Quick Method of Accounting and the Bottom Line of Your Small Business

A doubling of the annual taxable sales threshold applicable for the Quick Method of accounting for GST/HST was announced as part of the March 29, 2012 budget proposals tabled by Federal Finance Minister Jim Flaherty.  This means that more small businesses will have access to this potentially beneficial method of GST/HST reporting effective for reporting periods beginning after 2012.

Some people may not realize that the Quick Method of accounting for GST/HST can actually contribute to the bottom line of a small business. GST/HST registrants who elect to use the Quick Method collect GST/HST as usual but remit a reduced amount of the tax collected. In exchange, the registrant forgoes claiming input tax credits (ITC) unless the ITCs are in respect of capital assets acquired for use in the course of the registrant’s commercial activities. Therefore, the Quick method can be a source of income for businesses that incur a small amount of taxable expenses since there would be very few ITCs to forgo.

To illustrate, we can use the example of a consultant in Ontario, Paul Jones, who has elected to use the Quick Method of accounting with respect to the 2011 calendar year. We will assume the following facts;

• Taxable fees for the year – $175,000
• HST at 13% collected on fees – $22,750
• Taxable expenses incurred – $5,000
• HST at 13% incurred on expenses – $650

Based on the Quick Method of Accounting for GST/HST with respect to a service business located in Ontario whose revenue is derived at least 90% from sources within Ontario, the remittance rate is 8.8% of tax-included sales.

Furthermore, each year, GST/HST registrants who are on the Quick Method are entitled to a bonus 1% reduction in the remittance rate which is applicable to the first $30,000 of tax-included revenue for the year.

Therefore, Mr. Jones’ remittance for 2011 will be calculated as follows:

• GST/HST included revenues – $197,750
• Amount owing on first $30,000 of GST/HST included revenue ($30,000 x 7.8%) = $2,340
• Amount owing on balance (($197,750 – $30,000) x 8.8%) = $14,762

Total GST/HST to be remitted = $17,102If Mr. Jones would not have made the election, his remittance for 2011 would be as follows:

• GST/HST collected minus GST/HST paid.
• $22,750 – $650 = $22,100

In this scenario, Mr. Jones realized a pretax profit of ($22,100 – $17,102) $4,998 by electing to use the Quick Method of accounting for GST/HST.

The Quick Method is not available for everyone. For example, accountants, lawyers, bookkeepers and financial consultants are among those not permitted to use it.

This is the first time we have seen an increase in the threshold amounts since the GST came into force on January 1, 1991. Therefore, it’s not surprising that the government found it necessary to double the limit to $400,000 of GST/HST included sales.

Other streamlined accounting methods have also seen their limits doubled. For example, the thresholds for the Streamlined Input Tax Credit Method and the Prescribed Method for calculating rebates are now $1,000,000 of tax-included sales and $4,000,000 of taxable purchases.

- Mona Tessier, CA, CA.IT
Senior Manager
Welch LLP

Very Few Tax Measures in the Ontario Budget

Finance Minister Dwight Duncan yesterday delivered Ontario’s 2012 Budget. The Budget is projecting a deficit of $15.3 billion in 2011-12, $1 billion lower than projected a year ago, and decreasing to $15.2 billion in 2012-13. The 2010 Budget put forward a plan to cut the deficit in half within five years and to eliminate it in eight years. The government remains on track to meet the fiscal targets outlined in the 2010 Budget beyond 2012-13. This includes steadily declining deficits and a return to a balanced budget by 2017-18.

There are very few tax related measures included in the Budget. There were no changes to personal tax rates or tax credits. However, there was a significant change with respect to corporate tax rates. The “big business” general corporate income tax rate is currently 11.5 per cent. It was to be reduced to 11 per cent July 1, 2012 and to 10 per cent July 1, 2013. The Budget proposes to temporarily freeze the rate at 11.5 per cent until such time as the budget is balanced. There was no change to the “small business” corporate tax rate which remains at 4.5%.

I question the wisdom of the provincial government’s move to postpone the previously promised corporate tax rate reductions. Businesses have relied on the benefit of the tax rate reductions in their planning for the next few years. As such, the rate freeze can really be seen as a rate increase; the tax expense for a business will be higher than what was projected by that business. In what should be a primary goal of the government – to stimulate the economy and get the unemployed back to work – does it really make sense to increase the cost of doing business in Ontario?

For a more detailed review of the Ontario 2012 Budget, click on the link on our website: http://www.welchllp.com/publications/news/Provincial_Budget_March_27__2012.pdf

- Don Scott, FCA
Director of Tax Services
Welch LLP 

2012 Predictions

With 2011 in the “books”, what can we expect in 2012? Hopefully some stability will return to the economy, but, I would not count on it. With my financial bias in mind here are a few predictions:

1. Access to capital, particularly early stage companies that present the most risk and biggest opportunity, will continue to be a challenge. However, 2012 will be a transition year where new sources of capital will emerge and renewed interest in investing. 2013 and 2014 are the years where we will see funding flowing.
2. M&A activity will be steady or increase as companies with strong balance sheets struggling to grow revenue capitalize on the challenges mid market companies have to compete in the global economy. The acquisitions of mid market companies will provide liquidity to investors that will fuel the flow of funds beyond 2012.
3. Government rationalization of spending will put pressure on government incentives resulting in changes in 2012 that will impact 2013 and beyond. Lobby now for those incentives you believe should continue.
4. US accounting standard setters will agree to not adopt International Financial Reporting Standards and continue to maintain their own set of accounting standards.
5. The Canadian accounting professions will merge into one Canadian accredited accounting designation.

Pricing pressures will continue in 2012 as companies focus on protecting their bottom lines. To compete effectively, goods and services will need to be priced competitively and offer tangible benefits.

- Bryan Haralovich, CA, CPA (Illinois)
Assurance Partner
Welch LLP