Taxation is a necessary source of money for a government to run a state. It helps in the development and upliftment of the citizens. There are various kinds of taxation that different countries follow. However, GST is one such tax that is followed by 175 counties as of 2023.
Different countries have implemented GST in their own distinct ways. Similarly, Canada’s taxation policy follows a GST HST structure. It is a consumption tax that is levied on the majority of products and services in Canada. This tax is also levied on the final sale of tangible personal property and real estate.
If you have a budding business in Canada and do not know much about GST HST, consider reading the article below.
What are the Types of Tax Rates in Canada?
The GST/HST are the primary consumption taxes applied at the federal level in Canada. Understanding the types of tax rates is crucial for businesses to charge and remit taxes to the Canada Revenue Agency (CRA) accurately.
Tax rates might differ based on the nature of the supplier and the region or territory where the transaction takes place.
1. Standard Rate
The standard rate is the most common tax rate and applies to most taxable goods and services. As of my last knowledge update in January 2022, the standard rate for GST is 5%.
However, in some provinces and territories, the HST, which combines the federal GST with a provincial component, is used. Provinces that use the HST have their own specific rates.
2. Zero Rate
Zero-rated supplies are taxable supplies subject to a 0% GST/HST rate. Although businesses charge the tax at a zero rate, they are entitled to claim Input Tax Credits (ITCs) on the GST/HST paid for inputs used to make these supplies.
Examples of zero-rated supplies include basic groceries, prescription drugs, and certain agricultural and fishery products.
3. Exempt
Exempt supplies are not subject to GST/HST, and businesses cannot charge these taxes on exempt goods and services. Additionally, businesses cannot claim ITCs for inputs used to produce exempt supplies. Examples of exempt supplies include certain healthcare, educational, childcare, and financial services.
3. Provincial and Territorial Variations
The provinces and territories have the authority to set their own rates for the provincial component of the HST. Some provinces may have a different rate for specific goods and services or a different rate altogether.
4. Transitional Tax Adjustments
Transitional tax adjustments may apply in certain situations, such as the sale of real property or capital property, where the tax treatment changes due to a change in use or ownership.
6. Special Cases
Some goods and services may qualify for special tax treatment. For example, certain Indigenous goods and services may be eligible for tax exemptions.
What are the Applicable Tax Rates in Each Province of Canada?
In Canada, income and sales tax rates vary depending on your province or territory. Here’s a detailed breakdown of the applicable tax rates in each province:
| Province | Federal Income Tax | Provincial Income Tax | Combined Income Tax | GST | HST | PST | Carbon Tax |
| Alberta | 15%-33% | 0% | 15%-33% | 5% | 0% | 0% | $30 per tonne |
| British Columbia | 15%-33% | 5.5%-7.7% | 20.5%-40.7% | 5% | 0% | 0% | $30 per tonne |
| Manitoba | 15%-33% | 5.8%-11.7% | 20.8%-44.7% | 5% | 0% | 0% | $30 per tonne |
| New Brunswick | 15%-33% | 9.75% | 24.75%-42.75% | 5% | 15% | 0% | $30 per tonne |
| Newfoundland and Labrador | 15%-33% | 5.75%-13.25% | 20.75%-46.25% | 5% | 15% | 0% | $30 per tonne |
| Northwest Territories | 15%-33% | 0% | 15%-33% | 5% | 0% | 0% | $30 per tonne |
| Nova Scotia | 15%-33% | 15% | 29.5%-48% | 5% | 15% | 0% | $30 per tonne |
| Nunavut | 15%-33% | 0% | 15%-33% | 5% | 0% | 0% | $30 per tonne |
| Ontario | 15%-33% | 0% | 15%-33% | 5% | 13% | 0% | $30 per tonne |
| Prince Edward Island | 15%-33% | 9.5% | 24.5%-42.5% | 5% | 15% | 0% | $30 per tonne |
| Quebec | 15%-33% | 7.75%-16.93% | 22.75%-49.93% | 5% | 0% | 0% | $30 per tonne |
| Saskatchewan | 15%-33% | 6%-11% | 21%-44% | 5% | 0% | 0% | $30 per tonne |
| Yukon | 15%-33% | 0% | 15%-33% | 5% | 0% | 0% | $30 per tonne |
How Does GST/HST Work?
