Settling Canadian Sales Tax (Complex)

Introduction

Input Tax Credits and sales tax adjustments are often company-specific. As a result, the implementation of one simple solution for processing sales tax returns isn't possible. Described here is a method for recording sales tax related transactions to assist you with processing sales tax returns.

AccountEdge records GST, HST, PST and QST sales tax collected from sales, and paid on purchases. This note addresses Input Tax Credits (ITCs), adjustments (e.g., bad debt and customer credit/refunds), instalments, and remittance, and is just one possible process. You should discuss the details of your process and chart of accounts usage with your accountant.

This solution uses the following chart of accounts accounts: a sales tax header account in the Liability Classification, and detail accounts for tax paid, tax collected, instalments, input tax credits, adjustments and tax remitted. Additionally, expense accounts for PST and GST (to be used for adjustments, ITCs and cases, such as non-itc self-consumption):

Account Type
Sales Tax Liability (Header)
GST/HST Tax Liability (Header)
     GST/HST Tax Collected 1 (Detail)
     GST/HST Tax Paid-ITC 2 (Detail)
     GST/HST Tax ITC (Detail)
     GST/HST Tax Instalment (Detail)
     GST/HST Tax Remitted (Detail)
PST Tax Liability (Header)
     PST Tax Collected 3 (Detail)
     PST Tax Adjustments (Detail)
     PST Tax Instalment (Detail)
     PST Tax Remitted (Detail)
 
PST Sales Tax Expense (expense) (Detail)
GST Sales Tax Expense (expense) (Detail)

Notes:

  1. GST/HST Linked account for Tax Collected
  2. GST/HST Linked account for Tax Paid
  3. PST Linked account for Tax Collected

 

Sales Tax Related Transactions

These are the transactions that affect sales tax returns. These transactions include daily AccountEdge transactions, Instalment transactions, Input Tax Credit transactions, self-consumption (non-ITC) transactions, and adjustment transactions. They are explained below.

AccountEdge posts sales tax collected to the following accounts:

  • GST/HST posts to GST/HST Tax Collected
  • PST posts to PST Tax Collected
  • QST posts to PST Tax Collected

 

AccountEdge posts sales tax paid to the following accounts:

  • GST/HST posts to GST/HST Tax Paid-ITC
  • PST posts to an Expense/COS account
  • QST posts to an Expense/COS account

 

Instalments may be necessary for companies that file annually. You would post the instalments to (GST/HST or PST) Tax Instalment account to provide a clear audit trail. Spend Money CD transactions, debiting the Tax Instalment and crediting the chequing accounts, would be used. Instalment transactions are not tracked in AccountEdge reports as such, but will appear in the Cash Disbursements, Account Transactions and Trial Balance reports.

ITCs are posted to two different accounts:

  • GST/HST paid and payable on business purchases and expenses for which businesses can claim ITCs are posted to the GST/HST Tax Paid-ITC account (debiting GST/HST Tax Paid-ITC, crediting Accounts Payable), by AccountEdge. These transactions are tracked in the Sales Tax Information Reconciliation, and GST and PST Return reports.
  • Other ITC transactions (ITC credits) would be posted to the GST/HST ITC account (debit) and the Sales Tax Expense account (credit) using a Record Journal Entry transaction. You would record these transactions; they are not tracked in AccountEdge reports as such, but will appear in the Account Transactions and Trial Balance reports.

 

AccountEdge posts all GST/HST sales tax paid to the GST/HST Tax Paid-ITC account. You would need to post GST/HST (non-ITC) self-consumption sales tax to the GST/HST Sales Tax expense account (debit) and the GST/HST ITC account (credit) using a Record Journal transaction, if the GST/HST was collected by the vendor. This will effectively move the non-ITC amount to the GST/HST Sales Tax expense account, and reduce the ITC amount. These transactions are not tracked in AccountEdge reports as such, but will appear in the Account Transactions and Trial Balance reports.

All PST sales tax paid amounts are posted to an Expense or Cost of Sales account by AccountEdge.

PST (bad debt, customer credit and returns, etc.) adjustments would be posted to the PST Adjustments account (debit) and the PST Sales Tax Expense (credit) using a Record Journal Entry transaction. You would record these transactions as necessary. They are not tracked in AccountEdge reports as such, but will appear in the Account Transactions and Trial Balance reports.

Handling Sales Tax Returns

This is the method you would use when filing sales tax returns.

GST/HST Tax Returns

The following transactions affect the GST/HST sales tax returns:

  • GST/HST Collected is posted to GST/HST Tax Collected by AccountEdge
  • GST/HST Paid is posted to GST/HST Tax Paid-ITC account by AccountEdge
  • GST/HST Instalments are posted to GST/HST Tax Instalment account by you, using Spend Money transactions
  • GST/HST ITCs are posted to the GST/HST Tax ITC account by you, using Record Journal Entry transactions
  • GST/HST (non-ITC) self-consumption sales taxes are posted to the GST/HST Sales Tax expense account by you, using Record Journal Entry transactions

 

When processing the sales tax returns, you may need to record the following transactions:

