Return when calculating the income you should be taxed on.

Here’s another example, if you reported $5,000 of HST/GST collected on your HST/GST return but reported $10,000 of HST/GST collected on your Income Tax Return, the CRA will know that you didn’t remit enough HST/GST back to them via the HST/GST return, or you over deducted on your Income Tax Return and therefore owe CRA additional income tax.

On your Income Tax Return, you are only taxed on the net income excluding HST/GST collected on CRAs behalf and paid on business-related expenses. But you must disclose the HST/GST collected on the income tax return. On your HST/GST return, you are calculating the amount of HST/GST collected less HST/GST paid on business-related expenses to determine how much of CRA’s money you are holding in your bank account or how much money CRA owes you!

RESOURCES:

Ready to save more money by maximizing your your GST/HST return? Business Foundations: GST/HST Webinar provides everything you need to know about registration requirements, types of GST/HST, and how to save money by choosing the best filing method for you! Register now and save money on your next filing.