HST Information
Introduction
We have put together this information for any owners (or their accountants) who may have questions about how we handle HST collected from guests. I’ll explain more in detail below, but here’s an overall summary. Normally, HST collected from guests would flow from guests to The Gables to the unit owners to CRA. Our present model removes the owners from this equation, such that the HST flows from guests to the Gables to CRA. The unit owners would complete their HST returns as they normally would, and claim all applicable ITCs, but would not have to remit any HST on sales. Following is a more detailed discussion on the matter. If you require further clarification, please reach out to our controller.
Background
The Canada Revenue Agency requires that we collect HST from guests, without respect to the GST/HST registration status of unit owners. We collect this HST from guests and remit it to CRA quarterly. Prior to the 2016 season, The Gables would pass this HST on to unit owners based on their share of the sales. The unit owners would then remit this HST to CRA on a monthly, quarterly, or annual basis according to their individual circumstances. To avoid duplication of the amount remitted to CRA, The Gables would claim an offsetting credit for the amounts disbursed to owners. This put The Gables in a compromised position. In particular, in the event of an audit, CRA would require The Gables to provide support for the HST disbursed to the unit owners. Unfortunately, CRA does not accept internally prepared documents as support for such disbursements. The would require third-party support (ie. Documentation prepared and issued by unit owners). As a result, the previous system required unnecessary cash flows (ie. From The Gables to the unit owners to CRA, instead of merely from The Gables to CRA), and required the collection of supporting documentation (eg. Invoices) from unit owners. Furthermore, The Gables would be at risk of being unable to support credits taken if unit owners failed to provide support for the amounts claimed.
Alternative System
To avoid the inherent risks in the previous system and to avoid redundant cash flows and additional paperwork for everyone, we adopted a new model for 2016 and onwards. Under the provisions outlined in the instructions for the GST506 form (Election and Revocation of an Election Between Agent and Principal), The Gables remits the HST collected from guests directly to CRA, and only passes on the sales, excluding HST, to the unit owners. Under this system, unit owners who are GST/HST registrants are still required to file regular HST returns and may claim input tax credits (ITCs) for HST paid on purchases, including the amounts paid to The Gables as management fees. If you haven’t signed and returned the form, we encourage you to do so. As unit owners, you are considered the “Principal” in the agreement, and need to sign and date part D and return the form to us. Following is a sample of the completed form, which shows the areas of the form that need to be completed by the owner. Please complete the areas on the form marked with the red dots.
Please note that we are treating this new model as the default model, and require individual owners to “opt out” if they wish to remit their own HST. To do this, we require that you send us a properly formatted invoice on your company letterhead for the amount of HST on the sales shown on the monthly statement. To avoid timing differences, this invoice should be dated on the last day of the applicable month. As noted above, unit owners are required to file their own GST/HST returns on a monthly, quarterly, or annually basis as applicable. On this return, unit owners should report following with respect to their business arrangement with The Gables:
Line 101 – Sales and Other Revenues – Report the total sales shown at the top of the monthly statement from The Gables
Line 105 – GST/HST collected on sales – Report “0.00” on this line
Line 108 – Input Tax Credits – Report all eligible GST/HST paid on purchases, including the amount charged by The Gables on the monthly statement
Of course, if the unit owner has other business activity separate from The Gables, they should add those amounts to the above figures and reported the aggregated amounts. Following is a sample of what it might look like based on the following scenario:
1) There were no other business activities outside of The Gables
2) The monthly statement from The Gables showed sales of $12,000
3) The monthly statement from The Gables showed a management fee of $5,520.00 plus $828.00 HST.
4) The owner had $130.00 in GST/HST paid on other purchases during the month (eg. On electricity and other expenses).
5) The total HST paid on purchases during the month was $958.00 ($828.00 paid to The Gables and $130 paid on other purchases)
The GST/HST return for the month would look like this:
If you are contacted by the Canada Revenue Agency asking why you didn’t report any GST/HST collected on sales, you should explain to them that The Gables remits the HST on your behalf under an agent / principal agreement and refer them to the GST506 form (Election and Revocation of an Election Between Agent and Principal). You can provide the business number of The Gables (shown on each of your statements) if they need to verify that the HST has been remitted. Let us know if you have any questions.