Introduction Goods & Services Tax (GST)
Harmonized Sales Tax (HST)
The Goods & Services Tax (GST)/Harmonized Sales Tax (HST) is a value added tax that became effective in Canada on January 1, 1991 and which replaced the then existing 13.5% Federal Sales Tax, a hidden tax on manufactured goods.
GST/HST is levied under Part IX of the Excise Tax Act. The rate of tax is currently 5% as of January 1, 2008, having been reduced from the original rate of 7% in 2 steps of 1% each.
Several provinces have integrated their provincial sales taxes with the GST into what is called the Harmonized Sales Tax or HST.
Those provinces are Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island and Ontario.
The HST rates vary by province from a low of 13% in Ontario, New Brunswick, Newfoundland and Labrador to 15% in Nova Scotia. The three territories of Yukon, Northwest Territories and Nunavut do not have any sales taxes so only the 5% GST has to be charged.
The province of Quebec administers both the federal GST and its own Quebec Sales Tax (QST). It is the only province to administer the GST which is otherwise administered by the Canada Revenue Agency (CRA).
Because GST/HST is a value added tax, only the ultimate end user consumer pays the tax. At every intermediate stage of processing (for goods) or for all services, the vendor (called supplier in GST/HST language) charges the GST on its sales and claims a reduction (input tax credit or ITC) for all GST/HST paid to its suppliers. So take as an example our Canadian tax law firm.
We charge GST/HST to our Canadian clients at the rate applicable in their province of residence and claim an ITC for all amounts of GST/HST we pay. We then send a payment to CRA for the difference. The same would be true of a manufacturer.
It would charge GST/HST to its customers and deduct input tax credits for GST paid. Sales outside of the country are not subject to GST/HST (see article here) so exporters are often entitled to a GST/HST refund. However tax refunds are now always subject to GST/HST audits
Registration for The Goods & Services Tax (GST)/Harmonized Sales Tax (HST)
The threshold for GST/HST registration is $30,000 of annual sales. Any business that reaches this threshold amount is required to register and charge GST/HST for the year in which this sales amount is met.
Businesses with less than $30,000 of sales can elect to register for GST/HST in order to be eligible to deduct input tax credits. Failure to collect and remit GST/HST is a tax offence under the Excise Tax Act and is subject to tax prosecution and on conviction tax penalties of fines and jail terms.
GST/HST tax offences include filing a false or misleading statement under subsection 327(1) of the Excise Tax Act or failure to file a return under subsection 326(1) (Excise Tax Act).
Zero Rated and Exempt GST/HST Sales
GST/HST is imposed on the supply (sale) of goods and services that are purchased in Canada, except for certain specific items that are either exempt or zero-rated. See article here for details. For zero-rated sales GST/HST is charged by the vendor at a zero rate so no GST or HST is actually collected. However the vendor is eligible to claim an input tax credit for all amounts paid on purchases used in producing the goods or services. This effectively removes the value added tax from those specific goods and services. The most common zero-rated goods include groceries, prescription medication, inward/outbound transportation and medical devices and certain exports of goods and services.
This contrasts with tax-exempt supplies where the sale is not subject to GST/HST and suppliers do not charge any tax on their exempt sales (rather than a notional zero percent tax charge).The big difference is that suppliers that make exempt supplies are not entitled to claim ITCs. Common GST/HST exempt items include legal aid services, health and dental care, long term residential rents, financial services, educational services, day-care services and music lessons.
GST/HST Filing Requirements & Audits
GST/HST return filing requirements depend on the volume of sales and can be monthly, quarterly or annually. GST/HST audits are more common than income tax audits and most businesses can expect to have GST/HST auditors visit at some time. A refund claim is a guarantee of a GST/HST audit.
Director Liability for GST/HST
Directors of a corporation are personally liable for the unpaid GST/HST liability of a corporation unless they can demonstrate that they used due diligence in ensuring that the corporation tried to pay its GST/HST taxes owing. If the corporation is unable to pay its GST/HST taxes owing the director can expect a director liability assessment under section 323 of the Excise Tax Act.
GST/HST Objections and Appeals
A GST/HST assessment can be challenged by filing a Notice of Objection within 90 days of receipt of the GST/HST assessment or reassessment. If the 90 day objection deadline is missed there is a further 1 year to apply for an extension of time.
The time extension is discretionary and CRA does not have to grant it. If the results of a Notice of Objection are unsatisfactory there is a 90 day time window to appeal to the Tax Court of Canada. Again, if the appeal period is missed then an application for an extension of time can be made to the Tax Court itself. These extension applications are generally not granted unless there were exceptional circumstances outside of the control of the taxpayer.
Filing an Objection (or Tax Court appeal) does not suspend CRA collections actions, unless the situation with an income tax Objection or appeal. So CRA collections officers will continue to collect the GST/HST debt while the appeal is being processed.