A little misunderstanding about HST is causing a lot of cash flow issues for many small businesses. Even worst some tax accountants have also misunderstood this concept and are not warning their clients.

When new clients come to us, after we migrate their data to QuickBooks Online and attach and integrate a few superpower apps such a Wagepoint, Receipt Bank, and a few more apps. we analyze their data as well and go through a few checkups. We have noticed and discovered that almost all of them have filed their HST incorrectly and inadvertently put themselves in a cash flow issue.

(Updated) So periodically, review your sales and collectable and remove the uncollectible sales and consequently the HST that was recorded on those sales.  The ITCs must be reflected as an adjustment on the HST submission form.

The Scenario

As Numetrica City expert, I’ll give you this hypothetical scenario and you can see clearly why they are not doing right.

Let’s assume that you have created a new software and it is amazing and you have made a few sales. One of your clients puts a huge order for $1,000,000. You send the invoice and charge $130,000 for HST.

Updated: CRA suggest to claim the 130K of HST uncollectible as an adjustment.

The order has come at the end of your Q3, and your client said he’ll pay the bill soon.  So now you are ready to file your HST. Just based on this invoice alone, your HST owing could be $130,000. Your firm completes the HST form and submit and pays? How? I guess you had gone to the bank and got a loan or maybe had $130,000 in the bank to pay for your HST bill.

Let’s make this a bit more exciting, the client cancels the sales, he had an option to cancel at any time if he wasn’t happy with the software. So, you now have to either adjust your completed HST form or make an adjustment on the next remittance 3 months later. Meanwhile, bank is charging you interest, if you have not paid the CRA yet, they are charging you interest as well. Even worst, guess who is going to order an audit when you ask CRA to give you back your $130,000?

Impact on cash Flow

This is a huge mess, you have got a loan for $130,000, paying interest, cash flow is a down significantly, may even get a CRA audit, ….

So how to avoid this?
2 solutions,

  1. As soon as you sign a big contract, collect the HST and pay CRA so you are cash flow is not negatively affected.
  2. As soon as you find out that the sales is cancelled, adjust sales and HST and adjust your next HST filing.


The Solution

One of the features in QBO when you are generating an HST report, asks if you are using accrual or cash basis, choose the correct option and file your HST right.

We had a client that had a huge cash flow problem, it was a great company, they were growing very fast and needed cash for their projects. They owed a lot of money to CRA because they were filing their HST wrong. No one in management had even looked at the HST numbers and asked do we even have this money? I guess they were happy that they were successful and had great sales numbers but didn’t know the concept.  When the president and his CFO an accountant asked me how they can improve their cash flow, I looked at their HST numbers and forms and said well, you are filing this wrong. So we went through accounts receivable, identified the uncollectible sales and adjust the numbers and HST accordingly.

At the beginning I said another HST misunderstanding. The other one is Quick Vs Regular method, What?!!!!!! 😊

An update to this scenario.

There was a comment from Nate (Thanks Nate) that my suggestion was wrong.  I called CRA at 1 800 959 8287 and present them with a hypothetical situation.

You charge a client $1M dollars to build something.
So you issue an invoice for $1M and the HST on that is $130K.
Let’s say you file your HST monthly.
You haven’t being paid but you owe $130K.
no problem, you borrow the money from the bank and pay CRA.
The buyer cancels the order.

CRA suggestion: adjust your next HST filing.

This will definitely put a cash burden on the company. read the 2 solution suggestions above.

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