VAT, GST and Sales Tax in Canada

Summary

Name of the tax Goods and Services Tax (GST)
Date introduced 1-Jan-91
Name of the tax Harmonized Services Tax (HST)
Date introduced 1-Apr-97
Trading bloc membership North American Free Trade Agreement (NAFTA)
Administered by Canada Revenue Agency (http://www.cra-arc.gc.ca)
Sales tax rates
GST standard 5%
HST standard
Quebec 9.975% (see Sections B and D)
Ontario 13%
New Brunswick 15%
Newfoundland and Labrador 15%
Nova Scotia 15%
Prince Edward Island 15%
Other Zero-rated and exempt
Business number format 15 characters (9 numeric/2 alpha/4 numeric)
GST/HST return periods Monthly (turnover in excess of CAD6 million, optional for other registrants), Quarterly (turnover between CAD1.5 million to CAD6 million, optional for other registrants) Annual (turnover below CAD1.5 million)
Thresholds
Registration CAD30,000
Recovery of GST or HST by non-established businesses No

Scope of the tax

Canada’s federal government imposes a 5% sales tax known as the Goods and Services Tax (GST). When a supply is made in a “participating province,” the tax rate includes an additional pro­vincial component of 8% or 10%, depending on the province. The combined 13% or 15% tax is known as the Harmonized Sales Tax (HST). When the HST was first implemented, effective from 1 April 1997, the original “participating provinces” were New Brunswick, Newfoundland and Labrador, and Nova Scotia. At that time, those provinces adopted a provincial component of 8%, and the combined rate was 13%.

Nova Scotia increased its provincial component to 10%, effective from 1 July 2010, and its combined rate is now 15%. The com­bined rate in New Brunswick and in Newfoundland and Labrador increased to 15% effective 1 July 2016 with the increase in the provincial component of the HST from 8% to 10%. Effective from 1 July 2010, the provinces of British Columbia and Ontario adopted the HST. Ontario’s provincial component is 8%, which results in a combined HST rate of 13%. However, effective from 1 April 2013, British Columbia abandoned the HST and re-implemented a provincial sales tax system. Thus, as of that date, the HST no longer applies and supplies made in British Columbia are once again subject to the 5% GST and any applicable PST. While harmonized with the federal GST, British Columbia had a provincial component of 7%, which resulted in a combined HST rate of 12%. Effective 1 April 2013, the province of Prince Edward Island adopted the HST, with a provincial component of 9% and a combined rate of 14%. Prince Edward Island increased its provincial component to 10% effective 1 October 2016, and its combined rate is now 15%.

In implementing the HST, the participating provinces repealed their individual retail sales taxes and share in the revenues gener­ated by the HST. HST applies to the same base of goods and ser­vices that are subject to GST.

Although the province of Quebec is not considered a “participat­ing province,” it replaced its own retail sales tax and harmonized with the GST (subject to some exceptions) when it implemented its own Quebec sales tax (QST) on 1 July 1992.

On 30 September 2011, the Quebec and federal finance ministers signed a memorandum of agreement regarding further sales tax harmonization that provided for the implementation of certain changes to the QST to come into effect on 1 January 2013. This memorandum of agreement was followed by the signing of the Canada-Québec Comprehensive Integrated Tax Coordination Agreement (CITCA) on 28 March 2012, and legislation imple­menting some of the changes was passed into law on 7 December 2012. Effective 1 January 2013, QST is no longer calculated on price plus GST as it was prior to that date. As a result, the QST rate increased to 9.975% from 9.5% to maintain the existing combined effective rate of 14.975%. Also, effective from 1 January 2013, financial services, which were previously zero-rated for QST purposes, became exempt to parallel the treatment of those services under the GST and HST systems. As a result, financial institutions are no longer able to recover the QST paid on their purchases of goods and services used for exempt activi­ties, resulting in unrecoverable tax and accordingly additional costs.

