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Handling Sales Taxes
Charities and churches in the USA are sales tax-exempt, so because they normally don't pay it, there is no need to record it. So most of you in the USA can skip reading the rest of this Help page!
For charities (including churches) in Canada, the situation is different, because they do have to pay sales tax on purchases, but there are government rebates for part of what they paid. As a result, they need to track either all of the sales tax they pay, or the part of it that is eligible for a rebate.
Please consult the Government of Canada website (and where applicable your provincial government website) for a clear understanding of what the rebates are. And please consult your accountant for the best way(s) to record this in your accounting system (what accounts and transactions you should use).
As of early 2021, one relevant Government of Canada web page about the rebate on the federal and provincial portions of the HST (for provinces with HST) or the GST is https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4034/rc4034-gst-hst-public-service-bodies-rebate.html. For provinces with only GST, you may have to consult your province's website.
Automating the Recording of Sales Taxes
You can use the Maintenance ⇒ Sales Tax Codes window, and its popup Accounts window, to specify sales tax codes for different applicable taxes (for instance, HST and GST for many Canadian provinces), and which accounts from the chart of accounts are associated with them, with associated percentages.
Several sales tax related accounts that you could choose to use for those accounts associated with sales tax codes are included in the sample charts of accounts that you can select to use when you first set up a database with ACCOUNTS. If you don't start with one of those same charts of accounts, you may need to create the accounts you need in your chart of accounts.
Example of Handling Sales Taxes
As an example, in Ontario (at least as of 2016) the HST is 13%, of which 5% is the federal portion, and 8% is the provincial portion. Some items (such as books) have only the 5% GST applied to them. The federal recoverable amount for charities is half of the federal portion of the HST, or half of the GST, i.e. 2.5% of the pre-tax purchase price. The Ontario provincial recoverable amount is 82% of the provincial portion of the HST, or 6.56% of the pre-tax purchase price. (Other provinces have other percentages recoverable.)
Although we said that you should consult your accountant, we will offer two possible methods for handling the sales tax on a purchase, which we have learned from our users.
Method 1: Sales Tax Recoverable Accounts
This is the most recommended method.
In this method, for a province with HST, you would have two asset accounts, one for Federal Sales Tax Recoverable and one for Provincial Sales Tax Recoverable. You may also want to have a Sales Tax Rebates Due asset account, as explained below. As mentioned above, if you don't have such accounts, create them first in your chart of accounts.
When you purchase something that has HST charged on it, put the total amount including HST as the amount of the transaction (for example in the register for the Bank or Credit Card account). In the splits, enter first a line for 2.5% of the pre-tax purchase price with the account Federal Sales Tax Recoverable, and then a line for 6.56% of the pre-tax purchase price with the account Provincial Sales Tax Recoverable. Whatever is left should be allocated to the correct expense account, such as Office Supplies or whatever.
The splits mentioned above can all be automated by setting up and using an appropriate Sales Tax Code in the Maintenance ⇒ Sales Tax Codes window, without having to actually enter them directly in whichever data entry window you are using.
In dollar terms, if the item cost $100, and thus was $113 with HST, the allocation would be $2.50 to Federal Sales Tax Recoverable, $6.56 to Provincial Sales Tax Recoverable, and the remaining $103.94 to Office Expenses or whatever.
If it was a book purchase that had only GST charged, for $100, or $105 with GST, it would be $2.50 to Federal Sales Tax Recoverable and $102.50 to the expense account.
For a province with a separate PST (provincial sales tax) rather than HST, if rebates are available, you would still use the Provincial Sales Tax Recoverable account for the recoverable part of the PST.
You will note that in this method you are not tracking the total sales tax paid. There is actually no need to do that, because when you submit the forms to receive the sales tax rebates, you only need to submit the recoverable amounts, not the entire tax amounts. You can get the required numbers from the Balance Sheet report values for the two asset accounts.
When you go to apply for the rebates, which requires different forms for the federal and provincial portions, you could optionally move the total rebate amount in each application from the appropriate Sales Tax Recoverable account to a Sales Tax Rebates Due asset account, with a journal entry (or register transaction) crediting the Sales Tax Recoverable account, and debiting the Sales Tax Rebates Due account. When the rebate arrives, deposit it in your bank account, and the counter account (the credit) will be to clear out the amount in the Sales Tax Rebates Due account.
Alternatively, some might prefer to make no transaction when they apply for the rebate, particularly those who are doing cash-basis accounting. (Of course, just recording the original transaction with splits to the Sales Tax Recoverable account(s) is an accrual!) If you don't make a transaction when you apply for the rebate, the credit account when you receive the rebate and deposit it to your bank account will be to the appropriate Sales Tax Recoverable account.
