In this week’s video I walk through the steps to create a GST tax code for expenses you can use for your meals and entertainment costs to ensure that you do not claim more than the 50% allowable input tax credit.
Most business owners are aware that only 50% of meals and entertainment expenses are deductible. Often, however, they inadvertantly claim the full amount of GST input tax credits. This is something that is commonly checked if you have a GST audit. Imagine how impressed your GST auditor will be when they see you have not only correctly claimed only half, but set up your system to ensure that happens automatically!
By utilizing the difference between GST expense (input tax credit to be claimed as a refund) and PST expense (added to the expense in question) you can adjust the rates to create a new code.
This new code is then automatically applied to any expenses tagged as meals and entertainment in hubdoc, and set up in the expense account in your chart of accounts.
I love to hear from you. Please feel free to comment below, and also, let me know if there is anything else you would like to know about.
Hi, Kerry here from MyQuickBookKeeping.
When you set your business up in Quick Books Online or receive your file from us, the default tax codes will be based on where you operate; in some cases you may need to use different codes perhaps you provide services in another province but ship your products to another jurisdiction and have to collect tax there too. I like to set up a separate code for meals and entertainment expenses, in Canada only 50% of GST paid on these expenses can be claimed so by creating a separate code you can be sure that you don’t inadvertently claim credits you’re not entitled to. Be sure to watch to the end of the video so you can see how these changes impact your financial statements and you can easily check that you have applied the changes correctly.
We’re going to use the sample company in Quick Books to edit and add sales tax rates; we’re pulling up an invoice, you can see what my sales tax options are, exempt zero and HST. I’m in Vancouver, British Columbia, so let’s set up the PST and GST that’s normally collected here, select taxes on the left-hand margin and then add tax. We have the option to add tax for another province or territory. I’m going to select British Columbia, let’s choose January as the start date with a quarterly filing frequency; note this information will be obtained from the tax agency when you register. The reporting period would normally be accrual and the business number would be on your registration documents also, so let’s send this.
Now, you notice that you have arrows on the top of the sales tax page, you can toggle between you GST, HST and the PST depending upon which return you’re completing. You now have the codes you need to operate your business in both Ontario and British Columbia in order to create a meals and entertainment code we have to edit the existing codes, first, let’s have a look at how they work.
We have an expense for $100 for some promotional items that have GST and PST on them, here it is- GSG PST. The GST is 5% and the PST is 7%, part of the differences between GST and PST is that GST could be claimed back as an input tax credit, PST, on the other hand, cannot be claimed and it’s included in the cost of the item purchased. So, let’s change the date of this transaction to the 1st of September, so I can show you what we mean let’s just use a paid-[checks for something on screen] So let’s save this and run a profit & loss report for September. The only item we have showing here are the promotional items that we just purchased and you can see the cost showing up as $107. So, let’s pull in and see the expense we created, here it is- the $107 is made up of our $100 expense plus the 7% PST, the GST will be claimed back; it’s on the balance, I’ll write a balance sheet next. We run the balance sheet for September and if we scroll down a little you’ll see we have minus $5 here in GST that means we are owed $5 in the input tax credit, if we go down a little bit further we have a loss of $107, which is the expense that we just saw on the profit-loss, hopefully, that will make sense. Let’s make a new code; go to taxes and select add tax, first of all, we have to add a new mills GST rate and a new mill’s PST rate. So, let’s start, right here is the tax rate and the first one we’ll add will be the PST; now I’m going to call it M PST for- let’s add some entertainment PST, the tax agency for that one is the Ministry of Finance. We’re going to apply it to purchases; now here’s where it gets interesting, we can only claim half of the GST so it’s currently 5% that means 2 ½%. So, we’re going to add 2 ½% to the 7% PST and make that one 9.5%. It’s non-tracking so where I just showed you earlier how the extra $7 goes and includes in the expenses it’s because we’re not tracking it to claim it back, the only reason that this works. So, we’re going to save that one, now we’re going to create the GST one so I would call this M.G.S.T [typing], yes, okay, MGST this one is for Canada Revenue Agency for purchases and it’s 2.5 % and yes the account goes into our liability account; I’m going to show it on the input tax credits line, so hopefully that makes sense. Please drop me a line if it doesn’t and we’re going to save it.
Now, we need to combine the two so once again select add tax and then group rate, the group name is going to be M, I actually do use this rate myself for meals and entertainment. Let’s choose here M rate GST, which is going to be applicable on the net amount, we’re going to choose our MPST is that one, here you go, which once again is applicable on the net amount so we can save this. Now, let’s record an expense using our new code; we’re at a restaurant and we have Meal & Entertainment for $100, let’s use our new M code here it is, here M- 12%. As we can see the total is 12% as we had before the 7 and the 5 except now it’s split differently with 2 ½% of GST and that we’ll be claiming back as a credit and the balance- the $9.50 is added to the expense. Now, if you’re still with me we’re going to go and we’re going to set up a default for our Meals & Entertainment expenses so that each time we use this code account the code will be automatically applied. So, I’m going to save and close this one, I’m going to select accounting on the left-hand menu, I’m going to find Meals & Entertainment account, here it is, I’m going to drop down and edit it and then there’s a place for the default tax code which I will use as the just plain M right here so we can close.
Now, let’s have a quick look at that profit and loss report; we now have another expense for Meals & Entertainment $109.50 the $100 expense, the $7 and half of the GST that we cannot claim. If you look at the balance sheet now we can see that there’s a difference of $7. 50- it’s the $5 GST on the promotional items and half of the GST on Meals & Entertainment, hopefully, that pulls everything together.
This should save a lot of time in coding, particularly if you are importing transactions from your bank and Credit Card Company or using a service that’s just ad-hoc, only out of province expenses or those that relate to travel will need to be manually altered. If you have a GST audit you will not have over claimed the GST on Meals & Entertainment, something that’s very commonly checked.
If you would like to know how to edit existing codes if for example a tax rate changes I have another video using the US sample company that should help. Be sure that you have proper advice from your accountant about what taxes apply and when you need to collect and remit them. This video is only intended to show you how to make changes and set up new codes when required. Please don’t hesitate to reach out if you have any questions or would like help getting this setup.
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