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Last updated: Sept. 16, 2014.
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Goods and Services Tax

PM Harper reduces GST to 5%Effective January 1, 1991, Canada's Federal government began levying the Goods and Services Tax (GST) – a multi-layered VAT (Value Added Tax) at a rate of 7%.  Starting July 1, 2006, Prime Minister Harper (as seen in the picture to the right) reduced the general rate to 6%, and then starting January 1, 2008, he reduced it to 5%.

The tax is levied on most goods and services with relatively few exemptions.  Sales fall into one of three categories:
  1. Taxable at 5 percent
  2. Taxable at 0 percent (Zero rated sales), and
  3. Exempt

Taxable Sales (5 or 0 percent)

Businesses that sell taxable goods and services receive an Input Tax Credit that reduces the amount of GST they send to the government. 
 
The Input Tax Credit is merely the GST that businesses pay on their purchases.  And, if the Input Credit is greater than the GST a business charges for a period, the Federal government refunds the excess.  This can easily happen when a business makes large equipment and inventory purchases, and their total amount exceeds the company's sales for that period.  Examples of taxable sales:
Exporters may often receive GST refunds because they pay GST on their purchases, but charge 0% on their sales.

Exempt Sales

Businesses selling exempt goods and services charge no GST and get no Input Tax Credit for the GST on their purchases.  Examples: Medical and dental services.

Opting Out

Businesses with less than $30,000 of annual taxable sales have the option to not register for the GST.  If they choose to not register, they charge no GST, pay the GST on their purchases, and receive no Input Tax Credits.   On the other hand, a  small business may choose to register and charge the GST to prevent its customers from learning that it has less than $30,000 of annual sales.

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Harmonized Sales Tax

The Federal government offered the Provinces an arrangement to end their sales taxes and participate in the GST at a combined rate of 13% (originally it was 15%).

It promised to collect the combined tax and to refund the extra 8% to participating Provinces.  The Harmonized Sales Tax (HST) would follow the same rules as the GST, except that the rate in their Province would be 13%.  Prior to July 1, 2010, only three Provinces had adopted the HST:

  • Nova Scotia
  • New Brunswick, and
  • Newfoundland-Labrador

Recently, Nova Scotia raised its HST back up to the original 15%.

On July 1, 2010, British Columbia and Ontario scrapped their Retail Sales Tax and adopted the Harmonized Sales Tax, which includes both the 5% Federal rate and their previous sales tax rate.  The combined rate for British Columbia is 12% and for Ontario 13%.

However, the two provinces did carry forward some, but not all, of their previous sales tax exemptions.  The HST deals with the exemptions through a "Point-of-Sale Rebate" where a vendor provides an immediate rebate of the provincial component at the time of sale.  So a purchaser would pay only 5% HST for goods and services eligible for the "Point-of-Sale Rebate."  While the rebates for some goods and services are the same for British Columbia and Ontario, others are not.  For more information about the rebates, you can visit the provincial websites.   

   

If you need more advice or help regarding the GST/HST, please consider my firm and contact us.