  1. ITC Credits other than those recorded in the GST/HST Tax Paid-ITC account by AccountEdge, would be debited to the GST/HST ITC account, and credited to the GST/HST Sales Tax expense account using a General Journal transaction. You would record these transactions if there are additional ITC credits to record
  2. Handle Bad Debt in several steps (using the AccountEdge Undeposited Funds feature):
    1. Receive Payment on an outstanding, uncollectible open sales, posting the payment to Undeposited Funds
    2. In Banking > Prepare Bank Deposit, indicate this payment should be deposited to the chequing account, but before depositing, make a Deposit Adjustment posting the full payment value to a bad debt expense account
    3. Record a General Journal transaction debiting the GST/HST Tax ITC account and crediting the Sales Tax Expense account, with the GST/HST sales tax value
  3. Non-ITC, self-consumption sales tax should be debited to the GST/HST Sales Tax expense account, and credited to the GST/HST ITC account using a General Journal transaction by you, if needed

 

You can use the following reports to aid in processing sales tax returns:

  • Review the Tax Returns report to determine difference between collected and paid
  • Review the Account Transactions report, customized to show the 5 GST/HST liability accounts, and the appropriate date range to display transactions.
  • Review the Tax Information Reconciliation report to compare tax charged by code, and account values
  • Use Accounts List Detail, customized to show the 5 GST/HST liability accounts, subtotals and $0 accounts to display total Tax Liability. This will show sum of collected, paid, ITC, instalment and remitted, resulting in a positive or negative tax liability. This value should correspond to the final value on the return

 

The are no reports to track and report Instalments, ITCs, and Remittance, nor to identify (non-ITC) self-consumption or bad debt, as such. These transactions will appear in the Account Transactions and Trial Balance reports.

A positive Tax Liability value in the Accounts List Detail report is settled using a Spend Money (CD) transaction, posting the amount to the GST/HST Remitted account, and paying the authorities.

If the tax liability is negative, it's a credit. The settlement paperwork will reflect the same value as the tax liability. A Receive Money transaction would be used if the refund is immediate. The refund amount would be posted to the GST/HST Tax Remitted account (credit) and debited to the chequing account. If the receipt of the refund is not immediate, a Service or Miscellaneous layout sales invoice would need to be created, posting the refund amount to the GST/HST Tax Remitted account. When the refund is received, the payment would be applied to the invoice. Although this is a viable method for handling a refund, it will unfortunately affect the sales figures in the Sales reports, since refunds would be considered sales.

When these transactions are recorded, the Accounts List Detail report should show a value of $0 as the sum of all the accounts.

AccountEdge reports do not track or report remittance as such. The transactions will appear the in Cash Disbursements and Cash Receipts, as well as the Account Transactions and Trial Balance reports.

PST Tax Returns

The following transactions affect the PST sales tax returns:

  • PST Collected is posted to PST Tax Collected by AccountEdge
  • PST Paid is posted to an Expense or Cost of Sales account by AccountEdge
  • PST Instalments are posted to PST Tax Instalment account by you, using Spend Money transactions
  • HST ITCs are handled with the GST/HST ITCs
  • PST Tax Adjustments are posted to the PST Tax Adjustments account by you, using Record Journal Entry transactions

 

When processing the PST sales tax returns, you may need to record the following transactions:

  1. Adjustments are debited to the PST Adjustment account, and credited to the PST Sales Tax expense account using a General Journal transaction. You would record these transactions if necessary
  2. Handle Bad Debt in several steps (using the AccountEdge Undeposited Funds feature):
    1. Receive Payment on an outstanding, uncollectible open sale, posting the payment to Undeposited Funds
    2. In Banking > Prepare Bank Deposit, indicate this payment should be deposited to the chequing account, but before depositing, make a Deposit Adjustment posting the full payment value to a bad debt expense account
    3. Record a General Journal transaction debiting the PST Adjustment account and crediting the Sales Tax Expense account, with the PST sales tax value

 

You can use the following reports to aid in processing sales tax returns:

  • Review the Tax Returns report to determine difference between collected and paid
  • Review the Account Transactions report, customized to show the 4 PST liability accounts, and the appropriate date range to display transactions.
  • Review the Tax Information Reconciliation report to compare tax charged by code, and account values
  • Use Accounts List Detail, customized to show the 4 PST liability accounts, subtotals and $0 accounts to display total Tax Liability. This will show sum of collected, adjustments, instalment and remitted, resulting in a positive or negative tax liability. This value should correspond to the final value on the return

 

The are no reports to track and report on Instalments, ITCs, and Remittance, nor to identify self-consumption or bad debt. These transactions will appear in the Account Transactions and Trial Balance reports.

A positive Tax Liability value would be settled using a Spend Money (CD) transaction, posting the amount to the PST Remitted account, and paying the authorities.

If the tax liability is negative, it's a credit. The sales tax returns will reflect the same value. A Receive Money transaction would be used if the refund is immediate. The refund amount would be posted to the PST Tax Remitted account (credit) and debited to the chequing account. If the receipt of the refund is not immediate, a Service or Miscellaneous layout sales invoice would need to be created, posting the refund amount to the PST Tax Remitted account. When the refund is received, the payment would be applied to the invoice. Although this is a viable method for handling a refund, it will unfortunately affect the sales figures in the Sales reports, since the refunds would be considered sales.

When these transactions are recorded, the Accounts List Detail report should show a value of $0 as the sum of all the accounts.

AccountEdge reports do not track or report remittance as such. The transactions will appear in the Cash Disbursements and Cash Receipts, as well as the Account Transactions and Trial Balance reports.