Canadian Sales Tax: 3 Reasons Why Companies Overpay

“We’ve got it all covered, thanks,” is what companies usually tell us regarding the “Reverse Audit of Canadian Sales Tax (GST/HST).” Unfortunately, that’s a common misconception. Another common misconception is that companies can complete and file Canadian sales tax returns on time with 100% compliance and credit maximization. 

When things are going great, it’s easy to assume that no money falls off the table. The reality is that most companies who sell goods and services in or to Canada are unknowingly paying the incorrect amount of Canadian sales tax for a very long time, and therefore are paying the ultimate price of forfeiting additional savings.  

Why Sales Tax Overpayments Happen

Inadequate Tax Knowledge & Compliance

There is an inadequate communication of tax rules and regulations provided by the Canada Revenue Agency (CRA). Consequently, the personnel performing the tax accounting functions are ill-informed to take advantage of all the eligible refunds and credits.  Conversely, this also leads to poor compliance, which exposes the company to tax assessments, with interest and penalties when audited by the tax authorities.

System Errors

Because of incorrect system configurations, A/P system errors or general system errors result in wrong tax percentages being captured on input tax credits and sales transactions. These errors are then reflected in the company’s monthly tax returns.

Human Errors

Human errors occur because there is a need to rapidly process a large volume of A/P and sales invoices.  These errors result in input tax credits missed or captured incorrectly, and sales recorded incorrectly. Naturally, human errors are magnified by inadequate tax knowledge and system errors.

Often, these compliance errors result in significant overpayments of taxes that erode the companies’ bottom line.

Today, companies realize that regularly implementing a reverse audit strategy to identify and reclaim overpayments in Canadian sales taxes is a pro-active way to be more profitable. Moreover, they consider sales tax compliance, and they mitigate the risk of further costs arising in the form of reassessment and penalties.

What is Canadian Sales Tax Audit?

Recovery Scope

A GST/HST registered company, including an American Non-Resident Importer (NRI) can retroactively recover the GST up to four (4) years.

From our 30+ yrs experience in conducting Reverse Audits of GST for our clients we have found that:

  1. Company accountants never do any recoveries of their own errors or omissions;
  2. 85% of the time the tax is overpaid on monthly GST tax returns;
  3. At least two (2) significant input issues are missed by most US companies.

Companies Most Likely to Benefit from a Reverse Audit

Canadian and American companies that sell goods and services in or to Canada, who may or may not be registered for GST/HST, are entitled to a reverse audit and recovery of overpaid Canadian sales taxes.

In Canada, it is common practice to conduct a reverse audit every two (2) years to identify errors that lead to overpayments of GST/HST.

In the USA, companies who are not registered for GST/HST, but are selling to Canada, may also be missing out on the possibility of recovering the GST costs associated with the importation and clearing of their goods via a customs broker for their customers based in Canada.

A 3-Phase Reverse Audit Process

Our reverse audit goal is to maximize all eligible refunds while ensuring compliance. With this in mind, our specialists perform a non-intrusive comprehensive review of all Canadian A/P, Canadian sales transactions, and Canadian sales taxes paid to identify recovery opportunities.           

Phase 1

We commence our review by analyzing all the purchase and sales data and reconciling the monthly tax returns.  Compliance knowledge and human errors, such as over and underpayments, missed input tax credits, incorrect currency conversion, and other issues such as various discounts and deposits, are then investigated, confirmed, documented, and supported for refund purposes.

Phase 2

Next, we identify system errors in the form of incorrect tax percentages being captured on transactions, as a result of the incorrect system configuration. This regularly occurs as a result of miscommunication between parties filing the tax returns and those calibrating the accounting systems.

Phase 3

Lastly, our comprehensive audit applies an extra audit layer to find additional recoverieswith a focus on special proprietary issues outside of the regular accounts payable A/P input tax credits.

Once the audit is complete, a detailed written report is provided outlining the results which identify the areas of opportunity.

Upon client approval, our consultants prepare and file all refund claims with the tax authority and await approval of the refunds.

Our end-to-end service includes the management of all claims from start to finish and we work directly with the Canadian tax authorities should they have any questions regarding the refund claims.

Important Events That Urgently Calls for a Reverse Audit

Almost all companies believe that they have the right people and proper processes in place to maximize refunds and avoid overpayments. Yet, we find significant errors and omissions in 90% of our reverse audits.  Any of the following business conditions provide an especially good reason and opportunity to conduct a reverse audit of Canadian sales tax. These are:

  • New changes to the Canadian sales tax rules and regulations
  • Recent organizational and/or staff turnover presenting training issues
  • Implementation of system upgrades or new technology where system gaps or limitations may be present
  • Recent acquisitions, expansions, and mergers, where systems are not integrated and erroneous/missed input credits are made across multiple corporate entities
  • Multiple suppliers and disbursement locations such as duplicate vendors resulting in duplicate payments

There comes a time when companies are forced to make difficult decisions to find additional savings needed to expand, remain competitive, or even stay afloat. Getting additional financing or reducing budgets may provide some relief, but it might not be enough.

Conducting a “Reverse Audit of Canadian Sales Tax (GST/HST)” is an excellent complementary source for companies to tap into for significant additional savings to achieve their organizational goals!

For more information on our Canadian Sale Tax Recovery Audit Services please contact us at info@pmbusinessadvisors.com

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