The provinces of Manitoba and Saskatchewan continue to impose their own retail sales tax, while the province of Alberta and Canada’s three territories do not impose a retail sales tax.

GST/HST applies to taxable supplies of property and services made in Canada in the course of a business, and to imports of goods into Canada. Specific HST rules determine when a supply is made in a participating province and when property or services are brought into a participating province. Unlike traditional value-added taxes, GST/HST is designed as a tax on the purchaser, with an obligation imposed on the vendor to collect the GST/HST as an agent for the Crown.

The term “property” includes all property, whether real or per­sonal, movable or immovable, tangible or intangible, corporeal or incorporeal, any right or interest of any kind, and shares and choses in action. However, it does not include money. The term “tangible personal property” generally means goods.

The term “services” means anything other than property or money. It does not include services provided by an employee in the course of, or in relation to, an office or employment.

For the purposes of GST/HST the territory of Canada includes the following areas:

  • The seabed and subsoil of the submarine areas adjacent to the coast of Canada for which the government of Canada or of a province may grant rights to explore for, or exploit, any minerals (including petroleum, natural gas, related hydrocarbons, sand and gravel)
  • The seas and airspace above those submarine areas with respect to any activities carried on in connection with the exploration for, or exploitation of, minerals

Who is liable

Every person who makes taxable supplies of goods or services in Canada in the course of a commercial activity is required to reg­ister for GST/HST purposes, except in the following circum­stances:

  • The person qualifies as a “small supplier.”
  • The person’s only commercial activity is the supply of real prop­erty by way of sale other than in the course of a business.
  • The person is a nonresident who does not carry on any business in Canada.

“Commercial activity” means any of the following activities:

  • Any business, except to the extent the business involves making exempt supplies
  • An adventure in the nature of trade, except to the extent the activity involves making exempt supplies
  • The supply of real property, other than an exempt supply

For individuals and partnerships of individuals, the activity must also be carried on with a reasonable expectation of profit to con­stitute a commercial activity.

The definition of a “person” includes individuals, partnerships, corporations, trusts, estates of deceased individuals and bodies such as societies, unions, clubs, associations, commissions or other organizations of any kind.

A “registrant” is any person that is registered or is required to be registered for GST/HST.

Small supplier threshold. A “small supplier” is a person whose annual worldwide taxable and zero-rated supplies were less than CAD30,000 in the four preceding calendar quarters. The CAD30,000 threshold is determined by reference to the aggre­gate of taxable and zero-rated supplies made by the person and any associates of the person in the period.

A person whose activities exceed CAD30,000 must register for GST within one month after making the first supply that causes its turnover to exceed the threshold. However, if a person exceeds the CAD30,000 threshold in a single calendar quarter, it ceases to qualify as a small supplier beginning with the supply that causes it to exceed the threshold.

The small supplier threshold for a public service body (such as a charity, nonprofit organization, municipality, university, public col­lege, school authority or hospital authority) is generally CAD50,000.

The small supplier rules do not apply to the following businesses:

  • Persons who solicit orders for publications to be delivered in Canada by mail or courier
  • Taxi operators
  • Nonresidents who sell taxable supplies of admissions in Canada for places of amusement, seminars, activities or events held in Canada

A small supplier is not required to register for GST/HST but may do so voluntarily provided that it is engaged in commercial activ­ity in Canada.

Group registration. GST/HST group registration is not permitted. Legal entities that are closely connected must register for GST/ HST individually.

However, “closely related” corporations and partnerships may elect to deem supplies made between members of the group as being made for no consideration if the members are engaged exclusively in making taxable and zero-rated supplies. This pro­vision effectively makes sales between group members subject to the zero rate.

For purposes of the election, two corporations are “closely related” if one of the corporations (or a closely related subsidiary) owns at least 90% of the voting shares of the other. In general terms, the election is available only to Canadian residents. However, Canadian resident corporations that are closely related as a result of being related to a nonresident or non-registrant corporation or to a chain of such corporations are eligible to use the election if all of the other conditions for making the elections are satisfied.