The Goods and Services Tax and Harmonised Sales Tax system in Canada requires GST/HST registrants to charge and collect tax on taxable supplies made within the country. Registrants file regular GST/HST returns to report the collected tax.
Exceptions include certain real property transactions where the purchaser pays the tax directly to the Canada Revenue Agency (CRA) and cases such as selling a business under specific conditions.
GST/HST registrants can claim Input Tax Credits (ITCs) on their returns to recover the GST/HST paid on purchases and expenses used in commercial activities. For taxable supplies, registrants charge and remit the GST/HST, while for zero-rated supplies, they don’t collect tax but can still claim ITCs. Exempt supplies, on the other hand, do not involve charging or collecting GST/HST, but ITCs cannot be claimed.
When filling out GST/HST returns, registrants deduct their ITCs from the total tax charged, resulting in a net tax amount. If the tax charged exceeds the ITCs, the difference is remitted to the CRA. If the ITCs exceed the tax charged, registrants can claim a refund. This system ensures proper taxation on various supplies and allows businesses to recover taxes paid on inputs used in their operations.
Factors That Determine the GST/HST Rate
The determination of the Goods and Services Tax or Harmonised Sales Tax (HST) rate in Canada is contingent upon several key factors that businesses must consider when charging customers. These factors ensure that the appropriate tax rate is applied based on the nature of the supply, the transaction’s location, and the customers’ characteristics. Here are the main factors influencing the GST/HST rate:
1. Type of Supply
The nature of the goods, services, or intangibles being supplied is a critical factor. Different tax rates may apply based on the categorisation of supplies, such as taxable, zero-rated, or exempt.
2. Location of the Supply
Where the supply is made, specifically the customer’s shipping address or the place of consumption, plays a crucial role. Provinces and territories in Canada may have varying HST rates, and the location helps determine whether the federal GST, provincial HST, or a combination of both applies.
3. Recipient of the Supply
The type of customer receiving the supply influences the tax rate. For instance, certain supplies made to specific entities, like certain Indigenous groups or public institutions, may be subject to specific tax treatments or exemptions.
Who is a Small Supplier?
A small supplier in the context of Goods and Services Tax (GST) or Harmonised Sales Tax (HST) in Canada refers to a sole proprietor, partnership, or corporation whose total taxable revenue, before expenses, is $30,000 or less annually. To determine small supplier status, businesses must consider worldwide revenues from sales of goods and services subject to GST/HST, including zero-rated supplies and sales, as well as income from associates. Exclusions from this computation may include financial services, goodwill, and sales of capital property.
It’s important to note that the small supplier definition does not universally apply to all businesses. Certain types of businesses, such as taxi and limousine operators, as well as non-resident performers selling ticket admissions to seminars, performances, or events, are exceptions.
These businesses are required to register for GST/HST regardless of whether their taxable revenue before expenses fall below the $30,000 threshold in the last four consecutive quarters.
Understanding whether a business qualifies as a small supplier is crucial, as it determines the obligation to register for a GST/HST account with the Canada Revenue Agency (CRA).
Businesses meeting the small supplier criteria may choose not to register for GST/HST voluntarily, while those exceeding the threshold must register and comply with tax obligations.
Who Should Register for a GST/HST Account?
In Canada, the requirement to register for a GST/HST account is determined by the Canada Revenue Agency (CRA) and is primarily based on the level of taxable revenue generated by a business. Here’s a guideline on who should register for a GST/HST account:
1. Businesses With Taxable Revenue Exceeding $30,000
Most Canadian businesses are obliged to open a GST/HST account if their taxable revenue before costs reach $30,000 in the previous four calendar quarters. Taxable revenue includes the total revenue from taxable supplies made in Canada, excluding zero-rated and exempt supplies.
