In this blog I will discuss the Quick Method of reporting GST and demonstrate how some businesses can profit by electing to use this method. That’s right, there is profit available and the amounts that I see with some of my clients can be as high as $2,000+ per year. There are many rules for the Quick Method – the guide is 16 pages, (you can check the guide at http://www.cra-arc.gc.ca/E/pub/gp/rc4058/README.html).
To keep this readable I am only going to hit the main points and try to stay out of all the details.
It is important that you gain an idea of what the Quick Method is and whether it will work for your business situation. When I get into examples please remember that since I am an accountant in Calgary I will be using Alberta rates – if you are in an HST province you will have different rates.
The government initiated the Quick Method to create simplicity for small business in record keeping and reporting GST. In so doing there is a preferential remittance rate used to remit GST under this method which can result in real savings (profits) for some businesses.
Before you say, “that‘s great sign me up”, there are a few requirements you need to be aware:
- Total taxable sales including the GST must not exceed $400,000 in a 12 month period (the limit was raised from $200,000 on January 1, 2013)
- Certain businesses may not participate in the Quick Method. Non-allowed businesses include: legal services, accounting, actuarial, bookkeeping, financial consulting, tax consulting, and tax return preparation.
Record Keeping for Quick Method
The first advantage of the Quick Method is the record keeping. On your inputs (expenses) there is no need to strip out the GST paid. For example, a $100 office expense with $5 of GST would be recorded as $105 to office expenses – there would be no allocation of GST paid.
The Profit from the Quick Method:
The best way to understand the advantage of the Quick Method (for some businesses) is to compare the results of GST payable under the Regular Method against the results using the Quick Method.
A couple side notes…
Treatment of GST on Capital Assets:
The GST collected on the sale of capital assets and GST paid on the purchase of capital assets is treated the same under both the Regular Method and the Quick Method. Since the results are the same under both methods I have not included capital asset sales or purchases in my example.
Alberta remittance rate:
In order to keep things simple and the fact that I am an accountant located in Calgary, Alberta I am only going to use the Alberta rates. If you live in an HST province you have different rates but the premise will be the same.
The formula to calculate GST payable under the Regular Method is as follows:
- GST collected on sales
- Plus GST collected on sale of capital assets
- Less GST paid on expenses (inputs)
- Less GST paid on purchases of capital assets
- Equals GST payable to Canada Revenue Agency
Example: Alberta business – Regular Method (no capital asset activity)
- Total sales 300,000
- GST collected = 15,000 (5% x 300,000)
- Taxable inputs (for this example) = 40,000
- GST paid = 2,000 (5% x 40,000)
- Amount to remit to CRA = 13,000 (15,000 – 2,000)
The Quick Method formula looks a bit more complicated but it is easily understood when broken down to its 4 components:
- Total of Sales and GST collected x Quick Method remittance rate (.036 in Alberta)
- Less 1% of the first 30,000 in sales
- Plus GST collected on sale of capital assets
- Less GST paid on purchases of capital assets.
Example: Alberta business – Quick Method (no capital asset activity)
- Total sales including GST = 315,000
- Initial GST calculation = 11,340 (3.6% x 315,000)
- Less 1% on first 30,000 = (300)
- Amount to remit to CRA = 11,040 (11,340 – 300)
By using the Quick Method versus Regular method the profit (savings) is 1,960 (13,000 – 11,040)
Amount of your expenses
The most important factor is the amount of your GST paid on your supplies/expenses (your input tax credits). If your expenses are high then the Quick Method may not be appropriate as it will actually cost you money. Many services business that have low expenses, however will profit from the Quick Method.
You can check out whether there is an advantage by running your numbers to see what would happen using the Regular Method versus the Quick Method.
Breakeven Expenses
The important question is “at what taxable expense level will it make sense to be on the Quick Method versus the Regular Method”?
The breakeven point of expenses can be found by the following formula:
- (GST collected on sales – GST determined under quick method)/.05
- In my example the breakeven of taxable expenses is $79,200
- ($15,000 – $11,040)/.05
- = 3960/.05
- = 79,200
If the business had 79,200 of taxable expenses (inputs) the Regular Method tax remitted would be the same as remitted under the Quick Method. The tax remitted under both methods would be $11,040.
GST is normally neutral, that is to say we, as business owners, are tax collectors for the government – in the sense that we collect GST on sales, pay on inputs (our expenditures) and remit the difference. The Quick Method can gives us a bit of a profit because of the preferential remittance rate of 3.6% and the 1% credit on the first 30,000 of sales ($300). Remember these are all Alberta rates – if you are in an HST province your rates are different.
A comment on Resale of goods:
Please note if your business purchases goods for resale, i.e. Retail stores, then your preferential rate is 1.8% in Alberta (the HST provinces have different rates). The purchases for resale must be at least 40% of your total revenue.
To summarize, there can be two advantages of the Quick Method:
- Simplified bookkeeping as you do not have to strip out GST on each expense transaction
- You may profit from the preferential formula to calculate the GST to remit under the Quick Method
The Conditions:
- Sales plus GST do not exceed 400,000
- You do not fall within the business sectors that are not allowed to use the quick method
- Your supplies that you pay GST is small in relation to your taxable sales (check the results under both methods)
If you analyze the situation and have determined the Quick Method is the best for your business then you must submit an election to CRA to use the Quick Method – check out CRA form GST74.
You are welcome to give us a call: 403.509.3290
Bill Minor, CGA