The election is also available to groups that include partnerships, referred to as “Canadian partnerships.” A “Canadian partnership” is defined as a partnership in which each member is a corporation or partnership and is resident in Canada.

Special rules apply if a closely related group includes a financial institution.

Effective 1 January 2015, changes to the election for closely related persons came into effect. Important changes to the definition of a “qualifying member” were introduced resulting in a general increase in the availability of the election for new mem­bers of a qualifying group. In addition, a new provision made the parties to the election jointly and severally (or solidarily) liable for tax that applies in relation to supplies made among them on or after 1 January 2015.

Also effective 1 January 2015, the prescribed election form is required to be filed with the Canada Revenue Agency. Since its introduction in 1992, the previous prescribed form, Form GST25, had only been required to be kept with the parties’ books and records and produced for tax authorities upon request. All new elections made after 1 January 2015 are required to be made using the new Form RC4616, which replaced Form GST25. All elections that were in place prior to 2015 were required to be refiled with the Canada Revenue Agency prior to 1 January 2016, using the new election form but carrying the effective date used in the original election. If the new filing requirements are not respected, elections will be considered invalid, which could lead to significant tax consequences in the event of an audit.

Amendments proposed pursuant to the 22 March 2016 federal budget, which have not yet been passed into law, are intended to ensure that the closely related election will be available only in situations where the parent has nearly complete voting control over the subsidiary. Under the proposed amendments, in addition to having to meet the 90% test described above, for the parent and the subsidiary to be considered closely related, the parent corpo­ration or partnership must also hold and control 90% or more of the votes in respect of every corporate matter (“qualifying voting control”) of the subsidiary corporation. The proposed amend­ments apply as of 23 March 2017 to existing elections. However, they also apply as of 22 March 2016, for the purpose of determin­ing whether the conditions for making a closely related election have been satisfied where the election is intended to take effect after 22 March 2016.

Nonresident businesses. A nonresident business that does not carry on business in Canada but solicits orders for the supply of goods in Canada, or enters into an agreement to supply certain goods, services or intangible property in Canada, may register on a voluntary basis to claim input tax credits (see Section F). A nonresident business is not required to appoint a tax representa­tive in Canada to register for GST/HST. However, a nonresident business with no permanent establishment in Canada must pro­vide a security deposit to the GST/HST authorities to obtain registration.

In general, the amount of security is 50% of the estimated net tax (either positive or negative) for the first year of operations in Canada. The minimum acceptable amount of security is CAD5,000, and the maximum is CAD1 million. Security may be in the form of cash, certified check, money order or bond. All security deposits are payable in Canadian dollars (CAD).

A nonresident business may apply in writing to have the security requirement waived if it satisfies both of the following conditions:

  • Its taxable supplies in Canada do not exceed CAD100,000 annually.
  • Its net GST remittance or refund does not exceed CAD3,000 annually.

Imported taxable supplies. In some cases, recipients of imported services and imported intangible property are required to self-assess GST/HST. The Canadian recipient must self-assess and remit the tax if these supplies are for use in Canada, unless they will be used exclusively (i.e., 90% or more) in a commercial activity. Special rules apply to financial institutions.

Tax representatives. Form RC59 is used to authorize the Canada Revenue Agency to deal with an individual representative (such as an accountant, lawyer or employee) or a firm as a representa­tive for business account-related GST/HST information (as well as payroll, corporation income taxes, excise taxes, excise duties and other levy accounts). This consent can also be given online at http://www.cra.gc.ca/mybusinessaccount.

Reverse charge. Self-assessment of the GST or federal compo­nent of the HST is required on importations of intangible per­sonal property and services that are acquired from unregistered, nonresident persons outside Canada and not used at least 90% in commercial activities (100% in the case of financial institutions). The tax is calculated on the amount charged for the service or intangible personal property in Canadian dollars, and the tax is payable in the reporting period in which the amount for the ser­vice or the intangible personal property was paid or became pay­able. Registered purchasers of real property are also required to self-assess and remit applicable tax on the consideration paid for the property.

