Three Ways to Calculate GST/HST

Most business owners learn about GST/HST through their bookkeeper, accountant, or someone they know and the explanation is almost always the same: GST/HST Charged on Sales less GST/HST Paid on Purchases, equals your net tax owed. The reason most only use one method is simple – nobody told them there were others. In reality, there are three ways to calculate GST/HST in for-profit businesses in Canada, and which one is right for you depends on your company, your numbers, your industry, and where you do business.

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The Detailed Method

The Detailed Method is what most business owners follow naturally — because it is calculated the way they understand GST/HST to work.

• GST/HST Charged on Sales
• GST/HST Paid on Purchases — your GST/HST ITCs
• Send the difference to CRA

Every GST/HST ITC amount is recorded directly from the actual receipt. What you paid is what you record. All these added up give you your total GST/HST ITCs for your filing period.

Eligibility

• Available to all businesses
• No election required — applies by default
• No revenue threshold

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The Simplified Method

The Simplified Method doesn’t change the formula for the GST/HST calculation — it’s still GST/HST Charged on Sales minus GST/HST ITCs. What changes in this method is how the GST/HST ITCs are calculated.

Under the Simplified Method, what you pay is not necessarily what you would record. Instead, you calculate your GST/HST ITCs by ignoring the provincial tax on the receipt and calculating the GST/HST ITCs on the entire receipt amount. The formula to do that is 5/105*total receipt. This pulls out the GST/HST ITCs for the simplified method. All provincial sales tax is ignored entirely. One exception to this rule is when you purchase a capital asset. In this case, you must use the Detailed Method and record what you actually paid in GST from the receipt.

In practice, this means your bookkeeping software tax code for purchases is set to 5% only — not the combined GST/HST and provincial tax rate.

Eligibility

• Annual worldwide taxable revenues of $1 million or less
• Total taxable purchases of $4 million or less in the previous fiscal year
• No election form required — you can begin using it at the start of a reporting period if you qualify
• Your bookkeeper or CPA can confirm whether you meet the thresholds

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The Quick Method

The Quick Method is a different calculation entirely — different enough that it warrants its own post. Unlike the Detailed and Simplified Methods, it doesn’t follow the GST/HST Charged on Sales minus GST/HST ITCs formula at all.

The formula is different enough that you also need to apply to and be approved by CRA before you can use it. It’s not like the Detailed or Simplified Method where you can simply start using it at the beginning of a reporting period.

Key factors to be aware of with the Quick Method:

• It is a flat remittance rate set by CRA and is calculated on your total invoicing: GST/HST included
• The result of that flat rate calculation plus adjustments is what gets paid to CRA
• The flat Quick Method rates vary by province and business type
• GST/HST ITCs on most operating expenses are not claimed
• Capital purchases are treated differently from and are an adjustment to the Quick Method calculation
• There is a 1% credit on the first $30,000 of invoicing each fiscal year
• Form GST74 election must be filed and approved before the method takes effect
• There is a revenue threshold to use the Quick Method
• Certain professions are specifically excluded by CRA regardless of revenue

If the majority of your business expenses are wages — including paying yourself — it may be worth reviewing whether the Quick Method is a fit. That conversation starts with your bookkeeper or CPA.

Eligibility

• Worldwide taxable supplies of $400,000 or less (GST/HST included) over the relevant four-quarter period
• Must file and receive approval of Form GST74 election with CRA before the method takes effect
• Certain professions are excluded — bookkeepers, accountants, and others
• Your bookkeeper or CPA can confirm eligibility and run the numbers before you elect

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How They Compare

All three methods are acceptable to CRA. The difference is in how the actual tax owed is calculated — from detailed receipt entries, to a fractional calculation on purchase totals, to a flat CRA-set rate applied to total invoicing.

Determining which of the three ways to calculate GST/HST is most beneficial in your business depends on your revenue, your expense mix, your industry, and your eligibility. Run the numbers with your bookkeeper or CPA before switching methods — especially before electing into the Quick Method, which requires CRA approval before it takes effect.

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Next Steps