I work with a couple of engineers in a consulting practice. One of my colleagues lives in Ontario which has a different consumption tax regime than British Columbia. About 7 years ago they replaced the 8% Ontario Provincial Sales Tax (“PST”) and the 5% Federal Goods and Services Tax (“GST”) with a a single 13% Harmonized Sales Tax (“HST”).
Since all of our clients are in BC, we charge them GST at a rate of 5% (i.e. a total of $12,500)
Our total revenue is around $250K – with about $50K going to our Ontario colleague. So about $200K is distributed to BC contractors with GST of $10K. The remainder is paid to our Ontario colleague including HST of $6,500.
While GST appears to be handled properly by the software, it appears that Wave defaults to expensing the full amount of payments to our Ontario colleague – and none of the HST paid made it to our GST Payable account. Strangely when entering transactions, we are prompted and entered the 13% HST.
Perhaps this is the result of incorrectly setting up the sales tax accounts. The point is that it would be easy to overlook and the problem might not be discovered unless the bookkeeper (or their CPA) understands the company and the tax regime – and conducts reasonableness tests on the sales tax accounts.
So our income was $6,500 too low and we would have paid $2,500 in GST – instead of recovering $4,000.
Cost to the company if we didn’t find the error:
$6,500 less corporate tax reduction (13%) = $5,655.
This kind of error could easily be overlooked in a “Notice To Reader” engagement by many CPAs or even a CRA auditor doing a desk review. The takeaway for me is that bookkeepers should be suitably skilled to know how to conduct reasonableness tests.