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Becoming a GST Registrant
Expert: Robert Gold
As a recently graduated university student living in Calgary, I have upgraded my self-employed status from casual part-time to full-time. As my income is now reaching the $30,000 mark, I have had to register my business and start collecting GST. My question is, looking forward to income tax time, what is a good rule of thumb for how much of my income I should set aside? Do I need to start looking into paying CPP and EI installments? In the past, I seldom had to pay much in the way of taxes--tuition and education tax credits combined with considerably less income--but now I am concerned I will not put enough aside, and I will get a nasty shock come April next year.
Robert Gold answered:
You are quite right to register your business and collect GST. As soon as your gross income reaches $30,000 you are required to register for GST purposes. You must charge GST and remit to the government the net amount after you subtract GST you pay out yourself.
But what I recommend to clients, as part of good business planning, is not to wait until you reach the $30,000 mark, but to become a GST registrant once you start a business at any level. Even though you have to charge GST, you are allowed to deduct the GST from any purchases you make as part of your business from the amount you remit to the government.
For example, if you have $10,000 worth of business, you do not have to charge GST. But you would be paying GST on any purchases you make for your business. If you register for GST, even with just the $10,000 worth of business, you would have to charge GST. But, since you are registered for GST, you can deduct the amount of GST you have paid out-office rent, professionals, gas, and office supplies-from the amount collected by your business. You then send the government the difference.
Becoming a GST registrant early allows you some benefits and relief from the GST you pay out as you get your business started. A lot of people will say they don't want to charge GST because it makes their prices higher. Truthfully, we've had the GST in Canada for over 10 years. Everyone is used to paying now.
As far as tax time and what a good rule of thumb is, I'd suggest, at the $30,000 level, setting aside up to 20% of your gross income. Beware this amount may end up being on the high side for a number of reasons:
- Business-related Deductions. Your taxable income will be lower once you factor in deductions you can make related to the operation of your business, such as the purchase of office supplies and utilities.
- Personal Exemptions. Deductions for medical expenses and other expenses (charitable donations, gifts) can lower your taxable income.
- Education Expenses. Since you've recently graduated, you may have some tuition expenses and education tax credits you could apply to lower your taxable income for this year.
In the end, you may only need three quarters of the original 20% once you file your return, but it is better to have a little more set aside than a little less. You'll still be in for a shock next year, but planning and preparation now will ensure you are not taken by surprise and left owing significant amounts of tax.
And finally, the issue of EI and CPP deductions is handled differently when applied to a self-employed person. As a self-employed individual no EI is collected. CPP is collected when you file your income tax return. It is calculated in a separate section on the tax form under CPP for self-employed individuals, but you'll remit the whole thing at once using a portion the 20% of your gross income you've set aside for taxation purposes.
You may not be aware, but there is a requirement for self-employed people to pay installments of income tax every 90 days, but not during your first year. After you prepare and file your first year's tax return, the tax department will tell you what your tax installment requirements will be for next year. But keep setting aside that 20% for now.
About the author
Robert Gold, MBA, CA is a Managing Partner at Bennett Gold Chartered Accountants in Toronto, Ontario, providing a range of tax and accounting services to large and small home-based businesses. Visit the firm online at www.BennettGold.ca.