Construction: HST Implications
If you’re in the construction industry, you probably read the title of this blog and thought “I’m paying too much GST/HST to the CRA!” or “CRA always audits me on GST/HST!”. Hopefully I was right (about what you thought). There’s usually confusion surrounding GST/HST, not because it’s hard to understand but because every time you listen to someone explain it, it’s not in plain English. I hope to explain it in human language, something easy for you to understand.
If you haven’t seen my previous blog posts on the WIP report, please check it out here. In that post, I talk about the various types of stakeholders that require the WIP report, why the WIP report is crucial for you as the business owner and the different components that make up this report.
Let’s get started!
Basics of GST/HST
The Goods and Services Tax (GST) and the Harmonized Sales Tax (HST), as the name suggests, is a tax on most goods and services sold or provided in Canada. The rates are different between different provinces and territories. Some provinces opted in for HST which is a combination of GST and Provincial Sales Tax (PST). These rates may change from year to year as well.
For example, currently Ontario is 13% HST, Albert is 5% GST and BC is 5% GST and 7% PST. For the purposes of this blog, I will be using Ontario in my examples.
When to Register for GST/HST
How do you know if and when you need to register for GST/HST? Good idea to contact an accountant about it (hint: we at JTL CPA can help)
It’s mandatory to register when:
You exceed $30,000 in sales in a quarter
You exceed $30,000 in sales in the previous four quarters
Most sales in the construction industry are included in this calculation. For example:
You are a general contractor hired to install a bridge or erect a building
You are a plumbing materials supplier
You are an equipment rental company
What if you don’t meet the $30,000 threshold?
You can either wait until you meet the threshold to register or if you want, you can voluntarily register to take advantage of any GST/HST paid on purchases.
If you register for GST/HST, you are considered a GST/HST Registrant and other than the reporting requirements, you have to charge HST and show your HST number on all invoices.
Holdback
This is an important section to review because it’s one of the areas where CRA may look at most if you get audited.
If you haven’t checked out my previous blog on Holdback, make sure to check it out. There are two sides to holdback: the receivable and payable side and the high-level GST/HST implications are essentially the same.
Let’s see what CRA has to say (GST/HST and home construction - Canada.ca under Holdbacks section for reference):
GST/HST on the holdback amount becomes payable on the earlier of:
The day the purchaser pays you the amount of the holdback
The day the holdback period expires
Notice how the above doesn’t mention anything about the date of the holdback invoice? It actually doesn’t matter when the invoice was issued, what’s most important is that it meets one of those criteria. Accounting software would usually generate the holdback invoice first which gets posted in the system and GST/HST is allocated to the liability account. Best practice is to temporarily reverse the entry so that it doesn’t show a GST/HST payable until you receive the holdback or at the end of the lien period or don’t post it yet.
On the flip side, the same occurs on the ITC (Input Tax Credit which is GST/HST on purchases) side. If a subcontractor sends you a holdback invoice a lot earlier than one of those 2 criteria, you cannot claim the ITC on it. If CRA audits you on GST/HST, this is probably where they will look at most. Why? You’re reducing the amount that you pay to CRA, they want to make sure you don’t owe them more.
Let’s say that one of 2 criteria above is met for a project, what is the best practice for both receivables and payables? Record the GST/HST for both sides in the same month, that way, you are remitting the net amount to CRA and you will have a copy of Substantial Performance handy just in case. I’m sure you know this already, but lien period is 45 days under the old Construction Lien Act and 60 days under the new Construction Act after Substantial Performance has been issued.
GST/HST on Billings
When you’re submitting an invoice to your client, you most likely have to charge GST/HST if you meet those thresholds above.
If you supply materials or equipment, that’s straight forward, GST/HST is applied to the entire invoice. For example, you sold $5,000 of electrical wiring as an electrical materials supplier, your invoice would show $5,000 sales, $650 in HST and $5,650 in total receivable.
As mentioned in the previous section, Holdbacks’ GST/HST is not payable until you receive the funds or the lien period has expired.
Here is an example of how GST/HST is applied to an progress invoice:
Table showing HST on Construction Billings
Notice how the $585 in HST in the above table is based on net billings and is lower than the $650 in HST in the example above with the electrical materials supplier?
ITC on Purchases
In terms of purchases, it’s exactly the same treatment as GST/HST on billings.
If you purchase materials or equipment, that’s straight forward, GST/HST is applied to the entire invoice. For example, you bought $5,000 of electrical wiring from an electrical materials supplier, your invoice would show $5,000 cost, $650 in ITC and $5,650 in total payable.
Here is an example of how ITC is applied to an invoice:
Table showing HST on Construction Subcontractor Invoices
The question now becomes: What if your subcontractor doesn’t reduce the holdback off their invoice even though they are supposed to. It’s possible to manually write on the invoice that you deducted holdback and recalculated the ITC and total payable but the absolute best way is to get them to re-issue the invoice with the holdback deducted. That way, you won’t lose visibility into anything or you can track things properly without referring to another document.
If they invoice you $5,000 with $650 HST, but they are supposed to deduct holdback, you cannot claim the $650 in ITC. You can only claim $585 in ITC. By the way, if you get audited by CRA, they will most likely look at these types of transactions first.
Your Turn
In your own organization, do you have visibility into the numbers and is GST/HST being accounted for correctly? If you’re not sure or have no idea, it’s time to look for a solution that can help you bridge the gap. If you currently don’t have something like this but would be interested in setting something up, make sure to reach out to an accountant who knows the industry.
Here’s where you can find out more:
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At JTL CPA, our founder has just over nine years of experience in the construction industry (at the time of writing this article) with various general contractors and specialty trades, all the way to senior management. Our approach is unique because our solutions give you the ability to make sound decisions from good data. Check out our website here: www.jtlaccounting.com.
Thank you for making it to the end of the blog post. If there are topics that you would like to learn more about in the future, please let us know down in the comments.
Until then, see you next time!
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