Businesses are increasingly falling behind on remitting federal sales tax, a sign of financial distress as companies grapple with the pandemic and supply chain problems.
According to the Canada Revenue Agency, the total GST and HST debt to the government was $14.3-billion in September, 2021, an increase of 24 per cent over the $11.5-billion owed in March, 2020, when pandemic restrictions began.
The debt was calculated based on notices of assessment and reassessment the CRA had mailed out, and could be larger in reality because the agency has also noticed a drop in the number of returns that have been filed.
The CRA said there were approximately 105,000 fewer sales-tax filers in 2020-21 than the year-earlier period, and it had received about 500,000 fewer returns. (Most businesses file returns once a year or after every quarter, though some larger companies remit every month.)
Fred O’Riordan, EY Canada’s national leader on tax policy and a former executive at CRA, reviewed the data and pointed out the largest drop in returns was from quarterly remitters, who are those making between $1.5-million and $6-million in annual taxable income from goods and services.
“They’re not tiny,” Mr. O’Riordan said. “But they’re big enough that they’re probably experiencing supply chain problems … perhaps they’ve extended credit to customers and they’ve got bad debt accumulating themselves.”
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The data cover all provinces, including those that have a Harmonized Sales Tax, such as Ontario, and those that have separate provincial and federal sales taxes, such as British Columbia.
The data also provide a window into some businesses’ finances. One odd feature of the pandemic’s effect on the economy has been the stubbornly low number of insolvencies, despite widespread lockdowns and sharp revenue drops for many businesses.
The number of bankruptcies in the 12 months ending March 31, 2021, was 30,701 – nearly half of the 55,704 bankruptcies filed in the year ending March 31, 2020, which was on par with previous years.
Frances Woolley, an economics professor at Carleton University, said the CRA’s sales tax figures may indicate a change in the level of business activity that is not being measured by bankruptcy statistics.
“Not all companies that go out of business declare bankruptcy – some small companies may just stop operating,” Prof. Woolley said in an e-mail.
The main theory from economists and business leaders to explain the discrepancy between bankruptcies and revenue decline is that government support programs propped up indebted companies and staved off insolvency filings, though the growing sales-tax debt suggests not all that money has flowed to creditors.
Scott Terrio, manager of consumer insolvency at Hoyes, Michalos & Associates Inc., said he has seen many of his small-business clients in Ontario, such as restaurant owners, struggle with unpaid sales-tax bills that are often in the range of between $50,000 and $150,000.
He said some business owners who are struggling with bills may tap into the sales taxes they’ve collected because, unlike going to a bank for a loan, they already have the money on hand. And while it may initially be a short-term strategy for the owner, it will become a long-term problem if the money is not paid back.
“It is very typical of small business enterprises that are struggling,” Mr. Terrio said. “Maybe they first draw on their line of credit, but that carries interest and you’ve got to pay it back. You’ve got to pay HST and [payroll deductions] back, too, but they don’t always think that way.”
Mr. Terrio said that while the CRA extended deadlines early in the pandemic, their collections activity has ramped up in recent months.
EY Canada’s Mr. O’Riordan said that for some struggling businesses that have already reported and remitted their sales tax for amounts that later became bad debt, the CRA has options to write the amounts off to reduce future sales-tax owed.
The federal government collected a total of $37.4-billion from the GST in the 2019-20 year, according to Finance Department figures.
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Chris Hannay