ACCOUNTING PRINCIPLES Third Canadian Edition

Appendix B SALES TAX

Types Of Sales Taxes Goods and Services Tax (GST) Provincial Sales Tax (PST) Harmonized Sales Tax (HST)

Goods and Services Tax (GST) A federal sales tax on most goods and services provided in Canada A business, called a registrant, must register for GST if it: provides taxable goods or services has revenues of more then $30,000 in any year Although registrants pay GST themselves, they can claim an input tax credit (ITC) against the GST they collect from customers GST is remitted to the Receiver General

GST Categories of Goods and Services: Taxable supplies, where a rate of 7% is applied, such as building materials, convenience foods, and clothing Zero-rated supplies, subject to GST at 0%, such as basic groceries and prescription drugs Exempt supplies, not subject to GST, such as education, health-care, and financial services

Provincial Sales Tax (PST) Charged on retail sales of certain goods and services and applied to the selling price before GST (except in Quebec and PEI) Companies that apply for PST exemption numbers are not charged PST on goods purchased for resale Taxes are remitted to the provincial Minister of Finance or Treasurer In Quebec and PEI, the PST is cascaded (i.e. applied to the total of the selling price plus GST) PST rates vary by province and may not be applied at the same rate to all taxable goods and services Certain goods are exempt, such as personal services, children’s clothing, and books

Harmonized Sales Tax (HST) In Newfoundland, Labrador, Nova Scotia, and New Brunswick, GST and PST have been combined into the Harmonized Sales Tax (HST) HST is a combined rate of 15% on the selling price HST returns are submitted quarterly or monthly to the federal government, which then gives the provinces their portions

Sales Taxes Collected on Receipts Sales taxes collected by a business is not a source of revenue for the company Sales tax is collected on behalf of the federal and provincial governments Sales tax collected is a current liability to the company until remitted to the government at regular intervals

Tax on Services Entry made to record the billing of a client for $500 of services provided. In Ontario, legal services are exempt from PST, so only 7% GST is charged. Note revenue is recorded at $500, not $535. GST is recorded as a current liability.

Tax on Services Cleaning services provided by a company in Saskatchewan for cash. These services are subject to both PST (6%) and GST (7%). Both the PST and GST are recorded as current liabilities.

Tax on Services Cleaning services provided for cash in New Brunswick, where the HST is 15%. Note that the HST is recorded as a current liability.

Tax on Goods – Sales Sale of $1,000 of office furniture, on credit, in Ontario (PST 8%, GST 7%). The company uses the perpetual inventory system and the cost of the goods is $800. Under the periodic inventory system the second entry would not be recorded.

Tax on Goods – Returns A $300 sales return and allowance granted on May 25 for returned merchandise on the previous furniture sale. GST and PST payable accounts are debited to indicate the return of a previously collected sales tax. Under the periodic inventory system, the second entry would not be recorded.

Sales Taxes Paid on Disbursements Purchase of Merchandise for Resale PST is a single-stage tax collected from final consumers of taxable goods and services Businesses with a registration number purchase merchandise for resale exempt of PST GST charged on the purchase of merchandise for resale is offset against any GST collected; GST paid is consequently not part of the inventory cost of merchandise purchased The GST paid on purchases is debited to an account called GST Recoverable and is called an input tax credit

Purchases Entry to record the purchase of goods for resale at a price of $4,000, on account, using a perpetual inventory system. The GST is recorded as a receivable using the account GST Recoverable. Under the periodic inventory system, the $4,000 debit would be to Purchases.

Purchase Returns and Allowances A $300 return of merchandise on May 8. Note that the GST Recoverable account is credited instead of the PST Payable account because this is a return of previously recorded GST. Under the periodic system, the credit of $300 would have been recorded to the Purchase Returns and Allowances account.

Operating Expenses Purchase of Goods for Use When taxable goods and services are used in the operation of a business, the PST forms part of the asset or expense that is being acquired GST charged on the purchase of goods for use in a business is recoverable and can be offset as an input tax credit against GST collected

Operating Expenses This entry is for a purchase of office supplies for $200 cash in Ontario (PST 8%, GST 7%). The cost of the supplies includes both the supplies and the PST. Because GST is recoverable, it does not form part of the asset cost but is debited to the GST Recoverable account.

Operating Expenses The same purchase recorded in Prince Edward Island (GST 7%, PST charged on GST at 10%). Note that the provincial sales tax base includes both the cost of the item and the GST. Hence, PST is determined by multiplying 10% by $214 ($200 + GST of $14). Because GST is recoverable it does not form part of the asset cost.

Operating Expenses HST is treated the same as GST. HST is recoverable and does not form part of the cost of the item purchased. In Newfoundland and Labrador the HST would be debited to a HST Recoverable account.

Property, Plant, and Equipment PST and GST applies to all purchases of property, plant, and equipment. All GST (and HST) paid is recoverable and not part of the cost of the asset. The PST is part of the cost of the asset. This entry is for the purchase of office equipment, on account, for $1,000 in Ontario (PST 8%, GST 7%).

Property, Plant, and Equipment The same purchase of office equipment, on account, for $1,000 in Prince Edward Island, where GST is 7% and PST is charged on GST at 10%. Note that PST on $1,070 ($1,000 + $70 GST).

Property, Plant, and Equipment The same purchase of office equipment, on account, for $1,000 in Nova Scotia, where HST is 15%. HST is fully recoverable and therefore does not form part of the cost of that item purchased.

Remittance Of Sales Taxes Businesses collect taxes on behalf of the government when the sale occurs and periodically remit them to the appropriate government agency GST and HST remittances are reduced by claiming input tax credits

GST/HST When remitting GST (or HST), the amount of GST payable is reduced by any amount in the GST Recoverable account. The GST owing is credited to cash. GST (HST) is remitted at specific dates, depending on the volume of sales. If GST recoverable exceeds GST payable a refund is receivable and a debit to cash would be recorded.

PST Remittance of PST to the Treasurer or Minister of Finance of the applicable province or territory is for the balance in the PST Payable account.

CONCLUSION Sales tax law is intricate and has added complexity to the accounting of transactions which flow through today’s businesses Before recording sales tax transactions it is important to understand all of the relevant sales tax regulations Check the federal and provincial laws in your jurisdiction.

COPYRIGHT Copyright © 2004 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.