Source Deduction vs GST

At a Glance

Businesses are required to put aside a certain portion of an employee's paycheque and remit to the Canada Revenue Agency. This amount is called a source deduction and is submitted to the CRA on behalf of an employee.

The Goods and Services Tax (GST) is a 5% tax on Canadian goods and services. However, not all provinces charge the GST. With the exception of British Columbia, Alberta, Saskatchewan, and Manitoba, all other Canadian provinces use the HST which is a combination of the GST and provincial sales taxes.

Simplified Examples

Source Deduction:
Jay, a real estate agent, earns a monthly income of $5,000. His employer, a BC-based relator, deducts certain amounts from his pay as follows:

Basic Pay: $5000

Less Deductions:
Federal tax deduction $595
Provincial tax deduction $235
CPP deductions $242
EI deductions $71
Total deductions: $1,143

Jay's Take Home/Net Income: $3,857

Victoria Realtors sells a condo for $100,000. They are registered for GST and are required to remit the amount to the CRA. How should they go about recording their sale for the unit?

Unit price: $100,000
GST rate (5%): $5,000
Final unit price after tax: $105,000
Customers of Victoria Realtors will part with $105,000 for the unit

What the two taxes mean for business owners

Canadian businesses are required by law to deduct certain amounts from an employee's pay. Similarly, depending on the nature of your goods and services, you're required to charge GST on your items.

These amounts are filed and submitted to the CRA failure to which a business can incur hefty fines and penalties.

To ensure that your FST is calculated accurately, make sure that you properly document your purchases and sales receipts. For source deductions, you want to make sure that you religiously follow your provincial or territorial employment standards. Alternatively, you can use an updated tax calculator or seek the services of an accountant.