Method 2: Expense accounts for Sales Taxes
Some of you might prefer, and/or find it easier, to just record the actual sales tax amounts you pay as expenses. The advantage of this is that it is clear what you are paying on sales taxes, and there is no calculation required to set up the percentages for your Sales Tax Codes. The disadvantages include that you are recording sales taxes as a separate expense (which will show up on Income Statements) rather than including them with the appropriate actual expense categories corresponding to your purchase, and you have to do some calculations when it is time to apply for the rebates.
With this method, you would need a number of accounts, which you may need to create first in your chart of accounts: HST Paid (or in some provinces PST Paid), GST Paid, Federal Sales Tax Rebates Received and Provincial Sales Tax Rebates Received. All of those are expense accounts, which you might want to be sub-accounts of a parent account such as Sales Taxes.
If you do want to do this, if you made a $100 purchase with HST of $13 (total $113), you would split out $100 for the appropriate expense account, and $13 to the HST Paid expense account. If you made a $100 book purchase with GST of $5 (total $105), would you again split out $100 for the appropriate expense account, and $5 to the GST Paid expense account.
As with Method 1, these splits can all be automated by setting up and using an appropriate Sales Tax Code in the Maintenance ⇒ Sales Tax Codes window, without having to actually enter them directly in whichever data entry window you are using.
For a province with PST (provincial sales tax) on which rebates are available, you record those sales tax amounts in the PST Paid expense account. (If no rebates are available, you would probably want to just add it to the main expense account for the transaction.)
When you go to apply for the rebates, get the total HST Paid (or PST Paid, if appropriate) and GST Paid from an Income Statement for the relevant period. Multiply the HST Paid by 2.5 and divide that by 13 to get the federal rebate portion for the HST (for the example of Ontario), and divide the GST Paid by 2 to get the federal rebate portion for the GST. Multiply the HST paid (for Ontario) by 6.56 and divide that by 13 to get the provincial rebate portion for the HST. The PST rebate calculation, if any, would depend on your province.
When the rebates arrive, they are deposited into the bank, with the counter accounts for the transaction being the Federal Sales Tax Rebates Received or Provincial Sales Tax Rebates Received expense accounts as appropriate. (Do not record them in an income account - the Canada Revenue Agency will apparently not be happy with that, because it isn't really income!) These are negative expenses!
Accounts Used in Sample Charts of Accounts
All of the accounts mentioned in both Method 1 and Method 2 above are supplied with the sample charts of accounts for Canadian charities or churches. Having decided which of the two methods you are using (and which taxes and rebates apply in your province), you can delete the accounts that are not relevant for you.
For Method 1, keep the three sales tax-related Asset accounts (possibly deleting Sales Tax Rebates Due if you don't want to bother using it), but delete all of the sales-tax related Expense accounts.
For Method 2, delete the sales tax-related Asset accounts, and keep whichever of the sales tax-related Expense accounts apply in your province.
Then in either case, you will need to set up appropriate Sales Tax Codes, with their total percentages, and associated accounts, with their desired split percentages, in the Maintenance ⇒ Sales Tax Codes window.
Transactions that are only Partly Taxable
You may sometimes make a purchase where some parts of the purchase have sales tax charged on them, and other parts don't. Or one where different parts of the purchase have different sales tax rates charged on them.
The automated handling in the program with the Sales Tax Codes set up in the Maintenance ⇒ Sales Tax Codes window will obviously not give the correct values in that case, if you start by entering the total amount.
One way to handle this is to still use the Sales Tax Code in the transaction, because it at least creates the splits lines for the sales tax accounts you need. However, you will then need to hand-calculate the appropriate values for the sales tax on the parts of the transaction that are eligible for tax, and enter them into the splits window (for a register transaction) or the window you are working in (for a transaction using the Write Cheques or Credit Card Charges windows).
If you need a calculator to do those calculations, you can start the built-in Calculator program in Windows with the program's Tools ⇒ Run Windows Calculator menu option.
One case where you can still use the Sales Tax Code and get the right amounts is for a purchase, part of which is taxable, and part of which is not. To handle that, first enter the transaction on a Register window, but only for the total taxable amount, and use the appropriate Sales Tax Code. Save that transaction. That will create the splits with the correct tax account(s) at the correct percentages, for that taxable part of the transaction.
Then go back and edit the total of that transaction to be the real total, including the non-taxable part. Open the Splits for the transaction, and add one or more splits lines as desired, to cover those non-taxable parts of the total. Because the splits that were added based on the Sales Tax Code will not be re-calculated when you edit a transaction, they will still be correct.