2. Public Service Bodies (Non-Profit Organisations, Charities, Colleges, Hospitals, etc.)
Public service bodies, such as charities, colleges, non-profit organisations, and hospitals, have a higher threshold. They must register for a GST/HST account once their taxable revenue before expenses exceed $50,000. This threshold is higher than the one applicable to most other businesses.
3. Voluntary Registration
Even if a business does not meet the revenue thresholds mentioned above, it can choose to voluntarily register for a GST/HST account. Voluntary registration allows businesses to claim input tax credits (ITCs) on purchases and may be beneficial for those operating in industries where customers expect GST/HST on invoices.
4. Importers of Goods into Canada
Businesses that import goods into Canada, regardless of their revenue, are generally required to register for a GST/HST account. This ensures compliance with tax obligations related to imported goods.
How to Start Charging and Collecting GST/HST?
Starting to charge and collect Goods and Services Tax (GST) or Harmonised Sales Tax (HST) in Canada involves numerous steps to ensure compliance with the Canada Revenue Agency (CRA). Here’s a guide on how to begin charging and collecting GST/HST:
1. Registration Process
Ensure that your business is registered for a GST/HST account with the CRA. Businesses meeting the revenue thresholds or those choosing voluntary registration should complete the registration process through the CRA’s online portal or by filing the appropriate forms.
2. Determine the Applicable Tax Rate
Understand the factors influencing the GST/HST rate, including the type of supply (taxable, zero-rated, or exempt), the location of the supply, and the type of customer. The correct tax rate is crucial in ensuring accurate tax collection.
3. Invoice Compliance
Clearly indicate the GST/HST amount on your invoices. Ensure that your invoices include necessary details such as your business name, GST/HST registration number, a report of the services or goods provided, the date of the invoice, and the amount of tax charged.
4. Educate Staff and Customers
Train your staff to accurately apply the GST/HST rates and inform customers about the tax implications. Transparency in communication helps avoid misunderstandings and ensures compliance.
5. Record keeping
Maintain detailed records of all transactions, including sales, purchases, and expenses related to GST/HST. Accurate recordkeeping is essential for filing GST/HST returns and claiming Input Tax Credits (ITCs).
6. GST/HST Return Filing
Periodically file GST/HST returns as required by the CRA. The frequency of filing depends on your business’s annual revenue. Use the GST/HST return form to report the collected tax, claim ITCs, and calculate the net tax owing or refundable.
7. Remittance to CRA
Remit the collected GST/HST to the CRA by the specified due date. Payment can be made online or through other acceptable methods. Ensure compliance with remittance deadlines to avoid penalties.
7. Claiming Input Tax Credits
Use the GST/HST return to claim ITCs for the GST/HST paid on purchases and expenses related to your commercial activities. This helps offset the tax collected on sales.
8. Stay Informed
Regularly check for updates from the CRA regarding changes in tax rates, regulations, and filing requirements. Staying informed ensures continued compliance with GST/HST obligations.
What are the Benefits of GST/HST?
The GST/HST offer several significant benefits to both individuals and the Canadian economy. Here are some key advantages:
1. Revenue Generation
GST/HST is a major source of income for the federal government and participating provinces. This revenue funds essential public services like healthcare, education, and social programs.
2. Fairness
GST/HST applies equally to most goods and services, ensuring a broad base of taxpayers. This helps to distribute the tax burden more fairly across society.
3. Transparency
GST/HST is clearly visible on receipts, making it easier for consumers to understand the taxes they pay. This transparency promotes accountability and helps to prevent tax evasion.
4. Economic Stability
GST/HST provides a stable source of government revenue, even during economic downturns. This helps to maintain essential services and support economic recovery.
5. ITCs (Input Tax Credits) for Businesses
Businesses can claim GST/HST credits on the inputs they purchase for their operations. This helps to reduce their overall tax burden and encourages investment.
What are the Challenges of GST/HST?
The GST/HST also present several challenges. Some of them are:
1. Regressivity
GST/HST is a consumption tax, which means it takes a bigger percentage of lower-income persons’ wages since they spend a larger share of their earnings on needs. This can exacerbate inequality and place a disproportionate burden on those with limited financial resources.
