The GST has been part of the Canadian tax system for 20 years. The harmonized sales tax (“HST”) is an extension of the GST, administered under the same legislation. The HST is actually the GST levied at a higher rate in harmonized provinces. It is the result of a provincial government agreeing with the federal government to repeal or cease the application of that province’s provincial sales tax, in favour of a single tax, the HST, levied at a rate which is usually the combination of the GST rate and the repealed PST rate.
How does GST/HST work?
The GST/HST is a multi-level sales tax, imposed on a broad range of goods and services at each stage of the sale of a product or service (that is, manufacturing, wholesale, retail). The taxes paid at any stage are deducted from taxes collected (known as input tax credits, or ITCs). For example, a barber would pay GST/HST on scissors purchased to use in the business, but would deduct that amount from GST/HST charged to customers and eventually remitted to the federal government.
The GST or HST is levied in every province and territory of Canada, on the same goods and services. Four Canadian provinces levy a provincial sales tax, at rates ranging from 7% to 10%. Generally, provincial sales taxes are levied on sales of goods in the province, but the rules vary from province to province.
When the tax was originally introduced, the GST rate across Canada was 7%. That rate was reduced, effective July 1, 2006, to 6%, and reduced again, to 5%, effective January 1, 2008. The corresponding HST rates, effective April 1, 1997, were 15%, then 14%, and finally 13%. On April 1, 2013, British Columbia returned to a combination of 5% GST and 7% PST. PEI made the switch to HST, with a rate of 14%.
For GST/HST purposes, all goods and services sold in Canada are characterized as taxable, zero-rated (taxed at a rate of 0%), or exempt goods and services (supplies). For taxable supplies, as the name implies, GST/HST must be charged on sales, and the vendor can claim an ITC on GST/HST paid. Some goods and services are zero-rated (the most common are basic groceries, prescription drugs, and medical devices). For zero-rated supplies, the vendor does not charge GST/HST on sales, but is permitted to recover GST/HST paid on supplies by claiming an ITC. Finally, a number of goods and services (including most health, financial services, many educational services, used residential housing, and child-care services) are exempt from GST/HST. On exempt services, no GST/HST is charged, and the vendor cannot claim an ITC on GST/HST which he or she has paid on purchases relating to the supply of those exempt goods or services.
How do I register for GST/HST?
For most small- and medium-sized businesses in Canada, registration for GST/HST purposes is not optional. Businesses that provide “taxable supplies” (which include most goods and services sold in Canada) and do not fall under the definition of a “small supplier” (generally, a business which had total revenues of $30,000 or less in the last four consecutive calendar quarters) must register for GST/HST purposes.
Although registration for GST/HST purposes means taking on a number of filing and remittance obligations, there is a benefit in that only GST/HST registrants can get back the GST/HST paid on purchases of supplies related to their business, by claiming ITCs.
Registering for GST/HST purposes isn’t difficult. It can be done on the Canada Revenue Agency (CRA) Web site at www.businessregistration.gc.ca, or by paper-filing Form RC1A (BN), Business
Number – GST/HST Information, also available on the CRA Web site at www.cra-arc.gc.ca/E/pbg/tf/rc1a/README.html. Those businesses which do not already have a business number will need to acquire one as part of registering for GST/HST purposes. Information on how to do so is available on the CRA Web site at www.cra-arc.gc.ca/tx/bsnss/tpcs/bn-ne/menu-eng.html.
How to collect GST/HST
It doesn’t seem as though specific information should be required on how to collect a tax, but as is often the case in tax matters, there’s more to it than meets the eye.
Businesses in non-harmonized provinces (Alberta, Saskatchewan, Manitoba, and Quebec) must invoice and collect GST and show provincial sales tax separately. In Alberta, where there is no provincial sales tax, only GST must be levied and collected. In other provinces, GST is charged to the purchaser at a rate of 5%. The rules on calculating provincial sales tax will vary by province, and information on those rules is best obtained from the particular provincial sales tax authorities.
In the “harmonized” provinces, calculating the HST is easier – essentially, a vendor is required to collect and remit HST at the applicable rate on the value of any taxable supplies sold.
In all provinces, a vendor of taxable supplies is required to show the amount of the tax to be levied (whether GST or HST), either on an invoice or contract, or on a display in their place of business. An exception to this applies whereby the vendor may provide the GST/HST on the invoice, by including the tax in the total invoice amount. In this case, it must be stated on the invoice that the GST or HST is included, and if differing rates apply, a statement is necessary to make it clear what the tax is, such that it can be accurately calculated out of the total by the recipient. GST/HST registrants are entitled to recover GST/HST paid on purchases and expenses related to their business activities. Usually ITCs are claimed on the GST/HST return which relates to
the period during which the expenses were incurred.
Claiming input tax credits
There are some general rules respecting the claiming of ITCs. First, such claims can be made only with respect to purchases and expenses which are for consumption, use or supply in the course of
carrying on a commercial activity, which means making taxable or zero-rated supplies. As well, to claim an ITC, the expenses or purchases must be “reasonable” in quality, nature and cost in relation to the nature of the purchaser’s business.
There are a few purchases and expenses for which an ITC cannot be claimed, but many are unlikely to be relevant to a small business registrant.
The earliest that an ITC may be claimed is in the return for the reporting period in which the GST/HST was charged on an invoice received by the registrant. However, ITCs may be claimed on any future return, as long as that return is filed by the due date of the return for the last reporting period that ends within four years after the end of the reporting period in which the ITC could
have first been claimed. Shorter periods, such as two years, apply to certain entities and financial institutions.
The articles posted here provide information of a general nature. These articles should not be considered specific advice; as each vistor’s personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in these articles.
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