Canadian sales taxes are levied at both the federal and provincial level. The federal government administers the value- added GST and HST. Federal audits and administration is undertaken by the Canada Revenue Agency (CRA), except in Quebec where Revenue Quebec administers both GST/HST and QST for most registrants except certain financial institutions.
The other provinces administer their own provincial sales tax.
GST/HST
The GST applies to taxable supplies made in Canada at the rate of 5%, unless HST is applicable as described below.
GST is a value added tax that applies to the value of the consideration charged on most goods and services supplied or imported into Canada. Most GST registrants are entitled to recover the GST/HST paid on expenditures by claiming an
input tax credit (ITC) if the expenditures are used in commercial activities, or rebates in limited circumstances may be available.
The provinces of Newfoundland and Labrador, New Brunswick, Nova Scotia, Ontario and Prince Edward Island have repealed their provincial sales taxes and have adopted the HST (combined rate of the 5% GST and a provincial component (8%-10%). When a supply is made within these participating provinces, HST applies instead of GST. The tax base for GST and HST is the same. The HST rate is currently 13% in Ontario, 15% in Nova Scotia, Newfoundland and Labrador, New Brunswick and Prince Edward Island.
Specific place of supply rules determine in which province the supply is deemed to have occurred and which rate of GST or HST will apply. These rules have been in place since 1 May 2010.
Certain goods and services, such as exports, basic groceries and prescription drugs are generally zero-rated, i.e., taxed at 0%. GST/HST is not collected on zero-rated supplies but the supplier continues to be entitled to claim ITCs for the GST or HST paid on related inputs.
Goods and services such as financial services, health and educational services are generally exempt. No GST or HST is charged on exempt supplies. However, unlike zero-rated supplies, ITCs cannot be claimed by the supplier for expenditures related to making exempt supplies. Certain public sector bodies such as charities may be entitled to prescribed rebates.
QST
The Quebec Sales Tax (QST) is also a value added tax and applies only to taxable supplies made in the province of Quebec. Generally, both GST and QST apply on the same goods and services. These taxes are stated separately on the invoice. The rules governing the application of QST have generally been harmonized with those for GST. Most QST registrants are entitled to recover QST paid on expenditures by claiming an input tax refund (ITR) if the expenditures are used in commercial activities, or in certain circumstances rebates.
QST currently applies at the rate of 9.975% on the consideration for the supply.
Although Quebec essentially harmonized the QST with the GST effective 1 January 2013, they continue to maintain a separate tax regime with separate registration and reporting. Revenue Quebec also administers the GST/HST for businesses located in Quebec except for certain financial institutions.
Large businesses
Large businesses in Ontario and Prince Edward Island with revenues in excess of $10 million for the associated group are were subject to reporting and recapture of the provincial component of the HST on certain expenses. These recapture rules effectively restrict refunds in respect of the provincial component of the tax five categories of expenses: meals and entertainment, motor vehicles, fuel for motor vehicles (other than diesel), telecommunications and energy not used in manufacturing. The recaptured input tax credits (RITCs) will be at the rate of 100% of the provincial component of the tax for the first five years and will then gradually be phased out over a three year period. Once eliminated, there will be a full recovery of the tax on these expenses in Ontario effective 1 July 2018 and in Prince Edward Island effective 1 April 2021.
The same restrictions apply in Quebec although the compliance requirements differ. For QST purposes, large businesses with revenues in excess of $10 million for the associated group are restricted from claiming refunds of ITRs on the same categories of expenses. Quebec has announced that they will also phase out the ITR restrictions over a three year period for large businesses starting 1 January 2018 with restrictions being fully eliminated effective 1 January 2021.
Any person carrying on business in Canada, including a non-resident, is required to become registered for GST/HST if their worldwide taxable sales, and that of the associated group, exceeds the registration threshold of $30,000 annually. A non-resident does not need to have a permanent establishment to be required to register. Once a person is considered to be carrying on business in Canada and makes a taxable supply in Canada, they are required to register provided their worldwide revenue has exceeded $30,000. A slightly higher threshold of $50,000 is available for public sector bodies such as charities and not-for-profit organizations.
In certain cases, voluntary registration may be permitted for residents or non-residents who are not required to become registered but wish to collect tax and recover the tax they pay.
QST registration is similar to the GST/HST registration requirements for a business being carried on in the province of Quebec; however, there are certain restrictions for non-residents of Canada voluntarily registering for QST and Quebec imposes a registration obligation on Canadian organizations that sell goods to consumers in Quebec.
Registration in the other provinces depends on a number of factors. The revenue threshold is $10,000 (other than Saskatchewan where there is no threshold). Most provinces look to the presence and activities being carried on in the particular province to determine registration. These three provinces specifically require non-residents of the province to register if taxable sales are made and there is direct marketing in their province.
Yes. The key test though for a non-established business is if they are considered to be carrying on business in Canada. The CRA will look to a number of factors to make this determination.
