Small Suppliers - Should Sales Tax be Included or Excluded from the "Purchases During the Year" Inventory Expenses?

[justin14]

I have been a small supplier for the past few years (no HST number and not required to charge/collect HST), and have been accumulating an inventory of items to be resold over this time.

When I am reporting these expenses for inventory items, would I need to exclude the taxes from the amount? For example, if an inventory item was $56.50 after the 13% HST, would I only include the $50 pre-tax amount in the "Purchases During the Year" section, and would that be the correct place to enter inventory expenses?

If so, is there another place where I must enter the $6.50 amount for the taxes charged on the item, or is the sales tax just ignored for the purposes of the return for small suppliers?

Since I am currently a small supplier, I can not claim an ITC (input tax credit) on inventory expenses in my returns for years up to and including 2017, however, I will be registering for an HST number within the next few months as I will no longer qualify as a small supplier in the next quarter.

My understanding is that I will then be able to claim an ITC for my 2018 return on the inventory that I still have at the time I begin charging HST, even if that inventory was purchased in years prior to registering for HST. I would just need to value my inventory at the current fair market value or the original cost, depending on which is the lower of the two.

Is this correct, and is there a section in the online version of TurboTax where I would enter this information to make the claim for an ITC?

[TurboTaxJeffrey · Accepted solution]

For any period you are not registered for HST, the HST is included with your expenses.  So for that item you purchased, for $50, which was $56.50 including HST, you will record it as $56.50 going into your inventory.

You will need to delineate between before you register for HST and after.  Any inventory before will have the HST included in the cost.  Afterward, you will record the cost in inventory, and the amount of HST will be recorded separately.

The amount of HST owed is recorded as a liability.  Many people will record the HST on their purchases into the liability account (credit), and show a debit for HST on their purchases in the same account.  Therefore if someone collects $1,000 in HST on their sales, and records $300 in HST on their purchases, the account would show $700, and this would be the amount owed to CRA.

Many however prefer to show two accounts for HST...one for HST collected, and one for HST (ITCs) on purchases.  So in my above example you would have an HST account showing $1,000 and an ITC account (both in the liability section of your Balance Sheet) of $300.  When you record these on your HST return, you will still pay $700 to CRA.  However when you reconcile the HST it will be easier to determine if a mistake was made on the revenue side or expenses side.

When you show the payment, you will debit the HST account and credit the ITC account.

So the payment for my example would show as 

HST        $1,000

ITC                     $300

[justin14]

Thank you for the reply.

So, since I would be including HST in my inventory expenses before being registered for HST...would I then need to exclude the HST from the evaluation of my inventory value at the time of registering for HST (in the event that the amount I originally paid for the inventory is less than the current fair market value)?

For example, If I purchased an item in my inventory for $226 ($200 + $26 HST) in 2016, it would be reported as a $226 inventory expense in that year since I was not registered for HST. If I register for HST in 2018 and still have the same item in my inventory, and the market value of said item is $300, would I need to value the inventory item at $200 (the original cost minus the sales tax)?

[TurboTaxJeffrey]

The inventory cost is what you actually paid for it...so if that same item is still in your inventory, you will still show it as $226.  You won't deduct the HST for any items or expenses purchased before you registered.  The same for your revenue...you won't calculate HST on any sales before you registered.

[justin14]

Okay, the reason I was wondering about the inventory purchased before registering for HST is because I was reading through some information on the CRA website and came across a section stating "If you are a new registrant, you may be able to claim an ITC for the GST/HST paid or payable on property such as capital property and inventory that you have on hand on the day you register."

So if I have an inventory of $10,000 (what I paid including HST) at the time of registration and want to claim an ITC based on that value, it seems like I would need to calculate the amount of tax using the $10,000 as the amount paid after taxes, meaning that the credit to the ITC account would end up being $1,150.44. If I was to use $10,000 as the price before taxes then I would end up with $1,300 as the amount, but that doesn't seem right to me since I would be calculating tax on top of a number that already includes taxes.

Also, would I need to be using the regular method to be able to claim an ITC on inventory purchases in the future (after being registered for HST)?