For businesses with relatively low expenses in relation to their income, the quick method will leave you with more money. (See the end of this article for a comparison of high- and low-expense businesses.) I calculate the crossover point as being at about 28 percent: if your business expenses come to less than about 28 percent of your gross income, consider using the quick method. Here is a sample scenario.
The quick method of GST accountingIf you use the quick method, you collect GST on your earnings and then pay a set percentage back to the CRA. You don’t have to keep track of how much GST you pay on your business expenses because you won’t claim those back. As the name implies, the bookkeeping is about as simple as possible, especially if all of your clients are in the same province as you.
If you use the non-quick method, you count up the GST that you collected, and you pay it all back to the CRA. Then you count up all the GST you spent over the year on your business expenses (business use of home, software, accounting and legal fees), and you claim that back. It’s not that much more complicated, but you have to track how much tax you pay on every business expense.
The quick method for freelance professionalsWhat you want to figure out is which accounting method will leave more money in your account. Here is a comparison of the two methods for a hypothetical freelancer. This freelancer lives in British Columbia, and all of her clients are also in British Columbia. She works from a home office and deducts business use of home as part of her expenses.
GST collected on income and paid on business expenses
|Total income invoiced||$50,000|
|5% GST collected on income||$2,500|
|Total business expenses||$10,000|
|GST-eligible business expenses||$5,500|
|non-GST-eligible expenses:* monthly rent of $1,500; 25% business use of home||$4,500|
|Total GST paid for business expenses (5% on $4,500)||$262|
GST remitted to the government
|Quick method||Non-quick method|
|GST you have to remit||3.6% remittance rate on $50,000: $1,800||everything you collected: $2,500|
|GST paid on business expenses claimed against remittance||$0||$262|
|1% bonus available for those who use the quick method: 1% of GST-eligible income to a maximum of $300||$300||$0|
|Total GST you remit||$1,800||$2,238|
|Total GST you keep||$1,000||$262|
Other scenariosHere are some factors that could change the above result:
- Not charging GST on all of your income. If a lot of your clients are outside Canada, you won’t collect GST on this income, which means the amount you keep using the quick method is lower. In the above scenario, if all of our hypothetical freelancer’s income came from outside Canada, she would collect no GST and using the quick method would leave her with $0, while using the non-quick method would leave her with $262.
- Paying more GST on your expenses. This could happen if none of your business expenses are GST exempt, if a lot of your expenses are paid to a provider in another province with a higher tax rate, or if your total business expenses are simply higher. We could cook up a scenario here for a freelancer with important clients in the U.S. who subcontracts out a lot of work to a contractor in Ontario that would tip the balance to favour the non-quick method.
Appendix: comparing the methods for high-expense versus low-expense businessesWhat type of business should use the non-quick method? One with high expenses in relation to its gross earnings. For example, a business that buys something at wholesale prices and sells them at retail prices. These businesses have big inputs and big outputs and survive by taking a percentage off the transaction.
Here’s a quick and dirty comparison using completely made-up numbers. Both businesses have the same net income, but because the high-expense business spends almost as much GST as it collects, it is far better off using the non-quick method.
|Low-expense business||High-expense business|
|5% GST collected on gross income||$3,000||$12,500|
|5% GST spent on expenses||$500||$10,000|
|GST retained using the quick method minus GST spent on expenses||$640||–$9,000|
|GST retained using the non-quick method||$500||$12,500|