The purpose of this document is to explain how to setup Control to calculate taxes in certain Canadian provinces where the PST is calculated on the item cost + GST tax.

In Canada, taxes on goods sold consist of the PST (Provincial Sales Tax), levied by the provinces and the GST (Goods and Services Tax) federal tax. Some provinces use the HST (Harmonized Sales Tax), which is a combination of the PST and GST taxes. There are other significant differences with HST but do not need to be addressed for this document.

In most of Canada, like in the United States, sales taxes are applied to the price of the item purchased. If an item is purchased for $100, one may expect to pay local and state sales taxes for the purchase. Suppose local taxes are 10% and state sales taxes are 5%, a combined total of 15% would be applied on the purchase for a total of $15.00 dollars in taxes.

In at least two provinces, notably Quebec and Prince Edward Island, the PST is applied to the combined cost of the goods sold + plus the GST. For example, an item is purchased for $100 dollars. Suppose the PST tax 10% and the GST is 5%. In this case, you would not pay a combined total of 15%. The GST tax would be applied to the cost of the goods ($100 * 10% = $110) and the PST would be applied to the combined cost of the goods sold plus the GST. ($110.00 * 5% = $5.50). In this case the total taxes applied total $15.50.

Purchases and Bills

All sales taxes paid will be entered into the “Taxes” box on bills. A spread sheet with the breakdown of all sales taxes paid will need to be maintained. The amount of GST paid is then transferred (monthly) by a journal entry that Credits “Sales Taxes Paid” and Debits “GST Input Credits” for the amount of GST paid during the period. The “GST Input Credits” account acts as a Contra Account to your Sales Taxes Payable accounts, reducing the amount of the Sales Taxes Payable Liability shown on the Balance Sheet. The movement of the GST portion of “Sales Taxes Paid” to “GST Input Credits” will cause the Income Statement to then accurately show the true amount of Sales Tax Expenses on the Income Statement.

Remittance to Canada Revenue Agency

When doing your remittance to the CRA you will create a bill. The line items will be entered as “Other Item” for the “Item Type.” The “Expense Accounts” will be your Sales Tax Liability accounts including the “GST Input Credits” account. You will Debit each Sales Tax Liability account for the full amount of that account by entering the total as a positive number. The “GST Input Credits” account will be Credited for its full amount by entering in the “Total Cost” as a negative number. After Debiting all of your Sales Tax Liabilities accounts and Crediting your GST Input Credit account on the Bill the resulting Sum will be the “Balance Due” to the Canada Revenue Agency.

Control is going to calculate taxes based on the subtotal of the taxable goods multiplied by the combined tax rates of any given tax class. In order for Control to properly calculate the taxes for the second scenario described, you have to provide Control with the Effective Provincial Rate (EPR). The method to determine this number is as follows (using the tax rates above):

1. (PST/100 * GST) + PST = EPR
2. Using the numbers provided above: (10/100 * 5) + 10 = 10.5
3. In Control, the GST tax liability will be 5%. The PST tax liability will equal the EPR, 10.5%.