2. Complexity
The rules and regulations governing GST/HST can be complex, specifically for businesses that operate across multiple provinces or territories. This can lead to compliance costs, errors, and disputes with tax authorities.
3. Exemption Issues
Certain goods and services are excused from GST/HST, which can create uneven tax treatment and opportunities for avoidance. Determining what is exempt can be complex and lead to disputes.
4. Evasion and Avoidance
Businesses and individuals may engage in illegal practices to evade or minimise their GST/HST liability. This undermines the integrity of the tax system and reduces government revenue.
5. Political Resistance
Increases in GST/HST rates are often met with public opposition, making it politically challenging to raise revenue through this tax. This can limit the government’s ability to fund essential services.
Conclusion
Mastering the intricacies of GST HST in Canada is crucial for businesses. Charging and collecting the right tax rates depend on factors like supply type, transaction location, and customer characteristics. With a mandatory GST/HST registration for businesses exceeding $30,000 in annual taxable revenue, exceptions apply for specific industries.
The process involves precise invoicing, diligent recordkeeping, and regular GST/HST return filings. Remaining informed about Canada Revenue Agency updates is key, ensuring businesses align with regulations to manage tax responsibilities and contribute to a transparent business environment.
Also Read: What Are The Benefits Of Integrating GST Registration With Your Invoice/ Billing Software?
Frequently Asked Questions
Q1. Is There GST in China?
In China, the prevailing GST rate is a 13% Value Added Tax (VAT) that is applicable to the majority of goods and services. Additionally, there are two reduced VAT rates of 9% and 6%. While there are zero-rated goods that don’t incur VAT, their sale still needs to be reported on the VAT return.
Q2. Is GST HST the Same as VAT?
Yes, in Canada, there exists a VAT-like tax known as the Goods and Services Tax (GST) or, in certain provinces, the Harmonized Sales Tax (HST). While both the GST and HST operate similarly to VAT, there are nuanced distinctions between them.
Q3. Is GST HST Payable?
You are required to remit (pay) the GST/HST for any invoices included in your return, regardless of whether you have received payment. Further details on what to include in your return can be found for reference.
Q4. Why is There no GST in the USA?
The United States differs from many countries by not adopting a Value-Added Tax (VAT) or Goods and Services Tax (GST). This choice is influenced by the importance of state rights in the U.S., allowing some states to opt out of implementing any sales tax.
Q5. Who Pays TDS?
With a deduction feature not present in VAT, GST allows for a deduction of tax on supplies deducted from output tax obligation on services delivered. This distinction, among others, makes GST implementation on goods and services more efficient compared to VAT, as evidenced by a reduced tax liability of ₹16,500 (₹18,000 – ₹1500).
Q6. Is GST Better Than VAT?
Indirect tax takes different names worldwide, such as sales tax in the United States, value-added tax in Europe, goods and services tax in Australia, and consumption tax in Japan. While the collection processes may differ, the common outcome is that the end customer bears the tax burden.
Q7. What is GST Called in the USA?
The introduction of the Tax Deducted at Source concept aims to collect tax directly from the source of income. Under this system, a person (deductor) is obligated to make certain payments to another person (deductee), deduct tax at the source, and then remit the deducted amount to the Central Government’s account.
Q8. What is the 16B Form?
Form 16B serves as a certification that tax has been deducted at source from income generated through the sale of immovable property, excluding agricultural land. It confirms that the Tax Deducted at Source (TDS) amount has been deposited by the property buyer with the Income Tax department.
Q9. What is the HSN Code?
The Harmonised System of Nomenclature (HSN) is a globally recognised system for naming, categorising, and identifying products. HSN codes are crucial in the classification of goods for the calculation of Goods and Services Tax (GST).
Q10. What is 26AS?
Form 26AS is a comprehensive statement encompassing all tax-related information linked to the assessee’s PAN (Permanent Account Number). It provides a breakdown of details, including tax deducted at source, tax collected at source, advance tax payments made by the assessee, self-assessment tax payments, and any refunds issued to the taxpayer.
