A Guide to the Canadian Goods and Services Tax (GST)

The Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) are essential components of Canada’s tax system. These taxes directly impact businesses and consumers alike, making it crucial for entrepreneurs to understand their implications. In this article, we’ll delve into the basics of Canada’s GST/HST, explore their history, and discuss how they affect the tax liability of businesses.

GST/HST Basics

The Goods and Services Tax (GST) is a federal value-added tax (VAT) levied on most goods and services sold in Canada. The GST rate is currently set at 5%.

The Harmonized Sales Tax (HST) is a combined federal-provincial tax that incorporates both the GST and the Provincial Sales Tax (PST) of participating provinces. HST rates vary by province, ranging from 13% to 15%.

Presently, five provinces (Newfoundland and Labrador, New Brunswick, Nova Scotia, Ontario, and Prince Edward Island) have implemented the HST. In these provinces, businesses collect HST instead of separate GST and PST. In provinces that do not participate in the HST system, businesses collect GST and, if applicable, the PST levied by the province.

Broad Overview

Part IX of the Excise Tax Act outlines the legal definition of the Goods and Services Tax (GST). This tax applies to the purchase of goods and services in Canada, covering most items except for specific essentials like groceries, residential rent, medical services, and some financial services. Businesses can claim “input tax credits” for goods and services consumed, used, or supplied during their “commercial activities,” provided they meet the necessary documentation requirements.

When remitting the collected GST to the Canada Revenue Agency, businesses can deduct the GST paid during that period to prevent “cascading” or repeated taxation of the same good or service at different stages before reaching the end consumer. Ultimately, the final consumer bears the tax burden.

However, this system isn’t foolproof, as evidenced by fraudsters exploiting it by claiming GST input credits for non-existent sales from fictitious companies. Goods exported from Canada are “zero-rated,” (these goods and services are still considered taxable, but no tax is applied to their sale, effectively making the tax rate 0%)  and low-income individuals may be eligible for a GST rebate calculated alongside their income tax.

History of GST/HST

The GST was introduced in Canada on January 1, 1991, by the federal government under Prime Minister Brian Mulroney. The tax was designed to replace the hidden and complex Manufacturers’ Sales Tax (MST) of 13.5% and streamline the tax collection process. The introduction of the GST was met with considerable opposition, but it has since become an integral part of Canada’s tax system.

The HST was introduced in 1997 when the provinces of Newfoundland and Labrador, Nova Scotia, and New Brunswick opted to harmonize their PST with the federal GST. The aim was to simplify the tax system, reduce administrative costs, and improve the competitiveness of businesses in these provinces. Over time, other provinces have also adopted the HST system.

GST/HST and Business Tax Liability

The GST/HST impacts the tax liability of businesses in several ways:

1. Registration: Businesses with annual taxable revenues exceeding $30,000 must register for a GST/HST account. This threshold applies to both goods and services sold within a single province and those sold across Canada. Smaller businesses with revenues below this threshold can voluntarily register.
2. Collection and Remittance: Registered businesses are responsible for collecting the applicable GST/HST on their sales and remitting the collected amounts to the Canada Revenue Agency (CRA). Businesses must track and report their sales, along with the corresponding GST/HST amounts, on regular tax returns filed with the CRA.
3. Input Tax Credits (ITCs): To avoid double taxation, businesses can claim ITCs for the GST/HST paid on eligible business-related expenses. This allows businesses to recover some of the taxes paid on inputs, effectively taxing only the value added by the business. ITCs help reduce the overall tax liability of businesses and encourage compliance with the tax system.
4. Compliance: Businesses must adhere to the GST/HST reporting and remittance requirements set by the CRA, including filing deadlines and record-keeping rules. Failure to comply can result in penalties, fines, or audits.
5. Interprovincial Sales: Businesses engaged in interprovincial sales must be aware of the different tax rates and regulations across provinces. While the GST applies uniformly across Canada, the HST rates and PST rules vary by province, impacting the tax liability of businesses operating in multiple jurisdictions.

Understanding Canada’s GST/HST system is crucial for businesses to effectively manage their tax liability and comply with federal and provincial regulations. By familiarizing themselves with the basics of the GST/HST, their history, and their impact on tax liability, entrepreneurs can make informed decisions and develop sound tax strategies for their businesses.

In addition to navigating the complexities of the GST/HST system, businesses should also consider consulting with tax professionals who can provide tailored advice and guidance. This can help ensure that businesses are maximizing their input tax credits, accurately reporting sales, and remitting the correct amount of GST/HST to the CRA.

By staying compliant with the GST/HST system and implementing best practices, businesses can reduce their tax liability, minimize the risk of penalties, and focus on growing their operations.

In conclusion, the GST/HST system plays a significant role in Canada’s tax landscape, impacting businesses and consumers alike. By gaining a solid understanding of the GST/HST and its implications, entrepreneurs can better position their businesses for long-term success and financial stability. As Canada’s tax system continues to evolve, staying informed about the latest changes and adapting to new regulations will be crucial for businesses looking to thrive in a competitive market.

At Taxvisors, we are committed to delivering holistic tax and accounting services that empower Canadian businesses to flourish. Our devoted team of professionals is at your side during tax season and beyond, providing unwavering support. Get in touch today to discover more about our offerings and how we can assist your business in reaching its financial objectives.