Depending on where your business is located, GST rates can vary from 5% to 13% of all taxable supplies that your company purchases. For startups that expect to be in a loss position for a year or 2 after incorporation, that can mean a significant amount of cash donated to the federal government as a kind of ‘voluntary tax’ .
The problem is that registration isn’t automatic when you incorporate a company. In fact, until you’ve earned $30,00 in revenue you’re not required to register.
For many early stage companies they may spend 2 or 3 years burning through their equity to build a new product or service. If they don’t explicitly register for GST, they won’t be able to recover the 5% (or more) of expenditures paid to contractors and to purchase other services and supplies. In fact we recently completed 3 years of filings for a BC-based company that spent some $300K in developing new technology. Because they weren’t registered – at least not until we became involved – they lost almost $25K in recoverable GST.