Calculate HST and Canadian Small business.
I read two business reports this week,
one from the Canadian Federation of Independent Businesses
and one from the Canada Revenue Agency.
They both contain troubling information.
The combined effect is bad news.
CRA reports that businesses owe $14.3 billion in unpaid sales tax
CFIB says that small businesses in Canada
owe a collective $139 billion in debt due to the COVID-19
Pandemic. As of August 2021, almost three quarters of small businesses
that took on debt expect it to take more than a year to repay.
For businesses in the hospitality sector, the number jumps to 87%,
with most saying it will take longer than two years to pay it off.
Nearly a quarter worried about ever being able to pay off their debts.
These two reports clearly illustrate that one of the debts Canadian business
owners have amassed is collected, but unremitted harmonized sales tax HST.
This Brandon blog will not only describe how to calculate HST,
but also explain what will happen if you do not pay it over to CRA. HST
amounts in sales and purchase documents. You must register for GST/HST
if you bill more than $30,000 per year.
You do not need to register if you don't exceed this amount.
The HST calculation varies according to the province or territory you operate in.
Several provinces have harmonized their
provincial sales tax with the goods and services tax
and charge HST on taxable goods and services.
GST and provincial sales tax have to be charged in provinces with PST.
GST is calculated on the price of each
taxable sale of goods or services before PST is added.
HST is calculated on the revenue from each
taxable sale that is collectible or collected.
The HST on each taxable supply produces an input tax credit that can then be
deducted from the HST owing. HST on taxable sales
less input tax credits from taxable supplies is the net amount of HST
due or refund for the period. Your HST return may need to be filed
annually, quarterly or monthly, depending on how large your business is
measured by total sales and therefore sales taxes.
Also,
CRA has created an HST calculator to help you calculate HST.
Calculate HST is just one part of small business debt and the COVID-19 impact.
In their August 2021 research study, the CFIB uncovered a variety of issues
that show the Canadian small business sector is struggling.
They found it is estimated that 71% of Canadian small business owners have
taken on new debt loads to deal with the effects of the COVID-19
pandemic. CFIB estimates that total Canadian small business debt loads related
to the coronavirus is around $139 billion, and 76% of businesses
that took on debt said it would take them more than one year to repay it.
Governments should continue
business relief measures as government support is winding down.
Since Canadian small businesses are
carrying such a burden and are having difficulty regaining their footing
rent assistance is one such support program.
Only 39% of small businesses in Canada are
currently making sales they consider to be normal for this time of year.
Despite recent improvements,
most continue to experience declines in revenue.
About 17% of small businesses in Canada
have sales that are half or less of what they should be.
Four in five businesses are using one or
more sources of funding to cope with COVID-19
in the arts, recreation and information and hospitality sectors.
Nine of ten businesses are using some
federal, provincial or other funding to cope with COVID-19.
In three out of five cases,
government relief programs replace less than 30% of the COVID-19 shortfall.
Scaling back federal relief programs comes too quickly for most business owners.
According to half of the entrepreneurs, repaying their debt is the biggest
challenge their business faces on the road to recovery.
Now for the CRA news release that has to do
not only with how to calculate HST, but who is and is not paying their HST.
How to calculate HST is only the first part.
Businesses owe $14.3 billion in unpaid sales tax.
Canada Revenue Agency says the number
of companies falling behind on federal sales tax remittance indicates financial
distress as companies battle the pandemic and supply chain issues.
In March 2020, when pandemic restrictions began,
the nation owed $11.5 billion in GST and HST to the government.
By September 2021, it owed $14.3 billion, an increase of 24% over that amount.
As of 2021, the CRA
has received about 500,000 fewer sales tax returns than the year prior.
There were approximately 105,000 fewer sales tax filers, the agency reports.
Despite the fact that so many businesses are still operating at some level,
they are not even bothering to file their tax returns.
Most businesses file their HST
returns on either a once a year reporting period or on a quarterly reporting period.
Some larger companies report and remit monthly. Quarterly remitters with annual
taxable income between one $5 million and $6 million showed
the largest drop in returns by reporting period.
Therefore, it is clear that Canadian
businesses are using the tax amounts collected as another source of financing
since the pandemic hit. There is no mention of HST in the CFIB study.
