Indirect taxes hurt client incomes

Indirect taxes affect vendors selling services like legal counsel, or goods such as property, as well as buyers. The onus is on both parties to ensure they either charge or pay the correct tax rate. While the last major changes to indirect tax rates was in July 2010—when British Columbia and Ontario brought in HST—many businesses are still struggling to get the numbers right.

Read: Tax-efficient investor behaviour

Tracking taxes

When reconciling taxes, if you discover some tax hasn’t been properly charged, you have three options:

• Go back to customers and ask for the additional tax. This isn’t a real option, of course, as it would likely be very bad for business (and may prove futile).
• Cover the missing amount out of pocket, in addition to paying any interest or penalties that apply.
• Register for HST and PST in provinces where you do business, even if these rates don’t apply to your home provinces. This would help ensure you are charging buyers in those areas the right amount of tax at the time of transaction and reduce the risk of having to pay for those taxes out of pocket.

Read: Tax proposals change how you advise clients

Business owners who are buyers need to either self-assess (in cases where too little tax was charged) or seek a refund for taxes paid in error. Going the refund route requires sending in copies of invoices that prove they’ve overpaid, and detail what was purchased.

However, rectifying such errors costs more than just time. In addition to CRA charges and penalties, you need to cover the cost of appeals and audits. Besides, going back to the government with corrections opens up your entire business for review.

Read: Seven tips to reduce client tax burden