Being prepared for the HST might benefit small businesses

By anticipating any possible changes, a business can come out on top of the HST transition

For different businesses, the Harmonized Sales Tax means different things. Some may see it as a means of reclaiming more tax money. Others may see it as a potential threat to their business. Many still just see it as an added complication when filing its taxes. Love it or hate it, though, the Harmonized Sales Tax is rapidly approaching, and Canadian small businesses need to prepare.

What is the HST?

As of right now, the taxes that govern Ontario are the Retail Sales Tax and the Goods and Services Tax. The ORST is set at 8 percent, thought it can be higher, as is the case with alcohol and entertainment, or lower, like in the lodging industry. The GST is a 5 percent tax that is imposed on the supply of goods and services that are made domestically, with exception of a few items.

On July 1, 2010, the HST is set to go into effect. The HST will combine the GST and ORST into a single tax, rated at 13 percent. This essentially changes the ORST from a cascading tax system to a federally administrated, value-added tax system.

How the HST will affect businesses

For many small businesses, the change over to the HST will be a good thing - particularly those in service-providing industry. At face value, it may seem as if the HST would be a bad thing for service-providing enterprises, as it raises the 5 percent GST to 13 percent. Under the current tax system, a service-providing enterprise can claim back the GST it pays, but has to eat the losses it pays on the ORST. Under the HST, though, service-providing enterprises will still be able to claim back the HST, but they will no longer have to absorb the ORST.

The end goal of the HST is to reduce how much the Canadian consumer is paying for products. Though the HST will increase how much tax that consumers are paying at retail, the government hopes that the money that many businesses are saving will allow them to cut down on prices. Though many Canadian small businesses think the HST is a government tax grab, studies conducted by the Roger Martin Task Force have actually found that the government may lose money in the changeover.

How to prepare for the HST

The first thing a small business should do is determine if it even has to pay the HST. If an enterprise makes less than $30,000 a year, than the HST does not apply to them, which will save them hours of filling out business forms.

For businesses that are affected, though, the first thing they may want to consider is filling out a form for the $1,000 credit that the government is offering to businesses that make less than $2 million in annual revenue from taxable sales.

After that, GFS Consulting recommends that businesses take a look at every facet of their business that would be affected by taxes, from payroll to budgeting.

Morley Consulting recommends that businesses redo their cash flow forecast. Items that were taxable may no longer be taxable, while the opposite is also true. Some businesses may find themselves ahead, while others won't be as fortunate.

Service-providing enterprises may also want to take an inventory of products on hand to make sure they calculate the taxes correctly. Similarly, they may also want to take a look at bills in progress - work that covers the transitional period will need to show ORST and GST on business forms.

Finally, Morley Consulting suggests that businesses upgrade their accounting software to reflect the change in taxes.

The HST transition will be a confusing time for many businesses, but with a little preparation, small businesses may just be able to come out ahead.