Self-employed workers have the best of both worlds; they are mid-way between a
person who’s an individual, and a small business. Unfortunately, many self-employed
individuals don’t know that adherence to a GST/QST culture can result in a nice rebate
at the end of the year.
Beyond a certain income threshold, tax authorities require you to collect taxes on your
goods or services. However, your work as a “tax collector” can generate additional
business income since the tax you collect from your clients is not the same amount as
the portion you will have to return to the government.
Pocket the difference
Simply put, the tax collected from your customers is higher than all the taxes paid on
your deductible expenses. In other words, during your commercial activities, your
customers pay taxes. Then, based on Revenu Québec’s calculation method, you apply
the designated rate to your taxable income. Thus, your profit will be the difference
between the GST/QST versus the applicable Revenu Québec rate.
Heads or Tail?
An important decision you need to make is the method of calculation. There are two:
simplified and detailed methods for calculating your ITCs and ITRs. Self-employed
workers are generally businesses that primarily provide services. Therefore, consider the
simplified method for these types of companies; it will give you greater peace of mind.
Moreover, if your taxable sales are approximately $400,000 per year, including
GST/QST, you will probably have opted for a quarterly return; according to the Revenu
Québec website, the applicable rate is 3.6% for GST and 6.6% for QST.
Crunching the numbers
Your quarterly taxable supplies are 3.6% of $21000 and 6.6% of $21995. Added to this is
an additional credit of 1%. Your taxes to be remitted each quarter are $546 in GST and
$1,232 in QST.
Where is your profit? First, in GST, you collect 5% of your clients, but you only pay 3.6%
to Revenu Québec; The difference of $504 each quarter stays with your business. Then,
the same principle in QST; You receive $ 2194 from your customers, and you remit
1232$ to the Quebec tax authorities. In our example, an additional cash flow of
approximately 6000$ / year is added to your business income at the end of the year.
This is one of the rare occasions when you will be happy to pay taxes!