The Journal and Source Documents Lesson 3: Harmonized Sales Tax (HST)

What is the Harmonized Sales Tax (HST)? A combination of both the GST (Goods and Services Tax) and the PST (Provincial Sales Tax) Implementation in Ontario effective July 1, 2010 Subject to the same rules as for GST Businesses with annual sales ≥ $30,000 must register Each registered business is assigned a number and must remit the tax either monthly, quarterly or annually.

Impact in Ontario The PST is being replaced with a value-added tax similar to the GST Ultimately only the final consumer pays the tax Objective is to reduce hidden taxes built into products currently being produced and purchased by consumers The Ontario percentage will remain at 8% When combined with the GST (5%), the total rate will be 13%

Impact in Ontario More products and now services will be subject to the HST than was the case with the PST Government of Ontario tax cuts implemented to help lessen the impact for individuals Lower compliance costs for businesses Administration of a single tax instead of two means: one set of forms, one payment, and one point of contact for audits, appeals and taxpayer services

Accounting for the HST Two methods: Quick Method Available to most small businesses (some exemptions) with annual sales/revenues ≤ $200,000 Simplifies remittance calculations by applying a certain percentage to overall sales. Percentage varies by business type No need to keep a separate account for tax paid on purchases In order to use this method, you must file an election with Canada Revenue Agency

Accounting for the HST Regular Filing: Generally done either monthly or quarterly. Some smaller businesses file annually If file annually must still make installment payments to the government based on prior year’s remittance Complete and submit the Goods and Services Harmonized Sales Tax Return for Registrants Follow same rules as for GST with separate accounts for Refundable and Payable portions

Accounting for the HST Can claim rebate (Input Tax Credit – ITC) for the amount of HST paid on items purchased for business purposes In effect, costs of purchases will increase but rebate/ITC claimed Note that the increased short term cost may cause some cash flow issues for smaller businesses

Accounting for the HST HST rebates/ITC’s on the Ontario 8% portion are however being limited Financial institutions and businesses or groups of companies with annual sales of ≥ $10 million will not be able to claim the provincial component (8%) of their ITC’s on certain expenses Restrictions are currently planned for the first five (5) years and then will be slowly phased out

Two Parts to the HST Sales and the HST The tax is added to the customer’s invoice, collected from the customer, and remitted (sent) to the government. The sale can only take place one of two ways: Pay now (Bank) Pay Later (Accounts Receivable)

Two Parts to the HST Purchases and the HST All businesses are entitled to recover the GST portion (5%) charged by their suppliers. Most businesses are entitled to recover the PST portion (8%) charged by their suppliers. (See previous restrictions discussed) For teaching purposes we will always assume that the PST is recoverable by businesses. Businesses have to pay the tax to the supplier, but are entitled to recover this tax from the government. The purchases can only take place one of two ways: Pay now (Bank) Pay Later (Accounts Payable)

Accounting for the HST There are two accounts for HST in the ledger: HST Recoverable, and HST Payable

Accounting for the HST

Accounting for the HST In the Books of the Seller Step 1: Calculate the tax on taxable goods or services and add it to the sales invoice.

HST Number HST

Accounting for the HST Note the following: The company’s HST number must be reported on the sales invoice. HST amount of $234. The sales invoice is the source document for the accounting entries in the books of the seller.

Accounting for the HST Journal Entry for the Seller Dr A/R – ABC Bank 2,034 Cr Sales 1,800 Cr HST Payable 234

Accounting for the HST In the Books of the Purchaser Sparkles Cleaners is not just the seller of services. In some instances it is the purchasing company receiving the sales invoices of other companies. In the hands of a purchaser, these are purchase invoices.

Accounting for the HST In the Books of the Purchaser In order to recover the HST added by the seller, the purchaser must account for it.    The purchase invoice is the source document for the transaction.

Accounting for the HST In the Books of the Purchaser (Sparkles Cleaners): Dr Office Supplies 600.00 Dr HST Recoverable 78.00 Cr A/P – The Supply House 678.00

Remitting the HST Most businesses are required to file monthly and must remit the net tax owed within one month following the end of their reporting period. Refer to the example on the next slide:

Remitting the HST Note: Calculate the difference: HST Payable – HST Recoverable $2,309.65 - $1,567.90 = $741.75 (owed to the government) Note: If this is a negative amount, the company will receive a refund cheque from the Federal government.

Remitting the HST Make the Journal Entry Dr HST Payable 2 309.65 Cr HST Recoverable 1 567.90 Cr Bank 741.75

HST on the Balance Sheet The smaller account balance is subtracted from the larger. If the difference is a CREDIT, it is shown in the Liabilities section. If the difference is a DEBIT, it may be shown in the Assets section. However, most computer-generated balance sheets, will show a debit balance as a negative number in the liabilities section.

HST on the Balance Sheet