Harmonized Sales Tax (HST) is a combination of federal and provincial sales taxes on goods and services in Canada.
Last week, we spoke about how realtors could deduct commission rebate, and some of you asked me about calculating your HST in the first place. So let’s get right into it…
As a Realtor, the services you provide to your clients are subject to the Goods and Services Tax (GST) or the Harmonized Sales Taxes (HST) in Ontario.
In Canada, if you make over $30k annually from all your combined commercial activities, you must charge HST to your customers on behalf of CRA. However, CRA considers you a small supplier if you make less than $30k from all of your combined commercial activities on a rolling 13 month basis. This means you may be able to get away from not charging HST.
Practically speaking, most real estate brokerages require their agents to register with the government to collect HST. I have yet to see a real estate agent client that is not registered for HST..
Most real estate brokerages require realtors to provide their HST numbers, whether they make over $30K commission or not. Once you get your HST numbers, you are required to charge HST on the commission you collect, regardless of the amount you earn.
Some brokerages charge HST on behalf of their realtors. Then, they deposit the commission income, together with HST collected, into the Realtor’s bank account.
Most new Realtors do not understand that even though the HST money passes through your bank account, it doesn’t belong to you. You are only collecting it on behalf of the government.
This means you must keep track of the HST you collected on behalf of the government. Then you subtract the HST paid on all the services/products used for business purposes. Afterwards, you remit the net difference to the CRA at the end of the filing period.
Traditional Method Of Calculating Harmonized Sales Tax (HST) Payable
Let’s illustrate with an example…
If you make a $100,000 commission income for the year, in Ontario, you must charge 13% HST on behalf of CRA. So, you receive a total of $113,000 from your clients through the brokerage.
Note that you’re only eligible to claim the deductible portion of the HST you paid on meals & entertainment and the business use portion of the HST you paid on automobile expenses.
For example, only 50% of the HST you paid on meals & entertainment can be claimed against the HST you collected.
If you use the vehicle 90% of the time for business use purposes, only 90% of the HST you paid on vehicle expenses would be claimed against the HST you collected.
HST or PST you paid on insurance are not eligible to be claimed against your HST collected.
Assuming you spend $20,000 on goods and services as a business expense and pay 13% HST ($2,600) to the vendors, you would have paid $22,600 in total.
At the end of the filing period, you need to file an HST return and remit the net difference between what you collect and what you pay to the government.
In our example, it is $13,000 – $2,600 = $10,400.
CRA recognizes how much work is involved in filing an HST return, so it offers taxpayers another way to file HST returns more quickly and accurately.
This is called the Quick Method.
The Quick Method of calculating Harmonized Sales Tax (HST) payable
For Realtors to qualify for HST filing using the Quick Method, they have to meet the following conditions:
- The Realtor’s annual commission income must be below $400,000
- The Realtor must make an election to file the Quick Method or NOT revoke an election under the Quick Method.
- You are not a taxpayer such as accountants, bookkeepers, public institutions, etc.
Now that we have established the conditions required to qualify for HST filing using the Quick method let’s dive into how this method works.
In Ontario, Quick Method Remittance rates for service providers is 8.8% on gross income received (inclusive of HST), while for resale of goods, it is 4.4%.
As a Realtor, you are also eligible to claim 1% on the first $30,000 eligible supplies as a credit.
This means you would apply 8.8% to your income and subtract the 1% credit for the first $30,000 eligible supplies.
Using the same example above, you collected $100,000 income plus $13,000 HST from your clients. Ie. Gross income inclusive of HST = $100,000 + $13,000 = $113,000 in total for the year.
The Net tax payable under Quick method = $113,000 x 8.8% – $20,000 x 1% = $9,944 – 200 = $9,744
Recall that in the example above, if you were to file HST under the traditional method, our Net tax payable using the traditional method = $10,400.
This means you get to SAVE $656, which you will have to add to your income and pay the tax on it.
Even if you are at the top marginal tax rate in Ontario paying 54% tax, you will still net $302 after tax!
The Quick method is great, especially for businesses that are labor intensive with low expenses.
Benefits for filing using Quick Method
There are a few benefits using Quick Method for your HST filing:
- If your expenses are low in relation to how much you have collected, this can provide some tax savings, as illustrated with the example above.
- If you want to have certainty in terms of how much HST you have to pay, the Quick method provides a quick and easy calculation for you to set aside the amount for payment. For example, if you earned $100,000 commission, collected $113,000 from your brokerage, and you wondered how much you need to set aside.
With the Quick method, all you need to do is take the amount deposited in your bank account, multiply it by 8.8%, and you have the exact amount you need to remit to CRA.
In our example this would have been $113,000 x 8.8% = $9,944.
This helps with cash flow management and you know exactly how much you would need to set aside.
- Simple calculation – as illustrated in our example, the HST payable calculation can be as simple as taking the gross commission income and multiplying it by 8.8%. You don’t need to complete your entire set of bookkeeping before knowing what you have to pay.
No adjustments required for the non-deductible portion of meals and entertainment required. No adjustments for the personal use portion of your car expenses. All you need is your gross commission income, inclusive of HST x 8.8%.
Downside of using Quick Method
With its simplicity, it comes with a few disadvantages:
- If your expenses are high, using Quick Method to file your HST may cost you money. You’ll lose out on claiming extra HST that you pay on your high expenses.
- You can’t make a change easily. If you want to revoke your election to use Quick Method to file HST, you have to revoke the election by the due date of the HST return for the last reporting period for which you want to use the quick method.
We have a client who has been consistently late with his HST filing. By the time he recognized the HST implication and would like to revoke his election, it was too late.
- Quick method is only available for realtors who make less than $400,000 commission income. If you make more than that amount, you are not qualified to use the Quick Method for filing.
Deadline to file elections
For an annual filer, your deadline to file the election is the first day of the second quarter.
If you file your HST return quarterly or monthly, you simply need to make the election by the due date of the filing period that you start using the Quick Method.
You must file an election BEFORE you can use the Quick Method to report Harmonized Sales Tax (HST).
In other words, more incentives to file more frequently.
Until next time,
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant