How to Start a Small Business in Canada | Part 3: Federal Registration

This is the third post in our four-part blog series on how to set up your small business. In this post, we’ll go over the registration requirements for a Canadian Business Number and setting up a GST/HST account. Follow the rest of the blog series below:

• 1: Business Structure – Identifying & structuring your business
• 2: Provincial Registration – Registering your business name & PST/QST accounts
• 3: Federal Registration – Obtaining a business number & registering for GST/HST
• 4: Licensing & Insurance – Municipal business permits/licences & small business insurance

This post is informative only and is based on my knowledge and experiences. Please consult with a local professional for the best information for your business. This post may contain affiliate links, which means that I may earn a commission on any sales at absolutely no extra cost to you. Review our Policies for more info.

Canadian Business Number Registration

Obtaining a business number is completely separate from the provincial business name registration discussed in our last post. A business number is a unique, 9-digit number that is used to identify your business by the CRA. Business number registration is required if you incorporate your Canadian business and/or to access program accounts such as GST/HST or payroll.

If you are a sole proprietor, you will most likely be looking at obtaining a business number when it is time to register for GST/HST. Let’s take a closer look at that aspect of registering your business.

What is GST/HST?

First, let’s define the different tax acronyms in Canada to make sure you understand the differences.

• GST = Government Sales Tax. This is the federal tax rate of 5% that applies throughout Canada on all sales of taxable products.
• PST = Provincial Sales Tax. This is the provincial tax rate and it varies for each province. Some provinces, like Alberta, don’t have a provincial tax, so their residents only pay the 5% GST.
  • QST = Quebec Sales Tax. This is just Quebec’s provincial tax. It is the same as PST, just with their own acronym.
• HST = Harmonized Sales Tax. This is a combined provincial and federal tax that many provinces/territories use. Rather than charge two separate taxes on purchases, they charge one harmonized rate. In Ontario, the HST is 13%. This is comprised of the 5% GST plus Ontario’s provincial rate of 8%. In Nova Scotia, the HST is 15% as their provincial rate is higher at 10%.

For provinces that don’t have a separate PST, you only have to deal with the federal government for registering and remitting sales tax. However, if the province does charge PST separately, you need to register with that province and remit the PST portion you collect to them. We discuss the provincial sales tax registration requirements and processes in Part 2: Provincial Registration.

GST/HST Account Registration

When you are selling products or services, you must not collect sales tax unless you have first registered with the federal government to set up a GST/HST Account. If you are selling online through Etsy, Shopify, etc. there is often a section of the website to add your sales tax information and turn on the collection of sales tax. Do not turn this on unless you have already registered for collecting tax.

So when should/do you need to register for a GST/HST Account?

Voluntary GST/HST Registration

You can voluntarily register at any time. With your registration, you will receive a Canadian Business Number with a GST/HST Account number and are to immediately begin charging sales tax. You will need to keep records of the sales tax you collect and then remit (pay) that money to the government every year (or quarter, depending on your filing frequency).

Registering early can have several advantages to your business, such as:

• Consistent pricing – you may confuse customers by adding on sales tax at a future date
• Set-up better records – once you begin collecting sales tax, you will need to keep detailed records of your sales and purchases to properly remit them to the government. Being forced to set these systems up early can be very beneficial to your business, especially since your sales levels will be lower with less to keep track of at first.
• Income Tax savings – you will receive higher tax credits by claiming the tax you spend on your business expenses as Input Tax Credits (ITCs) when remitting the GST/HST you collected than you would by claiming them on your income tax return. We’ll take a closer look at this later in this post.

Mandatory GST/HST Registration

You must register for a GST/HST Account as soon as your business is no longer considered a small supplier, which the CRA defines below:

A small supplier refers to a person whose revenue (…) from worldwide taxable supplies was equal to or less than $30,000 (…) in a calendar quarter and over the last four consecutive calendar quarters.

CRA | Definitions for GST/HST

As soon as your sales exceed $30,000 in one quarter or over the last 4 quarters, you are no longer a small supplier and will have to register for GST/HST. This includes sales from all of your businesses (if you have multiple), but not your employment income. It also applies to worldwide sales, not just the sales you made within Canada.

A calendar quarter is a 3-month period beginning on the first day of January, April, July, or October. So the 4 calendar quarters in a year are Jan-Mar, Apr-Jun, Jul-Sept, & Oct-Dec.

Date of Registration

If you make over $30,000 in sales in one quarter, you have to register no later than the day you made the sale that sent you over the $30K threshold. You have to start charging GST/HST on your effective registration date, including on that sale that sent you over the limit.

If you didn’t make over $30,000 in sales in one quarter, but you’ve made over $30,000 in the last 4 consecutive quarters, then you have to register no later than the start of the month after you stopped being a small supplier. You have to start charging GST/HST as of your effective registration date.