As of 1 July 2021, a “simplified” GST/HST registration obligation was imposed on non-established businesses even if they are not considered to be carrying on business in Canada if they make taxable supplies of intangibles or services to consumers (which includes non-registered businesses) and those sales exceed $30,000. It is often referred to as digital services tax but is much broader in its application.
No. Non-residents without a permanent establishment in Canada are required to post security with the taxing authority.
The security is equal to 50% of the estimated net tax of the person with a minimum of $5,000 and a maximum of $1,000,000. Non-residents also must agree to make their books and records available in Canada for review or agree to pay the cost for the CRA to travel to complete an audit.
No security is required to be posted under the “simplified” regime.
Once registered, GST/HST and QST registrants are required to file returns on a monthly, quarterly or annual basis depending on their annual sales made in Canada. The GST and HST are filed on the same return with no requirement to account or report the two taxes separately. The QST is typically a separate filing in the province of Quebec, but in limited cases a joint GST/HST and QST return is permitted to be filed.
Monthly returns are required if the Canadian taxable revenue of the person and the associated group is over $6 million. Quarterly returns are required if the taxable revenue of the person and the associated group is over $1,500,000 and is $6 million or below. Annual filing is required where the revenue is $1,500,000 or below. A person can elect to file more frequently if so desired and would do so if refunds are anticipated. Electronic filing may also be mandatory.
Returns are due within one month after the reporting period for monthly and quarterly filers and within three months for annual filers. Any net payable for a reporting period must be paid at the time of filing. Annual filers are required to make quarterly instalments after their first year.
If the return is in a net refund (credit) position, the refunds will be paid out to the registrant. The registrant must have the required documentary support on hand prior to making an ITC or ITR claim on the return.
Group or consolidated filing is generally not permitted federally. Each entity must file on its own. Certain very limited exceptions may occur with an election for eligible investment plans. Where tax is remitted by the wrong person, CRA may still assess the other entity for failure to remit tax.
Returns are prepared on an accrual basis at the time the supply is made and not on a cash basis. If a customer fails to pay for the taxable goods or services purchased and the supplier has remitted the respective federal and provincial sales taxes on the supply, the supplier may claim partial bad debt relief from the respective taxing authorities. However, the supplier must have exhausted all other means to collect the debt and the debt must be written off from the supplier’s books and records in order to be eligible for the relief.
The relief itself does not necessarily equal the tax; the amount is prorated depending on the amount of consideration already received.
Under the “simplified” regime, returns are filed on a quarterly calendar basis regardless of the level of taxable supplies.
Generally, returns must be filed in Canadian dollars. However, under the “simplified” regime, returns may be requested to be filed in certain approved alternative currencies.
The federal government and the respective provincial governments have instituted systems of penalties in their tax legislation to discourage failure to comply with their respective sales tax system. In addition, interest is charged on amounts outstanding. These interest and penalty amounts are generally not deductible for income tax purposes.
A penalty may be imposed by the tax authority if GST/HST and QST returns are not submitted on time, or the related tax is not paid by the due date.
Certain information returns may also be required for financial institutions including pension plans.
Yes. A range of penalties can be imposed where businesses do not comply with the GST/HST and QST rules. For example, a gross negligence penalty of 25% may be applied.
Penalties and interest can be applied for errors and omissions made on tax returns or where the tax is paid late. Penalties can also be applied where the business has failed to maintain adequate records, provide information (including additional declarations), or makes repeated mistakes.
Criminal proceedings may be brought in the case of more serious matters.
Generally, only GST/HST registered organizations may recover the VAT incurred. Non-registered businesses may not usually recover the tax unless the tax was paid in error (for example on qualifying zero-rated exports); there are limited rebates and some instances where tax on import may be claimed by another party.
To help minimize the instance of unrecoverable tax incurred by non-resident businesses, the Canadian GST/HST system has numerous zero-rating provisions related to services and supplies made to non-residents. These provisions should be reviewed carefully by any non-resident person acquiring supplies from Canadian suppliers.
Under the new “simplified” regime, no recovery of tax is permitted by the supplier.
An invoice must show:
It is important to note that the tax authorities are very strict in regards to a person obtaining the required documentation to support their ITC and ITR. Therefore, ensuring the invoice reflects the right information is very important to the purchaser.
An invoice must show:
It is important to note that the tax authorities are very strict in regards to a person obtaining the required documentation to support their ITC and ITR. Therefore, ensuring the invoice reflects the right information is very important to the purchaser.
While there is no SAF-T requirement in the Canada – the CRA requires organizations that maintain electronic records to be able to provide such records on audit. This is not a new requirement but has been in place for years. Nothing though is required to be submitted or linked with the submission of a return at this point in time. It is understood that Canada like many other jurisdictions is looking into this and could implement some sort of requirement at some point in the future.
Certain jurisdictions, like Quebec, also require certain software to be included in certain end user industries, i.e., restaurants, to ensure completeness and accuracy of records.
For further information on indirect tax in Canada please contact:
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Christina Zurowski (Toronto, Ontario) |
Maryse Janelle (Montréal, Québec) |