Registration procedures. Persons required to register under the legislation must apply to the Canada Revenue Agency within 30 days following the first taxable supply made in Canada. Before registering for GST/HST, a business must obtain a Business Number (BN) from the Canada Revenue Agency by using its online service at http://www.businessregistration.gc.ca, by send­ing in a completed Form RC1, Request for a Business Number (BN), or by calling 1-800-959-5525.

The Agency will then assign a registration number to the regis­trant and provide notification in writing of the registration num­ber and the effective date of registration. Organizations can generally expect to receive confirmation of their registration and their nine-digit registration number by mail within two weeks after submitting their completed registration forms. GST/HST registrants who are based in the province of Quebec are required to register with Revenu Quebec using the online service at http:// www.revenuquebec.ca/en/sepf/services/sgp_inscription/default. aspx, by sending in completed form LM-1-V or by calling 1-800- 567-4692.

Late-registration penalties. Every person who is engaged in a commercial activity in Canada (other than a small supplier, a person whose only commercial activity is the making of supplies of real property by way of sale other than in the course of a busi­ness, or a nonresident person who does not carry on any business in Canada) is required to apply to be registered for the GST/HST before the 30th day after the day the person first makes a taxable supply in Canada otherwise than as a small supplier.

A person who is required to apply to be registered is also required to collect and remit the GST/HST on taxable sales whether or not the person is actually registered. Interest is payable at the pre­scribed rate where a person fails to remit or pay an amount on account of tax when required under the GST/HST legislation.

Digital economy. The 11 February 2014 federal budget invited interested parties to submit comments within 120 days after the budget with respect to various questions relating to tax planning by multinational enterprises, including what actions should the government take to ensure the effective collection of sales tax on e-commerce sales to residents of Canada by foreign-based ven­dors – for example, should these vendors be required to register for GST/HST purposes and collect and remit tax on e-commerce sales to Canadian residents. To date, the government has not released any proposals in response to the consultation process.

Deregistration. Where a person ceases to carry on a commercial activity or becomes a small supplier and, as a result, ceases to be a registrant, the person’s GST/HST registration may be cancelled by the Canada Revenue Agency on its own initiative or on request. In these circumstances, the person is deemed to have sold all its assets at fair market value upon deregistration. The non-registrant is subsequently required to account for the GST/ HST on this deemed disposition in the last GST/HST return as a registrant. The person must also repay any input tax credits claimed on prepaid rent and services to the extent the prepay­ments relate to a period after deregistration.

Conversely, tax that becomes payable by a person to suppliers after deregistration continues to qualify as a valid input tax credit where it relates to services rendered to the person before deregistration or to rental payments attributable to a period before deregistration.

GST/HST rates

The term “taxable supplies” refers to supplies of goods and ser­vices that are liable to GST/HST. The HST rate of 15% applies in Nova Scotia, effective 1 July 2016, in New Brunswick, Newfoundland and Labrador, and effective 1 October 2016, in Prince Edward Island. QST (see Section B) at a rate of 9.975% applies in the province of Quebec. The effective combined GST/ QST rate is 14.975%.

The 5% GST rate applies to supplies of property and services made elsewhere in Canada: in the provinces of British Columbia, Alberta, Saskatchewan and Manitoba and in the Yukon, Northwest and Nunavut Territories. A zero rate (0%) applies to a limited range of supplies of property and services. Although tax does not apply to zero-rated supplies, a registrant may claim input tax credits with respect to these supplies. As a result, zero-rated sup­plies bear no tax.

Examples of zero-rated supplies

  • Exports of goods and services
  • Basic foodstuffs
  • International transportation
  • Prescription drugs
  • Medical devices
  • Certain inputs used in agriculture and fishing

Certain supplies of goods and services, referred to as “exempt supplies,” are within the scope of GST, but are not liable to tax. However, these exempt supplies do not give rise to input tax credits.

