It Depends on What You Sell

There are three distinct categories for all goods and services sold in Canada for GST purposes -- zero rated, exempt and taxable. It is important that you know which type of revenue your business collects because you may be eligible for a refund.

For example, if you collect two different revenue categories, such as taxable and exempt, you must segregate all of your expenses along with the two categories. You only get a GST rebate on expenses incurred to supply the taxable goods and services. Purchases and expenses related to supplying exempt goods and services do not qualify.  

Failing to remit GST can result in heavy jail time and fines.    In one fraud case, the Supreme Court of British Columbia sentenced Vancouver car dealer Michael Wolfe to two years less one day in prison and fined him $6.9 million after a jury found him guilty on seven counts of Goods and Services Tax (GST) fraud and failure to remit the sales tax.    A Canada Revenue Agency (CRA) investigation found that between 1996 and 1998, Wolfe and his dealership received or attempted to obtain $8.1 million in GST refunds as part of an auto export scam.    The dealership claimed to have purchased more than 1,600 new vehicles at cost plus GST from an unrelated company. The vehicles, however, didn't exist – the transactions were created on paper only.    The dealership would then resell the phantom vehicles back to the unrelated company without charging GST, claiming the cars were for export. Wolfe's dealership then claimed credits for the tax it said it paid when it allegedly bought the vehicles.    When individuals or corporations are convicted of tax evasion, in addition to any fines imposed by the courts, they are still obligated to pay the full amount of federal and provincial taxes they owe, plus interest and any civil penalties the CRA may assess..

 

Goods and Services Tax (GST) is required to be collected and remitted on all taxable supplies made in a commercial activity in Canada. Most sales of Goods and Services are considered to be taxable. The purchaser pays the tax and the supplier is responsible for collecting and remitting it to the government.

 

A commercial activity is "any business, adventure, or concern in the nature of trade." It also includes the sale of certain real property. Even individuals are required to register if there is a reasonable expectation of profit. "Small suppliers" are not required to register for GST as long as their taxable sales do not exceed $30,000 in a 12 month calendar period.

Sometimes, it is an advantage to be registered, even if it is not required, because you can collect all GST paid on expenses incurred. These are called Input Tax Credits.

For example, let's say you made a significant purchase, such as a vehicle, and you are a commercial business registered for GST. Provided you use the vehicle 100 percent for business, you can receive back all the GST that you paid on your next GST report. However, if you are not registered, then you are not eligible to claim Input Tax Credits on any of the purchases made in your business.

Exceptions

Certain supplies of property made in a commercial activity in Canada are zero-rated. Entities involved in zero-rated taxable supplies are required to be registered for GST if they exceed the $30,000 small supplier threshold and are eligible to claim Input Tax Credits. To be zero-rated means that although the supply is considered to be taxable, the rate of tax that applies is 0 percent.

Let's take the example of buying a prescription at a drug store. The pharmacy is considered a commercial activity. Therefore, the sales of supplies are considered to be taxable. But because prescriptions are a  zero-rated supply, no GST is collected. However the pharmacy is still entitled to claim Input Tax Credits on the purchases of the supplies it makes for the business.

Here are some examples of zero-rated supplies:

• Prescription drugs and medical devices.
• Food, other than beverage alcohol, snack foods, sweetened baked goods, restaurant meals and take-out food. Livestock, poultry, raw wool and certain agricultural produce.
• Fresh fish and other marine animals used for food.
• Machinery and equipment designed for use exclusively by farmers and fisherman.
• Certain leases of farmland in exchange for a share of the production from the land.
• Personal property and services exported from Canada.
• International passenger or freight transportation.
• Supplies to diplomats, international organizations and members of visiting armed forces.
• Insurance for risks ordinarily situated outside Canada.
• Supplies to non-residents of financial services relating to deposits outside Canada or to loans for use outside Canada.
• The supply of precious metals to refineries. 

The last category of supplies in Canadian commercial activities are exempt supplies. Being exempt is different than being zero-rated. It means that GST is not required to be collected on the supply. Input tax credits cannot be claimed and registration is not required or available if only exempt supplies are made. 

Here are some examples of exempt supplies:

• Health care, child care and legal aid services.
• Educational instruction provided by elementary and secondary schools, universities, public colleges, private secretarial schools and business colleges.
• Financial services, other than zero-rated services.
• Sales of used residential housing and rentals of residential premises.
• A broad range of supplies of a non-commercial nature by charities, non-profit organizations, municipalities, and federal and provincial governments.
• Certain financial services rendered to residents of Canada.
• Certain intra-group supplies between members of a closely related group when the group includes a financial institution.

Probably the easiest way to determine whether your business is supplying taxable, zero rated or exempt goods and services is to assume that your services are taxable unless you supply a basic need, such as food supplied by farmers and fisherman, which are zero rated.

If your business provides health care, education services or financial services, such as banking and investing, you are usually exempt. If the goods and services you sell fall somewhere in between, check with your tax adviser.

Probably the easiest way to determine whether your business is supplying taxable, zero rated or exempt goods and services is to assume that your services are taxable unless you supply a basic need, such as food supplied by farmers and fisherman, which are zero rated.If your business provides health care, education services or financial services, such as banking and investing, you are usually exempt. If the goods and services you sell fall somewhere in between, check with your tax adviser.

(For more information, read our previous article "To Be or Not To Be a GST Registrant.")