I am self employed and pay HST quarterly with quick method - do I include HST in my expenses in parts 4-6 on T2125?

[Delphision · Accepted solution]

Since you are unable to claim input tax credits using the quick method, you can include the GST in the expense.

[Michael24]

Thank you. I spoke to CRA earlier today and they said I should not include HST. They have been wrong before. Any thoughts?

[Delphision]

The way the quick method works is that you charge GST on all of your sales, and instead of claiming input tax credits, you only remit a certain percentage of the collected GST.  In BC you collect 5% and remit 3% much like a commission, so 2% becomes income and offsets the expense.   As far as journal entries go, you could reasonably split out the GST to a tax expense account, and offset the expense with the 2% of tax income.  For accounting purposes, you have to show the GST somewhere.  If you write a cheque for supplies, you have the full amount of the cheque coming out of the bank.  You have to offset that with an equal amount of money.  

I'm not a great believer in the Quick method.  For some businesses it works very well, and for others, not so much.

[Michael24]

Thank you. I like the convenience of the quick method. But what is your opinion to my income tax question - do I include or not include HST on my expenses/deductions on the T2125 if I use the quick method of remitting HST?

[Delphision]

It is never a bad idea to go with what CRA recommends.

[overtaxed58]

I use the quick method myself (but in Quebec where GST and QST are separate). In part 1 of form T2125: Line A = sales without taxes included. line (ii) is the sales taxes I charged, line (iii) is the amounts I remitted to the govts by using the quick method. You should then notice that line C will equal line A plus the taxes you charged, minus the amounts you remitted to govts. This is correct, since you're "making a profit" with the taxes.

[Michael24]

Thank you. I do the same. But when you carry on to list your expenses in parts 4 thru 6 do you include the GST to your deductions?

[Michael24]

I agree except I have had conflicting advice from both CRA and accountants in the past it.

[Delphision]

Tax issues constantly involve grey areas.  You balance your risk of reassessment.  I'm not sure I agree with the "profit on the taxes", as the purpose of the quick method is to cushion the loss of the input tax credits. If you don't add the Gst on the expenses, then you really are making a profit on the taxes.  If, as CRA says, you remove the GST from the expenses, you are reducing your expenses but adding 2% of the GST as income.

We may not be able to give you an absolutely definitive answer, and overtaxed and I might or might not make the same deductions ourselves in the same situation. I would include the GST in the expenses because then, in my mind anyway, the 2% GST credit  more accurately balances the expense debits.