Examples of exempt supplies

  • Supplies of used residential property
  • Financial transactions (as discussed in Section B, financial services were previously zero-rated in Quebec but became exempt effective 1 January 2013)
  • Most supplies by charities and public sector bodies
  • Health care
  • Education

Option to tax for exempt supplies. In some cases, the GST/HST legislation permits parties to a transaction to elect to treat par­ticular exempt supplies as taxable. Elections are available, for example, in respect of the supply of a residential complex by a person other than a builder, particular sales of real property by an individual where made in the course of an adventure or concern in the nature of trade, certain supplies of instruction or examina­tions by a professional or trade association, government, voca­tional school, university, public college or regulatory body, certain memberships in a public service body or professional organization and some supplies of real property by public service bodies. In most cases, conditions must be satisfied before the election can be made.

Time of supply

In general, tax on a taxable supply becomes payable on the ear­lier of the date on which the consideration for the supply is paid or the date on which the consideration becomes due. The consid­eration is considered to be paid when the supplier receives the money (or other form of agreed consideration) for the supply. The consideration for a taxable supply is deemed to become due on the earliest of the following dates:

  • The date on which the supplier issues an invoice with respect to the supply
  • The date of the invoice
  • The date on which the consideration falls due under a written agreement
  • If an undue delay occurs in the issuance of an invoice for ser­vices, the date on which the supplier would have issued an invoice with respect to the supply, but for the delay

Tax may also become due when the supply is completed in spe­cific circumstances. For example, tax on a sale of real property generally becomes due on closing. Similarly, if goods are sold, any tax on the supply that has not previously become due becomes due at the end of the month following the month when the goods are delivered to the purchaser.

Imported goods. Tax on imported goods becomes due when the goods are released by the Canada Border Services Agency for entry into Canada. Specific HST rules apply when property or services are brought into a participating province.

Recovery of GST/HST by taxable persons (registrants)

A registrant (taxable person) may recover the GST/HST payable on property and services that it acquires or imports for consump­tion or for use or supply in its commercial activities. This is accomplished by claiming input tax credits as a deduction on the registrant’s GST/HST return.

A valid tax invoice or customs document must generally be obtained before an input tax credit may be claimed.

A registrant generally claims its input tax credits in the GST/HST return for the reporting period in which the tax becomes payable. However, a registrant may claim an input tax credit at a later date. Recovery is generally possible in any return filed within four years after the end of the reporting period in which the tax became payable. The recovery period is reduced to two years for certain large businesses (more than CAD6 million in annual tax­able supplies) and listed financial institutions.

Restrictions on input tax credits. Input tax credits may not be recovered to the extent that an input is used in making exempt supplies.

The amount of input tax credits that may be recovered is based on the extent to which the input is used for consumption or for use or supply in commercial activities. Special rules apply to capital goods and capital real property. Input tax credits may not be claimed for purchases of property and services that are not used for business purposes (for example, goods acquired for private use by an entrepreneur or an officer or shareholder of a company). If an item is used less than 10% for business purposes, no recovery is permitted. In addition, input tax may not be recov­ered for some items of business expenditure.

The following lists provide some examples of items of expendi­ture for which input tax credits may not be claimed and examples of items for which input tax credits are available if the expendi­ture is related to use in commercial activities.

