Before I begin, I just want to put up a disclaimer that I am not an accountant, and nothing in this post should be construed as formal legal or accounting advice. The content of this post is for general information only – you should contact an accountant for more detailed information regarding how to handle your unique circumstance.
Employee vs Independent Contractor Income
If you are an employee at a clinic or spa, you should not be collecting HST at all. The business itself may charge the client HST for the services you provide, but the entirely of the service fee (including the HST) goes to the spa or clinic. You’re paid your employee wage with appropriate income tax deductions, and don’t have to worry about HST collection or remittance at all.
If you are an independent contractor, your income is business income. You may choose to collect HST, or be required to collect it depending on the amount of money you make as business income. How you collect your fees will play a role in what HST you collect, and what you can write off when remitting the HST collected.
When HST Collection is a Requirement
On massage therapy forums, there is often confusion about when a business has to start collecting HST on it’s services.
One common cause of the confusion is the $30,000 rule, which states that when a business earns at least $30,000 in the last 4 consecutive quarters, plus one month (referred to as “month 13”), they have to start collecting HST on their services. Businesses that earn less than that amount every 4 quarters are considered small suppliers, and do not have to collect HST.
Let’s take a look at the rule, and break it down a bit.
A small supplier is defined by the CRA as:
“A person is a small supplier during any particular calendar quarter and the following month if the total value of the consideration for world-wide taxable supplies, including zero-rated supplies, made by the person (or an associate of the person at the beginning of the particular calendar quarter) that became due, or was paid without becoming due, in the previous four calendar quarters does not exceed $30,000 or, where the person is a public service body, $50,000.”
Are we public service bodies?
Massage therapists do not fall under the definition of “public service body”, which is reserved for non-profit organizations, charities, municipalities, school authorities, hospital authorities, and public colleges and universities. That means the limit that applies to us is $30,000, not $50,000.
What does “calendar quarters” mean?
Calendar quarters are the four, three month periods that make up a calendar year, and are usually described using the abbreviations Q1 (January – March), Q2 (April – June), Q3 (July – September), and Q4 (October – December).
The “previous four calendar quarters” does not mean the previous calendar year – it means the four most recent quarters. At the beginning of each quarter, the total sum of the last 4 quarters is what matters.
On July 1st, the total is calculated from Q1 and Q2 of the current year, as well as the total of Q3 and Q4 of the previous year.
On October 1st, you would look at the total business income from Q1, Q2, Q3 of the current year, and Q4 of the previous year.
An important exception to the 4 quarter rule
If you earn at least $30,000 in a single quarter, you are also required to register and collect HST regardless of the business income from the previous quarters.
What happens when I earn more than $30,000?
Remember that only business income counts – if you are an employee at one location, and have a separate business where you see clients on the side, you do not include your employee income when determining whether you have hit the $30,000 limit. If you are a sole proprietor of more than one business (including a business in an unrelated field), you must add the total sum of all business revenue together – it all counts toward the limit.
Once you hit the $30,000 minimum income, either in a single quarter, or as a sum in 13 months (four most recent quarters plus the current month), you have 29 days inclusive of the day you hit the $30,000 limit to apply for an HST account.
You are only responsible for collecting HST from the date you became registered, or you have surpassed the 29 day grace period for registration (whichever came first). You do not need to “back pay” HST on fees you collected prior to becoming registered to collect HST. Do not collect HST until you are registered to do so. If you have already collected HST before registering an HST account (say, between the time you hit $30,000 and the actual date you applied for your HST account), you should have the CRA backdate your registration. They will only do this easily if you started collecting HST within the previous 30 days of being registered. If you have been collecting HST for more than 30 days prior to being registered, you can contact the CRA HST department for help at 1-800-959-5525.
Can I Collect HST Before I am Required to?
You can voluntarily register for HST collection at any time. If you collect HST for your services, you must register for an HST number, and you must remit the money you collect. You cannot keep the HST money you collect on your services even if you don’t hit the $30,000 limit – any taxes collected have to be claimed and remitted to the CRA (though you may be able to write some of it off during the process).
Should I voluntary register early?
Some people volunteer to register before they have to, others decide to wait until they’re required to register. The choice is largely personal, but you should discuss the issue with your accountant to figure out what makes more financial sense for your situation.
Some pros include HST write offs and the business appearing more “professional” (the clients not knowing it makes less than $30,000), but the downside is additional paperwork, and having to add HST to your fees before it’s necessary.
Common Massage Therapy Business Arrangements
Let’s review some common massage therapy contract arrangements, and how you might navigate the issue of HST collection.
Massage therapist is an employee of the spa or clinic
In this scenario, the RMT doesn’t have to collect or remit any HST. Only business income counts for HST purposes – the business will collect all fees rendered for the service, and pay the HST if applicable. The RMT just gets their usual employee paycheck.
Massage therapist is an independent contractor, makes less than $30,000 in service fees, and isn’t voluntary registered for HST
If the clinic collects the fees from clients:
- In this scenario, the RMT would not collect any HST from the clinic. If they have a percentage split arrangement, the percentage is based on the pre-tax value of the fees collected – all of the HST collected (if any is collected) goes to the clinic / spa owner, as they have to claim the total amount of tax for the service charged when they file their HST remittance. The business owner is responsible for the HST collection / remittance, not the RMT. The clinic’s information (including their HST number) is included on the receipts.
If the RMT collects the fees from clients directly:
- HST is not charged to the client. The therapist’s independent business information is listed on the receipt, and there is no HST number provided since the therapist doesn’t have one.
Massage therapist is an independent contractor, and is registered to collect HST (voluntary or mandatory)
If the clinic collects the fees from clients and pays therapist:
- In this scenario, the RMT invoices the clinic for their % of the HST in addition to their % of the pre-tax fees. If the therapist is paid a flat rate instead of a percentage, the HST value of the flat rate is paid in addition to the base rate. The business will claim the full amount of the HST collected, and write off the HST paid to the therapist during their remittance. The therapist will claim and remit the amount of HST they receive. The clinic’s information and HST number is included on receipts to clients.
If the therapist collects the fees from the clients and pays the clinic for rent:
- In this case, the RMT collects and remits all HST charged to the client. The clinic invoices the therapist for their rent amount (% or flat rate), and includes HST on the rent if the business is registered to collect HST. The RMT pays it and writes off any HST paid for rent when they do their HST remittance just like any other business-related HST expense. The RMT’s business information and HST number is included on receipts.
There are many other business arrangements – the above scenarios are just examples of what you may run into. If you’re not sure what’s best for your particular situation, contact your small business accountant and explain your situation… they will have advice that pertains to your particular situation. They’ll also be able to go over your business expenses with you, and help you to figure out what HST fees you can write off when remitting your HST. As a general rule, any HST you pay out for business related expenses can be written off (just like the pre-tax value of those expenses can be written off on your income tax), but your accountant will help you figure out what’s appropriate for your circumstance.
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