A practical bookkeeping guide for Canadian Shopify stores.
One of the biggest challenges for most Shopify stores and businesses is understanding how GST, HST, PST, and QST aligns with the tax obligations recorded in QuickBooks or Xero. For growing Shopify businesses, small discrepancies can quickly escalate; therefore, properly reconciling these amounts is crucial.
While Shopify reports provide an excellent overview and help identify the source of these figures, they do not always translate directly into your accounting software. That is why it is important to understand how Shopify sales tax can impact your accounting records.
This blog aims to provide a clear distinction and understanding of how to reconcile sales tax in QuickBooks or Xero for Canadian Shopify businesses.
1. Start with Shopify’s Canada Sales Tax Report
If you’re trying to figure out how to reconcile your sales taxes in Shopify with your accounting software, the first place to start is Shopify’s Sales Tax Report. This report provides a summary breakdown of sales tax by province and tax type. This detail allows you to drill down the tax liabilities as well as the sales associated with sales tax.
For bookkeeping purposes, you need to treat this report as your starting point for your reconciliation. Export the report for the same period you’re reconciling in QuickBooks or Xero. Keep the date range consistent with the reporting period you’re reviewing. Depending on how your sales are imported in QuickBooks or Xero, you can match each transaction on the report to the sales taxes recorded in your accounting software. If they both match, congratulations! You’ve reconciled your sales tax. If they don’t match, you still need to dig in to further investigate.
2. Separate Tax Liabilities
Certain provinces do not only collect GST or HST alone. There are a few provinces that collect PST as well as QST, and require separate registration, filing, and remittance requirements.
On your sales tax report, these have been cleverly separated for you. The same should be the case in your accounting software. Clumping all the sales tax together in one account will make it difficult for you to file sales taxes in the future.
Of course, there are exceptions. GST and HST are submitted to the same agency (CRA) and therefore those can be clumped together. However, PST and QST are only filed provincially and therefore need to be separated. This means in your accounting software you should have at most three accounts that clearly show the sales tax collected: GST and HST in one, PST in another, and QST in a third account. This makes it that much easier to reconcile your sales tax using the sales tax report and make any changes accordingly.
Luckily, accounting software like QuickBooks or Xero make it easy to separate sales tax by jurisdiction and province so you don’t have to. Contact Paperless Books on how to get this set up.
3. Reconcile Shopify to Quickbooks or Xero
Reconciling your Shopify sales tax to your accounting software sales tax involves looking at the two and making sure they match. Here are a few things you can look at to make sure that your Shopify sales tax matches with your figures in QuickBooks or Xero.
- Gross and net taxable sales recorded from Shopify.
- GST/HST collected according to Shopify versus the GST/HST recorded in the accounting file.
- PST and QST collected versus their corresponding liability accounts.
- Tax adjustments caused by refunds, returns and cancelled orders.
- Tax collected on shipping, where applicable.
- Any manual tax adjustments, exemptions or overrides.
Here’s where it gets tricky. If the totals do not agree, don’t simply post an adjusting entry to force the balance to match. Instead, look at the reason why there are differences. This is because you want to make sure that each sale is accounted for and each sale that collected or did not collect sales tax is also accounted for. This allows you to have a more accurate and better report when filing your sales taxes. Not doing so could mean that the same errors could repeat each and every month.
4. Pay Special Attention to Refunds
Refunds are common cause of confusion when it comes to sales taxes. Shopify’s sales tax report shows a reduction in the relevant tax line when a sale with tax is refunded. The detailed version of the reports shows the refunded line separately. Your accounting software does not need to show the refunded line separately. However, the refunds do need to be reflected in your accounting software.
In your Shopify account, when you’re recording sales taxes associated with refunds, check against the exact sale the refund occurred in. This will allow you to also pinpoint and record accurately the refunded sales tax in your accounting software. This is especially important for stores with high return rates such as apparel, footwear, and other size-dependent products.
5. Don’t Confuse Sales Tax Collected with Sales Revenue
There are many instances where taxes are included in the sales amount, and in such a case, it becomes harder to separate the two. It is important to note that sales taxes collected from customers are generally amounts collected for a tax authority and should not be recorded as additional store revenue.
If your Shopify business has the habit of collecting sales tax and combining it with the sales revenue and recording that into QuickBooks, you can create a lot of confusion. Recording sales tax with revenue in QuickBooks or Xero, can make sales and tax liabilities misleading.
When entering your sales and your sales taxes in QuickBooks, it is important to have accounts that clearly separate the two. Remember, sales revenue are part of the profit and loss statement, whereas sales taxes are only to be included in the liability section of the balance sheet. Understanding this concept makes it that much easier to enter your sales taxes from Shopify into your accounting software.
6. Compare the tax return to the books before filing
Before filing, reconcile the return back to the accounting ledger. For GST/HST, this includes considering eligible input tax credits on business purchases and expenses in addition to tax collected on sales. The CRA requires registrants to maintain records that support the amounts reported.
The key question is not simply, “Does Shopify calculate tax?” It is, “Can I explain why the amount I am filing agrees with my underlying sales, refunds, expenses and tax accounts?”
A simple monthly Shopify tax reconciliation checklist
- Export the Shopify Canada sales tax report for the period.
- Confirm sales and refunds agree with the Shopify amounts posted to the books.
- Compare GST/HST collected with the GST/HST liability in QuickBooks or Xero.
- Compare PST and QST separately where the store is registered to collect them.
- Review refunds, shipping tax, exemptions and manual adjustments.
- Investigate unexplained differences instead of forcing an adjustment.
- Reconcile the final tax return to the general ledger before filing.
The bottom line
Shopify can calculate and report Canadian sales tax, but it does not replace the bookkeeping reconciliation behind the return. As a store grows across provinces, the number of transactions, refunds and tax jurisdictions makes small posting errors harder to spot.
A consistent monthly reconciliation between Shopify and QuickBooks or Xero gives you cleaner books, more reliable tax liabilities and a clearer trail when it is time to file GST/HST, PST or QST returns.
Need help reconciling Quickbooks for your Canadian Shopify store? Contact Paperless Books today.