Examples of items ineligible for input tax credits

  • Purchases used less than 10% in commercial activities
  • Membership fees for social clubs
  • 50% of business meals and entertainment costs
  • Gifts to employees (subject to exceptions)

Examples of items eligible for input tax credits
(if related to commercial activities)

  • Hotel accommodation
  • Attending conferences and seminars
  • Purchase, lease or hire of cars, vans or trucks, subject to certain limits
  • Maintenance and fuel for cars, vans or trucks
  • Parking
  • Mobile phones

Nondeductible (temporary recapture of) input tax credits. The provinces of British Columbia and Ontario, which implemented the HST effective from 1 July 2010, both adopted temporary restrictions on certain input tax credits for large businesses, similar to those in place under the QST regime. As British Columbia exited the HST system effective 1 April 2013, these temporary restrictions no longer apply in that province. When Prince Edward Island implemented the HST effective 1 April 2013, it also adopted temporary restrictions on certain input tax credits for large businesses.

A person is generally deemed to be a large business if either of the following conditions is met:

  • The total amount of the value of the consideration for taxable supplies (including zero-rated supplies) made annually in Canada (other than supplies of financial services and supplies arising from the sale of real properties that are capital proper­ties of the person) by the person and its associated persons exceeds CAD10 million.
  • The person is, or is related to, a bank, a trust company, a credit union, an insurer, a segregated fund of insurers or an investment plan.

It was originally announced that, during the initial eight-year period of the HST in British Columbia and Ontario, large busi­nesses would be required to recapture (repay) a portion of the 7% or 8% provincial component of their total input tax credits calcu­lated for HST paid or payable on specified property or services acquired in, or brought into, British Columbia or Ontario for use by that business in those provinces. These recapture requirements were to be phased out over this eight-year period. For the first five years, beginning on 1 July 2010, large businesses were to be required to recapture 100% of the provincial component of their British Columbia and Ontario HST input tax credits; the recap­ture rate was then to be reduced by 25% over each of the follow­ing three years. As of 1 July 2018, large businesses were no longer to be subject to these recapture rules.

The above approach continues to apply in Ontario. Effective 1 July 2015, the phase-out of recaptured input tax credits in Ontario began, and the recapture rate was reduced to 75%. It will gradually be phased out as the recapture rate is reduced by 25% per year. Effective 1 July 2016, the recapture rate was reduced to 50% and it will be reduced to 25% effective 1 July 2017 and eliminated by 1 July 2018. As discussed in Section B, British Columbia exited the federally administered HST system and reinstated a PST system effective 1 April 2013. As a result, these temporary restrictions in British Columbia no longer apply.

During the initial eight-year period of the HST in Prince Edward Island, effective 1 April 2013, large businesses are also required to recapture (repay) a portion of the 9% provincial component of their total input tax credits calculated for HST paid or payable on specified property or services acquired in, or brought into Prince Edward Island for use by that business in the province. These recapture requirements are to be phased out over this eight-year period. For the first five years, large businesses are required to recapture 100% of the provincial component of their Prince Edward Island HST input tax credits; the recapture rate is to be reduced by 25% over each of the following three years. The first reduction will be effective 1 April 2018 when the recapture rate will be reduced to 75%. As of 1 April 2021, large businesses will no longer be subject to these recapture rules.

For purposes of the temporary recapture rules, specified property or services generally include the following, with minor differ­ences among the provinces:

  • Specified energy
  • Specified telecommunication services
  • Specified road vehicles
  • Specified fuel (other than diesel)
  • Specified food, beverages, and entertainment

Under the Canada-Quebec CITCA signed on 28 March 2012 (see Section B), the restrictions on input tax credits for large busi­nesses in Quebec will be eliminated gradually, beginning in 2018. When they were introduced in 1992, the restrictions were intended to be temporary, but they have remained in place since then.

Quebec’s 2015–16 budget, tabled on 26 March 2015, confirmed that the elimination would be effected by reducing the restriction rate by 25% per year over a three-year period commencing 1 January 2018. Large businesses will be able to claim input tax refunds with respect to property and services to which restric­tions currently apply, at the rate of 25% in 2018, 50% in 2019, 75% in 2020, and 100% as of 2021.

Partial exemption. Tax paid on inputs related to making exempt supplies is generally not recoverable as an input tax credit. A GST/HST registrant that makes both exempt and taxable supplies may be limited to claiming a partial input tax credit.

