Phase 4 – Tax Coding & Compliance
Lesson 1 – GST, PST & Tax Code Selection
Learning Objectives
By the end of this lesson, the Junior Bookkeeper will be able to:
- Understand the purpose of GST and PST.
- Explain the difference between tax collected and tax paid.
- Correctly identify when GST should be applied.
- Recognize transactions that are Out of Scope.
- Understand when Input Tax Credits (ITCs) may be claimed.
- Recognize common GST/PST coding errors.
- Understand how incorrect tax coding affects GST returns and financial statements.
- Apply Eagleeye’s research process before assigning tax codes.
Why This Matters
Selecting the correct tax code is just as important as selecting the correct expense account.
Incorrect tax coding can result in:
- Incorrect GST returns.
- Overpayment or underpayment of GST.
- Incorrect financial statements.
- CRA reassessments.
- Interest and penalties.
- Additional year-end corrections.
- Increased accounting costs for clients.
Unlike many bookkeeping errors, tax coding mistakes often have direct consequences with the Canada Revenue Agency (CRA).
Our goal is to ensure every transaction is coded accurately based on the facts and supporting documentation.
Understanding GST
The Goods and Services Tax (GST) is a federal value-added tax collected on many goods and services sold in Canada.
Businesses registered for GST generally:
- Collect GST on taxable sales.
- Pay GST on eligible business purchases.
- Remit the difference to the CRA or receive a refund if eligible.
Bookkeepers are responsible for ensuring GST is recorded accurately—not estimating or assuming tax treatment.
Understanding PST
Provincial Sales Tax (PST) is administered separately by the Province of British Columbia.
Unlike GST, PST generally:
- Is not recoverable through an Input Tax Credit.
- Forms part of the cost of the purchase unless specific exemptions apply.
- Has its own legislation and rules.
The treatment of PST depends on the nature of the purchase and the client’s circumstances.
Tax Collected vs. Tax Paid
Understanding the difference between tax collected and tax paid is fundamental.
GST Collected
GST collected is tax charged to customers on taxable sales.
It becomes a liability until remitted to the CRA.
GST Paid
GST paid on eligible business purchases may be recoverable through an Input Tax Credit (ITC).
Whether an ITC can be claimed depends on:
- The client being GST registered.
- The purchase being for business purposes.
- Adequate supporting documentation being available.
- CRA eligibility requirements being met.
Input Tax Credits (ITCs)
An Input Tax Credit allows a GST-registered business to recover eligible GST paid on business expenses.
Before claiming an ITC, confirm:
- The client is registered for GST.
- The purchase relates to commercial business activities.
- The required documentation is available.
- The expense is eligible under CRA rules.
If any of these conditions are not met, additional research may be required.
Out of Scope Transactions
Not every transaction requires GST.
Some transactions are considered Out of Scope.
Examples may include:
- Personal transactions.
- Certain shareholder transactions.
- Transfers between company accounts.
- Certain financing activities.
- Transactions where GST does not apply.
Always determine why GST is or is not applicable rather than assuming a default tax code.
Eagleeye Tax Coding Standard
Before selecting a tax code, ask the following questions:
Step 1
Is the client registered for GST?
Some clients are not required to register for GST.
If they are not registered, GST should generally not be recorded as recoverable.
Step 2
Does the client claim Input Tax Credits?
Not every client chooses or is eligible to claim ITCs.
Understanding the client’s filing practices is essential.
Step 3
Is the purchase related to business activities?
Personal expenses generally require different treatment than business expenses.
Step 4
Does supporting documentation clearly identify the taxes charged?
Invoices and receipts should clearly show:
- Supplier name.
- Purchase date.
- GST charged.
- PST charged (where applicable).
- Description of goods or services.
If documentation is incomplete, follow Eagleeye’s Document Request SOP.
Step 5
Is additional CRA research required?
If uncertainty exists regarding GST or PST treatment:
- Review previous similar transactions.
- Review internal SOPs.
- Consult CRA guidance.
- Escalate only after completing reasonable research.
Common Tax Coding Errors
Assuming Every Expense Includes GST
Not every supplier charges GST.
Always verify the invoice.
Claiming GST Without Supporting Documentation
GST should not be claimed simply because a bank transaction exists.
Supporting documentation is required to support Input Tax Credits.
Ignoring Client Filing Status
Some clients:
- Do not file GST.
- Are exempt.
- Use special reporting methods.
Always understand the client’s filing requirements before selecting tax codes.
Coding Everything the Same
Different purchases often require different tax treatment.
Examples include:
- Meals and entertainment.
- Vehicle expenses.
- Capital assets.
- Professional services.
- Insurance.
- Financial services.
The nature of the purchase determines the tax treatment.
Guessing Tax Codes
Never assume a tax code because a transaction “looks similar.”
Instead:
- Review documentation.
- Review historical transactions.
- Research CRA guidance.
- Ask questions only after reasonable investigation.
Supporting Documentation Requirements
Supporting documentation should identify:
- Supplier
- Purchase date
- Goods or services purchased
- Total purchase amount
- GST charged
- PST charged
- Business purpose
Without sufficient documentation, the correct tax treatment cannot always be determined.
Impact on Financial Statements
Incorrect tax coding affects more than just the GST return.
Errors may also affect:
- Expense accounts.
- Asset values.
- GST payable.
- Balance Sheet accuracy.
- Profit & Loss reporting.
- Year-end working papers.
Accurate tax coding supports accurate financial reporting.
Eagleeye Research Standard
Before selecting a tax code:
- Confirm whether the client is GST registered.
- Confirm whether the client claims ITCs.
- Review supporting documentation.
- Review previous similar transactions.
- Research CRA guidance if required.
- Explain your reasoning before escalating questions.
Our expectation is thoughtful decision-making supported by documentation—not assumptions.
Competency Checklist
Upon completion of this lesson, the Junior Bookkeeper should be able to demonstrate the following competencies:
□ Understands the purpose of GST.
□ Understands the purpose of PST.
□ Explains the difference between GST collected and GST paid.
□ Understands Input Tax Credits.
□ Identifies Out of Scope transactions.
□ Reviews supporting documentation before selecting tax codes.
□ Understands the importance of client GST registration status.
□ Recognizes common tax coding errors.
□ Conducts appropriate research before requesting assistance.
□ Understands how tax coding affects GST returns and financial statements.