GST & HST - An Introduction
GST & HST
The GST is Canada's multi-level, value-added taxing system which has been in effect since January 1, 1991. It is imposed under Part IX of Canada's Excise Tax Act (the ETA), and is administered by the Canada Revenue Agency (the CRA).
The GST is imposed on a comprehensive range of transactions involving goods, services and intangibles called supplies unless these supplies are exempt or zero-rated under Schedules V and VI of the ETA. Unlike other sales taxes, which only levy tax on the consumer or user of the goods/services, the GST is levied on every transaction in the production and distribution chain, generally requiring all suppliers to register for the GST, and charge, collect and remit GST on their taxable supplies.
When first implemented, the GST was 7%, but was decreased to 6% effective January 1, 2006. It was decreased again to its current rate of 5% effective January 1, 2008
Along with the obligations resulting from GST registration, registrants can generally recover the GST paid on their inputs through input tax credits (ITCs), provided the nature of their supplies are taxable (i.e., not exempt). ITC eligibility results in a netting out of the GST remittable, whereby the registrants legitimate ITC claims are subtracted from GST collected, with the registrant either remitting the excess amount collected, or being refunded the excess ITC amount claimed. This ITC mechanism ensures that the ultimate burden of the GST does not exceed 5% and that it remains with the final consumer or user of the taxable good, service or intangible.
Before discussing the special rules for zero-rated and exempt supplies, it is worth noting that a supply of a good, service, or intangible will only be subject to GST to the extent that it first falls within one of the three taxing divisions in the ETA.
The first taxing division (Division II) is the most comprehensive, and applies to supplies made in Canada. By definition, supplies made outside Canada do not come within the scope of the GST and complex rules are found in section 142 of the ETA to help determine whether supplies are made inside or outside Canada.
The second taxing division (Division III) imposes GST on all goods imported into Canada, based on their "value for duty" as determined under the Customs Act.
The final taxing division (Division IV) is generally viewed as a catch-all, and with some exceptions, imposes GST on non-commercial users of services and other intangibles acquired outside of Canada for consumption or use inside Canada. (Remember that goods acquired outside of Canada for consumption or use inside Canada would generally be taxed under Division III when imported to Canada for that consumption of use).
Exempt and Zero-Rated Supplies
As previously indicated, even if a particular supply falls within one of the three taxing divisions, it may still escape tax if the supply qualifies as an exempt or zero-rated supply.
Exempt supplies are specifically enumerated in Schedule V of the ETA.
Zero-rated supplies are specifically enumerated in Schedule V of the ETA.
While both "exempt" and "zero-rated" supplies result in no tax being charged to or paid by the purchaser of the particular supply, there are important differences between the two classifications. The essential difference between the two relates to the ITC treatment afforded to the supplier.
In the zero-rated situation, the supply made by the supplier is still considered a taxable supply albeit at a rate of 0% which means that the supplier is entitled to full ITCs on its inputs. (Examples of zero-rated supplies include basic groceries, prescription drugs, and virtually all exports. ) In contrast, exempt supplies are considered "non-commercial", which means that the supplier of an exempt supply is generally precluded from claiming any ITCs for GST paid on its inputs (i.e., the goods, services, and intangibles acquired by the supply in order to be able to make its "exempt" supplies). For example, suppose a company provides exempt medical testing; if it requires a taxable computer system to generated the medical tests, and pays GST on that, it will not be able to recover that GST by way of ITC, since the computer was acquired for the purposes of making "exempt" supplies of the medical tests). Accordingly, and in the "exempt" supply context, even though the consumer appears to pay no GST on the particular supply, there will generally always be an element of GST incorporated into the price the consumer pays for the particular good or service. (Examples of exempt supplies include, most notably, financial services and used residential housing.)
As of April 1, 1997, the provinces of Nova Scotia, Newfoundland and New Brunswick harmonized their provincial retail sales taxes with the GST. Ontario and British Columbia also harmonized their provincial retail sales taxes with the GST effective July 1, 2010; however British Columbia subsequently reverted to its old system effective April 1, 2013.
The result of the harmonization is an additional provincial Harmonized Sales Tax (HST) being levied under the ETA on goods and services supplied in these harmonized provinces.
This is over and above the application of the 5% GST component, resulting in a total value-added tax in these provinces of between 13% and 15% - depending on the province. The HST rules generally parallel those for the GST and, before the HST applies, the supply must first fall within one of the three main taxing divisions described above. Once it is determined that GST applies, there are additional place of supply rules that must be considered to determine whether HST applies, particularly, whether the supply is made in a harmonized province. For the most part, the HST place of supply rules are significantly different from their GST counterparts and are contained in Schedule IX of the ETA.