The amount of input tax credits that a business engaged partially in exempt activities may claim is calculated in the following two stages:

  • The first stage identifies the tax on inputs that may be directly and exclusively allocated to taxable supplies and the tax on inputs that may be directly and exclusively allocated to exempt supplies. Tax on inputs exclusively attributable to taxable sup­plies is eligible for full input tax credits. Tax on inputs exclu­sively related to exempt supplies is generally not recoverable.
  • The second stage apportions tax on other inputs between tax­able and exempt supplies, based on any method that is fair and reasonable in the circumstances and consistently used. The proportion that relates to commercial activities may be claimed as an input tax credit.

Financial institutions are subject to special rules for calculating input tax credits. Charities, qualifying nonprofit organizations and public service bodies, including municipalities, universities, schools and hospitals, may claim a rebate to recover all or a por­tion of the tax paid on inputs used to make exempt supplies.

Refunds. If the input tax credits claimed in a period exceed the amount of GST/HST collected or collectible in the same period, the registrant may claim a refund.

Preregistration costs. When a person who was formerly a small supplier, i.e., with annual sales of taxable and zero-rated supplies below CAD30,000, becomes a registrant for GST/HST purposes, it can claim an input tax credit for the GST/HST it paid on prop­erty that was previously acquired but still on hand for use in commercial activities. This property can include capital property, real property, and inventory. The GST/HST that can be claimed as an input tax credit at that time is equal to the basic tax content of the property.

An input tax credit may also be claimed for GST/HST that became payable before a person became a GST/HST registrant, on services to be rendered after the person becomes a registrant or on any rent, royalty or other similar payment relating to prop­erty that is attributable to a period after the person becomes a registrant. The input tax credit is available only to the extent that the service or rental is for consumption, use or supply in the course of a commercial activity. No input tax credit is allowed to the extent that the payment is for services provided before regis­tration.

Recovery of GST/HST by nonresident businesses

Canada does not refund GST/HST incurred by businesses that are not registered for GST/HST. Refunds are available to non­residents for tax paid on short-term accommodation included in a tour package. Refunds are also available for certain expendi­tures related to conventions held in Canada if at least 75% of the attendees are nonresidents.

Invoicing

GST/HST invoices and credit notes. Strict documentary require­ments must be satisfied before a claim can be made to recover tax that has been paid or become payable. Suppliers are required to provide this information on request.

An invoice or other supporting document containing prescribed information is necessary to support a claim for an input tax credit, refund or rebate.

If a registrant has collected an excess amount of tax, it may refund or credit the excess amount to the customer. A registered supplier has up to two years from the end of the reporting period in which the excess amount was charged or collected to make the refund or adjustment. If the supplier chooses to take this action, the supplier must, within a reasonable time, issue a credit note to the recipient for the amount of the refund or credit.

If the supplier has already accounted for GST/HST on the supply, the supplier may use the credit note to reduce its tax liability in the period in which the credit note is issued. Conversely, if the recipient of the supply has already recovered the tax by claiming an input tax credit or rebate, the recipient must repay the credit or rebate to the Canada Revenue Agency.

Similar tax adjustment measures also apply if tax has been charged or collected correctly by the supplier but the consideration is sub­sequently reduced for any reason. Both volume discounts and returns are treated as price adjustments for GST purposes.

Exports. In general, GST/HST does not apply to exported goods. If the supplier delivers the goods outside Canada, the transaction is treated as a supply outside Canada and is generally not taxable.

If the supplier delivers the goods in Canada, the export sale is zero-rated if all of the following conditions are satisfied:

  • The property must be exported by the recipient as soon after delivery as is reasonable in the circumstances.
  • The property must not be acquired for consumption, use or sup­ply in Canada before exportation.
  • The recipient must not further process, transform or alter the property, before exportation.
  • The supplier of the property must maintain satisfactory evi­dence of the exportation by the recipient.

