Understanding GST Instalments: A Guide for Sole Proprietors and Small Business Owners

As a sole proprietor or small business owner in Canada, staying on top of tax obligations is crucial to managing your cash flow and avoiding penalties. One such obligation that often goes unnoticed is the requirement to make Goods and Services Tax (GST) instalment payments. Many business owners assume that GST is only due at tax time, but the Canada Revenue Agency (CRA) has a system in place that requires instalment payments if you exceed certain thresholds.

Let’s break down what GST instalments are, why they are required, and how you can ensure compliance.

What Are GST Instalments?

GST instalments are periodic payments that certain businesses are required to make during the year, based on their expected GST/HST net tax owing. This net tax is the difference between the GST/HST you collect from your customers and the GST/HST you paid on purchases used in your business (known as input tax credits).

Instead of paying the entire amount of GST owing when you file your annual return, the CRA may require you to make quarterly instalments throughout the year if your annual GST liability exceeds a certain amount.

Who Needs to Pay GST in Instalments?

You may need to pay GST instalments if your net tax owing exceeds $3,000 in a fiscal year. Specifically:

1. If your net GST/HST payable is $3,000 or more in the current year and either of the two previous years, you will be required to pay in instalments.

2. If you are a new business, you won’t need to make instalments in your first year, but if your net tax exceeds $3,000 in that year, instalments may be required in future years.

   
   

Why Are GST Instalments Required?

The purpose of instalments is to help businesses manage their tax payments and reduce the risk of accumulating a large tax bill at the end of the year. Instalment payments allow the CRA to collect the GST owing in smaller amounts spread across the year, which can make it easier for businesses to handle their cash flow.

How to Calculate and Make GST Instalment Payments

If you are required to make GST instalments, the CRA will notify you, and you will have the option of paying quarterly based on one of two methods:

1. Prior-Year Method:

• This is the simplest method. You calculate your instalments by dividing the total amount of GST net tax owing from the previous year by four (for quarterly payments).

2. Current-Year Method:

• Alternatively, you can estimate your current year’s GST liability and divide it by four. This method may be preferable if you expect your net GST to be lower than in the prior year, but it carries some risk. If your estimates are too low, you may face interest charges.

When Are Instalment Payments Due?

GST instalments are generally due on a quarterly basis:

• April 30

• July 31

• October 31

• January 31 (of the following year)

  
  

Missing these deadlines can result in interest charges from the CRA, so it’s important to stay organized and ensure your payments are made on time.

How to Make Your Instalment Payments

There are several ways to make your GST instalment payments:

• Online through CRA My Business Account.

• Pre-authorized debit set up with the CRA.

• Through your financial institution using online banking.

• By cheque with a completed Form RC160, GST/HST Remittance Voucher.

It’s a good idea to keep track of all your payments and ensure they are credited to your account properly.

What Happens If You Don’t Pay Instalments?

If you fail to make your instalments or underpay them, the CRA may charge interest on the unpaid balance. This interest compounds daily, so missing instalments can become costly over time. In addition to interest, not making instalments can leave you with a large, unexpected tax bill at the end of the year, which may be difficult to manage.

Key Takeaways for Sole Proprietors and Business Owners

• Be aware of the threshold: If your net GST/HST owing exceeds $3,000, you will likely need to make instalments.

• Use the prior-year method: This is the easiest way to calculate your instalments, as it uses last year’s figures.

• Stay organized: Missing instalment deadlines can result in interest charges, so it’s important to pay on time.

• Manage your cash flow: Instalments spread out your tax burden and help avoid large lump-sum payments at year-end.

Understanding and complying with GST instalment requirements is a crucial aspect of business financial management. By being proactive and making timely payments, you can avoid penalties and keep your business running smoothly.

For further guidance, it’s always a good idea to consult a tax professional or accountant who can help you navigate these requirements and ensure your business stays compliant with CRA regulations.

Are GST instalments confusing? Let Anker RETax simplify the process and help you stay compliant with CRA regulations. Contact us today!

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