As a small business owner, the collection of HST may be seen as a nuisance and for some it may feel as if you are acting as a tax collector. Like it or not, we all have to comply, file and remit the HST we have collected.
Whether you complete your HST return yourself, have software calculate it for you, or you use a bookkeeper, you should take the time to review the return (or ask questions) to ensure that some of these common processing errors have not been made.
Restricted Input Tax Credits – Meals & Entertainment
The most common HST errors occur with meals and entertainment expenses. Under the Income Tax Act, the allowable deduction for meals and entertainment is restricted to 50%. Similarly, the HST that can be claimed as an input tax credit (ITC) is also restricted. If you file quarterly or monthly, you may claim the full amount of the ITC and make a year-end adjustment.
Another common error that occurs with meals is the proper accounting for the tip: Especially when using bookkeeping software. There is a tendency to input the total amount of the meal, including tip and let the software calculate the sale tax. Make sure the sale tax amounts are double-checked!
Another common area where errors occur is with motor vehicle expenses. It is common to see the entire amount of HST on automobile expenses claimed as an ITC. Again, the Income Tax Act only permits a deduction for business use of the vehicle and a similar proration must be made.
There are two common errors that occur when reporting bad debts. The first error occurs when the business owner writes off the full amount of the invoice including HST for income tax purposes and does claim the ITC. The amount that should be written off is the pre-HST amount and the unpaid HST is claimed as an ITC.
The second error occurs when an invoice is short-paid and the balance is written off. When this occurs the HST component must be pro-rated.
Often a business will transfer funds from one company to another and fail to issue an invoice and of course, fail to account for the HST. Certain elections may be available and must be on file to account for the HST or lack there on.
Software controls can be relatively simple to input the reduce the impact of HST errors. For example, you can set-up QuickBooks to properly account for the 50% ITC up front so that you can claim the proper ITC.
Despite the software controls you can put in place, it is still recommended that a careful review of the HST filing be done to ensure that errors will not come back and surprise you when the CRA comes knocking for an audit.