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Made your hobby into a business? There’s a tax for that.

21/01/2020


If you are thinking of turning your hobby or expertise into something marketable or are one of the 3.5 million Canadians who already have a side hustle, make a cup of tea, find a cozy spot and read on. As we closed off another calendar year it is a good idea to pause, look at your sales records and make sure you are meeting your tax obligations as a small business — which is what you are if you’ve been selling goods or services.

The Canadian tax regime can be complex, but taxes essentially fall into two categories: income tax and sales tax.  Provincial sales tax (PST), also called retail sales tax (RST), as the name suggests, is the provincially regulated sales tax as opposed to the federally regulated goods and sales tax / harmonized sales tax (GST / HST). 

This blog specifically addresses Manitoba’s seven-percent RST.

Getting the Tax Lingo Right

Let’s start with some basic sales tax-specific terminology. You are the “vendor” and your customer is the “purchaser.” The purchaser pays sales tax and the vendor merely remits, or forwards, that tax to the government. Once registered for RST, the vendor is called a “registrant.” The good or service is called the “supply.”

Common Misconceptions

  • You would only have to pay sales tax if you formalize your business.

Sales tax obligations would exist even if your business isn’t formal (e.g. haven’t registered a business name, didn’t incorporate, do not have a written partnership agreement, etc.).

  • If you pay cash, no sales tax applies.

The reality is all taxable sales, including cash sales, are subject to sales tax.         

  • If you don’t make any sales, you don’t have to file a return.

Once you are a registrant, you must still file a return every period even if you don’t have any taxable sales (a nil return).

Ultimately, the person who is consuming and using the supply pays the PST/RST. However, the transactions leading up to that sale are exempt. For example, the person buying an appliance will pay the PST, but the retailer, wholesaler and manufacturer won’t when they build or sell it.

Taxable vs Exempt Supplies

There are two categories of supplies: taxable and exempt. Most goods (and some services) in Manitoba are taxable. But others aren’t and that can lead to some costly confusion.

For example, the contractor fixing the stairs up to your front door supplies a service but it’s not subject to tax in the province. However, the photographer’s fee for your wedding pictures is taxable.

Meanwhile, things like car seats, food and fishing nets are goods but exempt from the provincial tax. For more details, Manitoba Finance has a summary of some taxable and exempt goods and services located on their website https://www.gov.mb.ca/finance/taxation/pubs/bulletins/030.pdf

Manitoba RST Rules

The province where you reside is the jurisdiction where you are most likely required to remit tax. The following laws apply to those living in Manitoba:

  • If you reside in Manitoba, sell products in person or online from Manitoba to people who will consume your products in Manitoba, you must register, collect and remit RST when your taxable Manitoba sales exceed $10,000 in a calendar year or anticipate you will exceed this amount in the current calendar year. Below this amount you are considered a small business and exempt from having to register (but you must pay PST on your taxable purchases).
  • You must register within one month after sales exceed $10,000, but you must collect and remit on all taxable sales that exceed the $10,000 threshold (and the sale that put you over the threshold).
  • Your filing frequency depends on your average monthly Manitoba RST and is either monthly, quarterly, or annually. A unique aspect of Manitoba RST is you receive a small commission (maximum $58) from Manitoba Finance for your work.
  • Generally, customers outside Manitoba are exempt from the provincial RST — unless they arrange their shipping via a common carrier.
  • Manitoba RST on taxable February sales must be remitted to the government by March 20 deadline or the next business day when it falls on a weekend or holiday,

Non-resident Businesses and Online Sales Platforms

If you are engaging in online sales out of province, you need to be compliant with tax rules in the other Canadian jurisdictions that have a provincial sales tax — B.C., Saskatchewan and Quebec. Likewise, Canadian businesses outside Manitoba should understand the basics of the Manitoba RST. 

As an oversimplification, if a business keeps inventory in Manitoba (for example, through an Amazon fulfillment centre) they must collect RST from their Manitoba customers if they exceed the $10,000 provincial small business exemption. Also, if a business ‘solicits for sales’ in Manitoba in addition to shipping products to Manitoba customers, they, too, must collect provincial RST from their Manitoba customers.

Many platforms for online shopping (e.g. Shopify, Etsy) allow the seller to add sales taxes. Once you have exceeded the small supplier exemption, you must set up your online store to charge customers the appropriate sales tax. Doing so will save you collecting the information manually later and help keep your business compliant.

Remit Now or Pay Later

As with any tax, you face penalties and interest for remitting the RST late. In Manitoba, late remitters face a penalty of 10 percent of the tax due (minimum $10), plus interest (subject to change), currently 9.95 percent.

And if you aren’t registered yet, you might want to and take advantage of certain benefits. For example, an RST registrant in Manitoba can purchase goods or services for resale exempt from RST by providing their RST number to the supplier.

Example

Henry got serious about his photography hobby in 2018, started to advertise and soon began photographing weddings and pet portraits, primarily in Manitoba. He also shot one event in Alberta in June 2018. 

Henry’s monthly sales rose steadily and reached $10,000 in Manitoba sales in October 2018; however, he didn’t think of applying a sales tax until November 2019. Oh-oh. Henry should have registered and begun collecting RST from purchasers starting in October 2018 on the Manitoba sale that caused him to exceed the threshold (the Alberta sales weren’t considered in determining the $10,000 small business exemption).

To be compliant, Henry needs to register for Manitoba RST, file returns going back to October 2018 and remit the RST. He will be assessed interest and penalties on this amount. Henry could go back to his customers and request they pay RST, however, he is likely on the hook for those amounts.

Be Prepared

As you can see, provincial sales tax is something that should optimally be tallied once a month and not left for tax time in March. If you exceeded the small supplier exemption earlier in the year or even in a prior year, you need to register with the Manitoba Ministry of Finance, begin collecting RST on sales and remit that RST to the government.

If you are just starting out, keep this information in mind and register for RST as soon as required and avoid penalties or interest.

For more information, contact Jeff Harrison at [email protected] or 306.790.7900.