The Canadian marketplace is a small universe despite its geographical expanse. It’s as common for businesses in Chilliwack, BC to have ties with customers in Regina, Sask., or St. John’s, Nfld., as it is to work with clients next door in Vancouver. Cross-provincial commerce has made it vital for businesses to factor in diverse market regulations and the resulting indirect taxes.
Indirect taxes affect vendors selling services or goods such as property, as well as buyers. The onus is on both parties to ensure they are either charging or paying the correct tax rate.
The last major changes to indirect tax rates took place in July 2010—when BC and Ontario brought in HST—but many businesses are still struggling to get the numbers right.
When reconciling, if you discover some tax hasn’t been properly charged, your vendor client has several options:
- Ask customers for the additional tax. However, this may not be possible.
- Reconcile the differences by covering the missing amount out of pocket, in addition to paying interest or penalties.
- Register for PST in provinces where they do business. This would help ensure they are charging buyers in those areas the right amount of tax at the time of transaction.
Clients who are buyers may 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 detailing what was purchased.
Rectifying such errors costs more than just time. In addition to CRA charges and penalties, there are the costs of dealing with appeals and audits, as well as your additional fees for working with them through the process.
Voluntary Disclosures will provide relief from penalties on unpaid amounts; however, a business must be prepared to disclose everything and, of course, pay any additional taxes and interest that are owing.
Reviewing tax policies is especially important for start-ups and businesses in the process of expanding. Owners of start-ups should work with you, as well as an indirect tax advisor, right from inception rather than waiting until an audit.
Even though it’s more money up-front, it will save a lot in the future— not to mention the pain avoided during a possible audit.
For businesses moving into new territories, applicable indirect taxes are an obvious consideration. But what if a business is expanding its product line or service offerings? New services or offerings may have different tax treatments from the rest of the line up. If the billing location has changed, or a new shipper is used, all of that will affect indirect taxes.