The great thing about being registered for GST/HST is that you’re entitled to a refund of the GST/HST you pay on your qualifying expenses. Why? GST/HST is meant to be an end-customer tax. So if you pay GST/HST when you buy supplements and then your patient pays GST/HST again when they buy those supplements from you, there would be double taxation. That’s why you get a refund of the GST/HST you pay.
Here’s how it works
You’ll pay GST/HST on most of your business purchases and expenses. When you file your GST/HST return, you have to remit all the GST/HST you collected from your patients, but you can reduce the amount you remit by the GST/HST you paid on your qualifying expenses. These deductions are called Input Tax Credits (“ITCs”).
How do you calculate your ITCs? You have to divide your purchases into two buckets: purchases that are used all or substantially all of the time (90%+) in taxable sales, and multiple-use purchases that are used for both taxable and non-taxable sales.
Purchases used directly in taxable sales – In this bucket are things like supplements, and needles purchased exclusively for cosmetic acupuncture. You can claim a full refund for GST/HST paid on these purchases.
Multiple-use purchases – Most naturopaths’ purchases will fall into this category. This includes just about everything used in your business, from your clinic lease to marketing expenses to business mileage. You can claim a partial refund of the GST/HST you paid, proportional to its use in taxable sales. For most naturopaths, this is based on proportional revenue.*
For example
Your revenue from your Ontario clinic is $100,000, of which $40,000 comes from supplement sales (which are taxable) and the remaining $60,000 from HST-exempt naturopathic services. You collected $5,200 in HST (13% of $40,000) from the supplement sales.
You paid $35,000 for your supplements, on which you paid $4,550 in HST ($39,550 total). You had $10,000 of other expenses, on which you paid $1,300 in HST ($11,300 total).
When completing your HST return, you need to remit the $5,200 in HST you collected on your supplement sales. But you can also deduct the $4,550 in HST you paid to purchase those supplements. Plus, because your other $10,000 in expenses were used 40% in taxable sales ($40,000 supplement sales divided by $100,000 total revenue), you can deduct 40% of the $1,300 in HST you paid on those expenses, or $520. So out of the $5,200 in HST you collected, you only need to remit $130 to the government ($5,200 - $4,550 - $520) – that’s a lot of cash back in your pocket.
Exceptions
This is tax we’re talking about, so of course there are exceptions. Some of the most relevant for naturopaths include:
10% threshold – If a purchase is used less than 10% in taxable sales, then you can’t claim any refund on it. For example, if your supplement sales make up 5% of your total revenue, you can claim a full refund of the HST paid on your supplement purchases, but no refund of the GST/HST paid on your other purchases.
Special items – Special rules apply to GST/HST paid on items that aren’t deductible for income tax purposes (e.g., half of meals & entertainment, club memberships, etc.).
* Technical explanation: Technically speaking, you can claim an ITC in proportion to its use in making taxable sales. Since revenue reflects the output – not the use – of products, the CRA is generally cautious when businesses use revenue as a basis for allocating ITCs. However, we argue that naturopaths’ “inputs” are their time, which is reflected in the amount they charge per hour in patient visits, for example. In our opinion, allocating purchases based on proportional revenue is fair and reasonable, as long as it’s applied consistently throughout the year.