Issue/Symptom/Question

How do you manage sales tax on purchases and customer billings for work performed in Canada?

Applies To

PENTA for Windows → Purchasing → Purchase Orders - Grid Option

PENTA for Windows → Accounts Payable → Invoices → Invoice & Credit Memo Entry

PENTA ECM → AP Routing → Invoice Distribution

PENTA for Windows → Project Management → Owner Contract Information → Contract Information

Resolution/Fix/Answer

Canadian sales tax is a value added tax, meaning the amount remitted to the governing authority is the net difference between the taxes paid on purchases and the taxes collected on customer billings. PENTA’s Sales & Use Tax module is designed to manage US based sales and use taxes and is not applicable to Canadian taxes. The primary difference being: in the US the sales tax paid on purchases is recorded as an expense (ex. cost on a job) whereas in Canada the tax paid on purchases is not recorded as an expense rather accrued on the balance sheet and used to offset sales tax collected on customer invoices. 

The following describes how to manage Canadian HST/GST/PST taxes in PENTA.

This example assumes a harmonized tax rate (HST) of 13% (which can differ from province to province). Harmonized tax rate means a combination of GST and PST tax rates.

Organization Unit Setup

Because all transactions are to be treated as non-taxable for treatment by the US Sales & Use Tax module (assumption is this option is active in the database) mark the Canadian balance sheet organization unit as Non-Taxable

Job Types

Because all transactions are to be treated as non-taxable for treatment by the US Sales & Use Tax module mark Jobs as Non-Taxable (can default from the Job Type):

Purchasing

When recording a Purchase Order in PENTA it will be necessary to add a line item for the Canadian tax amount.  After entry of the line items detailing the materials being purchased add a line item for the HST tax:

• determine the tax amount by multiplying the PO Subtotal amount (lower right hand corner) by 13% to determine the HST tax amount. If the total PO amount is not subject to HST it will be necessary to manually sum the amounts of the taxable line items before applying the 13%.
• down arrow to add a new line item
• delete the Job Id that defaults into the new line item (assuming the PO is job related), this opens the OU and Account Number fields for entry
• enter the HST tax amount in the Amount field
• enter the balance sheet OU Id in the OU Id field
• enter the HST tax account in the Account Number field (note the HST account needs to be setup as an account type of “L” liability)

Accounts Payable Entry

When processing vendor invoices for purchases made in Canada the HST tax will be posted as a separate distribution on the AP invoice entry.

AP Invoice & Credit Memo Entry

Purchase Order Distribution

Document tab:

• When entering the invoice total values do not enter the HST amount in the TAX-Amount field (this is specific to US Sales & Use Tax functionality)
• Enter a currency for Canadian dollars (CAD in this example)

PO Distribution tab:

• Post entries for the non-HST tax amounts – standard AP PO distribution entries

• Post the entry to the HST tax line item

• If you select the "Distr Detail" button on the bottom of the tab and arrow down to the HST line item you will see that PENTA is posting the entry to the HST account

Job Distributions – No Purchase Order

For AP invoices that are job related that are not linked to a purchase order the following steps should be followed:

• Job Distribution tab:
  • Post the entries to the Job / Cost Type / Cost Code as normal

• After posting the entries to the job navigate to the Account Distribution tab to enter the HST tax amount:
  • Post the entry to the balance sheet OU
  • Post the entry to the HST accrual account
  • Enter the amount of the HST tax in the Distribution Amount field

OU/Account Distributions (SG&A) – No Purchase Order

For AP invoices for overhead expense that are not linked to a purchase order the following steps should be followed:

• Account Distribution tab:
  • Enter the OU / Account distribution required to record the expense of the invoice
  • Include an additional distribution for the HST amount (see instructions above for the HST entry for a job cost distribution not linked to a purchase order).

AP Invoice Processing via AP Routing

The primary difference when using AP routing is PENTA allows for the identification of the Canadian sales tax accrual account when creating the AP routing forms:

For invoices not tied to a purchase order, PENTA automatically creates the entry to the HST accrual account and eliminates the need for the user to create this additional distribution. See the steps below.

 When completing the AP Routing form enter the amount of the HST/GST/PST tax amount in the GST Amount field in the invoice header record.

• When distributing the invoice against the job, overhead accounts, etc. do not enter a distribution for the HST amount
• PENTA will automatically create the OU / account distribution for the HST amount to the account assigned in the Form configuration (pictured above - Control Form - AP Routing)

For the distribution of an AP invoice to a purchase order where a separate PO line item has been created for HST  do not enter a value in the GST amount field, instead distribute the HST to the PO line item as you normally distribute amounts to PO line items.

Managing Canadian Tax on Customer Billings

To establish the rules for including HST on a job billed through PENTA use the Contract Information window to setup an HST line item:

• The line must be a Cost Plus line item type
• Add a line item number that is numbered higher than the other line items on the job
• The Line Item Type Cost = “T” for Tax
• Enter the HST tax rate in the Line Item Based % field

• Select the Accounts button to map this line item to the HST accrual account:
  • Enter the HST accrual account in the Sales account field, PENTA will post a credit to this account when the billing is generated.

• Navigate to the Line Item Basis tab and cross-reference the HST tax line items to the other line items on the job the tax applies to:

When generating an invoice via PENTA’s automated invoice process PENTA will calculate the applicable HST amount and post the credit to the HST accrual account.

When recording a manual billing entry in PENTA record an entry to the HST tax line item on the Lump Sum / CP tab of the Manual Billing entry window.