HST collected but not remitted,
was not even considered as a source of financing, which it is.
Calculate HST, but if you don't pay, it is a deemed trust.
Regardless of the business legal
structure, the GST HST amounts you collect from your customers
are considered a deemed trust in favour of the federal government.
In an operating business, it takes precedence over whatever debts
you owe to other creditors, including secured creditors.
The CRA can still get payment from your bank.
Even if the bank does not lend money to you.
They can go to the bank where you keep your business funds and get payment there.
All that is explained in my blog post about Canada versus Toronto Dominion Bank.
However, the CRA has the following options
garnish bank accounts, accounts receivable and all other sources of income,
confiscate and sell assets and pursue other legal remedies.
In my experience, CRA does not typically seize and sell assets.
Instead, they pursue garnishments.
As in the TD bank case,
they can also just go to whichever of the financial institutions the business
banks with and demand the HST funds that have been deposited.
When a company owns real property,
they may get a judgment from a federal court without notifying the owner
and register that judgment against the title to the real property.
Upon refinancing or selling the property,
the business owner is required to repay the judgment plus interest.
Calculate HST or HST and COVID debt crushing the life out of your business?
In an environment hamstrung by manufacturing and shipping backlogs,
businesses may experience supply shortages and higher delivery costs.
Even though paying your bills may be
the most emotionally satisfying course of action, it may not be the most practical.
It's better for your business and your employees
if you seek professional advice.
If you believe that you cannot make next
month's payroll, the following issues cannot be ignored.
Lenders demanding loan repayment, landlords threatening to end your lease or
seize your assets as payment, suppliers cutting off credit or halting deliveries.
The first thing I do as a licensed
insolvency trustee is to determine what stage of the business the company is at.
The stage the business is at is crucial for me to understand.
The choices are: solvent and viable,
solvent but not viable, insolvent and viable, insolvent and not viable.
The business can probably restructure with some simple changes to its operations
if it is solvent and viable.
Insolvent companies that are still viable may be restructured under the provisions
of the Bankruptcy and Insolvency Act or the Companies' Creditors Arrangement Act.
The business can be liquidated or sold if it is not viable, but it is solvent.
If it is insolvent and not viable,
we are probably looking at bankruptcy or receivership.
A deep dive is required to find out what the correct answer is.
For sure. I would need to calculate HST
collected but unremitted as that is, a deemed trust claim,
apart from one exception I describe below.
Calculate HST.
What happens to the deemed trust claim in a bankruptcy?
The Excise Tax Act
as a deemed trust claim.
Under the ETA, a deemed trust claim will include amounts for GST/HST
that was collected by the business but not paid to the CRA.
There is only one exception.
A bankruptcy of the business will rearrange the priorities.
In a bankruptcy, the deemed trust GST HST
claim becomes an ordinary, unsecured claim.
There is no statutory authority for this
same outcome in a BIA restructuring proposal.
However, sometimes as an administrative issue, CRA will allow this treatment.
Also,
according to one school of thought,
intermittent amounts included in deposits or loan repayments to a financial
institution before bankruptcy continue to be deemed trust claims.
Nonetheless, the Supreme Court of Canada
clarified GST HST deemed trusts and secured creditors responsibilities
for funds received. The Callidus Capital Corporation v.
Her Majesty the Queen decision was
reversed by the Supreme Court of Canada in 2018. For secured creditors
the decision that the deemed trust provisions of the ETA become inoperative
on bankruptcy and therefore secured creditors are not liable to account
for proceeds received from a debtor pre-bankruptcy is significant.
Calculate HST: HST
liability for Directors. ETA section 323
increases the CRA's power to collect unremitted GST/HST.
When efforts to collect against corporations prove futile.
As a result of the failure of the Corporation to remit GST/HST,
its directors will be liable for any tax the Corporation should have remitted.
The directors are jointly and severally
liable for the corporation's unremitted GST/HST.
CRA has the right to look to the directors
whether the Corporation is in bankruptcy or not.
When we calculate HST
and discover a company owes net HST, there is another downside to bankruptcy.
CRA may now want to claim on the directors
sooner because of the HST liability becoming unsecured.