Understanding the wording alone can be a little tricky, so let’s look at an example of each scenario.

The Registration Process for your Canadian Business Number & GST/HST Account

For your Canadian Business Number & HST Account registration, you will need to have all of the following information:

• Effective Date of Registration: This is the date on which you must begin charging sales tax. It may be the day you register, or an earlier date if you are registering a bit late.
• Fiscal Year: This is what your business uses as a “year” for tax reporting and is usually the same for GST/HST reporting as it is for your income tax return. For most businesses, you must use a normal Calendar year (Jan – Dec).
• Annual Revenue: Your business’ total annual sales of taxable goods. If your business is new, you can provide an estimate.
• Other Basic Information: You will need to provide information about the business owner(s): name, Social Insurance Number (SIN), date of birth, and residential postal code. You will also need to provide information about the business itself: business name, business structure (ex. sole proprietor), address, and description of the business’ main activity.

Once you have gathered all of the information above, you can complete the registration online, by mail/fax, or telephone.

What You’ll Receive

You will receive a Canadian Business Number (BN) (if you don’t already have one from a previous account registration) and a GST/HST Account Number. The business number is a unique 9-digit number that represents your business (ex. 123456789). You can only have one business number, even if registering for multiple accounts. The GST/HST Account Number is attached to the end of the BN and will look like this: RT0001. So your GST/HST number is 123456789 RT0001.

If you were to register for a separate GST/HST account for a subdivision of your business, it would use the same BN but a different Account Number (ex. 123456789 RT0002).

If you register for another CRA account, you will receive a program number for that account. For example, payroll accounts use the letters RP, so your payroll account number would be 123456789 RP0001.

Find more information about registering for GST/HST with the CRA here, including the various sales tax rates across Canada, products with special/exempt tax rates, and how to remit the tax you collect.

Input Tax Credits

One of the benefits of registering for GST/HST mentioned above was the ability to claim the sales tax you paid on business expenses as an Input Tax Credit (ITC). Let’s dive into that a bit further.

How you claim your business expenses will change once you are registered for GST/HST.

Claiming Business Expenses as a Non-Registrant

If you’re not registered for GST/HST, you claim the tax you spent on business purchases as part of your expenses when filling out your income tax return. You therefore save the income tax rate on that amount as you’re deducting it from your taxable revenue. The income tax rate varies depending on your income level, but we’ll use 20% as an example.

Let’s say your annual sales last year were $25,000. The total that you spent on business expenses was $8,850 + $1,150 HST = $10,000 in total expenses.

If you are not a GST/HST registrant, you claim the total $10,000 as your expenses. That makes your net revenue $15,000 ($25K sales – 10K expenses).

You owe income tax on your revenue. So if we say your income tax rate is 20%, you owe 20% of $15,000 = $3,000.

To summarize your earnings:

• Total income: $25,000
• Total expenses: $10,000
• Amount paid to the government: $3,000
• Your profit for the year: $12,000

Claiming Business Expenses as a GST/HST Registrant

If you are registered for GST/HST, you don’t claim the sales tax you spent on your business expenses when filing your income tax return. Instead, you claim the tax portion of your expenses as ITCs on your GST/HST return. With ITCs, you get a 100% deduction, rather than the 20% or so savings on your income tax return.

Using the same numbers as above, let’s see the impact this would make. On your $25,000 in sales, you also collected $2,000 in GST/HST.

On your income tax return, you only claim the $8,850 in expenses as you don’t include the tax you spent. That makes your revenue $16,150 ($25K – $8850). You pay 20% for income tax, which is $3,230.

You must also file a GST/HST return to pay the government the sales tax you collected from your customers. Here you can claim the sales tax you spent on business purchases as an ITC. The $2,000 you collected minus $1150 in ITCs = $850. You must pay the government $850. You get to keep the rest of the $2,000 you collected.

So how do these numbers compare to the first example without ITCs?

• Total income is higher: $27,000 ($25K sales + $2K HST)
• Total expenses are the same: $10,000
• Total amount paid to the government: $4,080 ($3,230 in income tax + $850 HST)
• Your profit for the year: $12,920

You made/saved an extra $920.

These savings are one of the main advantages to registering for GST/HST even before you are required to do so.

Please keep in mind that this is an example only. Your savings will vary, depending on many factors such as sales volume, expenses, domestic vs. international sales, province, income tax rate, etc.

Next Steps

In these last 3 posts, we’ve covered everything from how to identify and structure your small business, registering your business name with the provincial government, registering for a federal business number, and setting up PST & GST/HST accounts.

In the final post of this blog series, we’ll discuss any municipal requirements for your small business and setting up business insurance. Read more about that here.