Most services supplied to nonresidents qualify for the zero rate. However, several exceptions apply. For example, the zero rate gen­erally does not apply if the service relates to property located in Canada or if it is rendered to an individual in Canada.

Foreign-currency invoices. Suppliers may invoice in foreign cur­rency and recipients may make payments to suppliers in foreign currency.

If an invoice is issued in a foreign currency, it must be converted to Canadian dollars (CAD) for reporting purposes. In general, the Canadian currency equivalent may be determined by using the exchange rate in effect on the date on which the consideration for the supply is paid, the date on which the foreign currency was acquired or the average rate of exchange for the month in which tax became payable. Acceptable foreign currency exchange rates include those established by a Canadian chartered bank, the Bank of Canada or the Canada Border Services Agency. The method of conversion chosen by a registrant must be applied on a consistent basis.

GST/HST returns and payment

GST/HST returns. Reporting periods are monthly, quarterly or annual, depending on the level of taxable and zero-rated supplies made by the registrant.

Registrants whose turnover exceeds CAD6 million a year must file returns monthly.

Registrants whose turnover is between CAD1.5 million and CAD6 million a year must file returns quarterly (with an option of filing monthly). Registrants whose turnover does not exceed CAD1.5 million must file annually (with an option of filing monthly or quarterly).

Any net tax due for the period must be remitted with the return. Payments must be made in Canadian dollars.

Annual returns and payment by installment. If a registrant is eli­gible to file annual returns, it may have to pay four GST/HST installments each year. If the total net tax remittable for the cur­rent or preceding year is less than CAD3,000, quarterly install­ments are not required.

Installments are based on an estimate of the net tax due for the current year or the amount of net tax remitted in the preceding year, whichever is the lower amount. Interest applies to underpaid installments. The GST/HST return filed at the end of the year reconciles the installments paid with the amount of net tax actually owed for the year. Any additional tax due must be remitted with the return.

Special schemes. The Streamlined Accounting (GST/HST) Regulations set out several methods that eligible small businesses as well as eligible public service bodies may elect to use for cal­culating their net tax liability. The methods, which are intended to simplify the calculation of net tax, are:

  • The quick method
  • The special quick method for public service bodies
  • The streamlined input tax credit method

Charities that are registered or required to be registered for GST/ HST purposes are required to use a special net tax calculation method.

Electronic filing and archiving. The legislation allows a person who is required to file a GST/HST return to file returns elec­tronically if the person meets the criteria specified in GST/HST Memoranda Series, Chapter 7.5: Electronic Filing and Remitting by the Canada Revenue Agency.

Every person who carries on business or engages in a commer­cial activity in Canada is required to maintain records and books of account for GST/HST audit purposes. The records must gener­ally be kept in French or English at the person’s place of business in Canada. The Agency may permit a registrant to keep his or her records outside Canada in certain cases. Persons using electronic records must retain all business records in an electronically read­able format, and the data must be capable of relating back to the supporting source documents.

Generally, electronic and other records must be retained for six years from the end of the calendar year to which they relate, or for such longer period as may be prescribed by the regulations. However, the minister may authorize a person to dispose of his or her records before the normal retention period has expired or demand that he or she keep them for a longer period. The autho­rization or demand must be made in writing.

Administrative monetary penalties and criminal offenses apply where electronic suppression of sales (ESS) or “zapper” software is used by businesses to modify or delete transaction records with a view to hiding sales and evading GST/HST and income taxes.

Annual returns. As discussed above, persons filing on an annual basis are required to pay quarterly installments and file their annual return within three months following the end of their reporting period. Registrants whose annual revenues from tax­able and zero-rated supplies in Canada, including those made by associated persons, do not exceed CAD1.5 million have the option of filing annual returns (rather than quarterly) and making quarterly installment payments of tax during the year. Any regis­trant has the option of filing returns monthly, even if revenue from taxable and zero-rated supplies is less than CAD6 million.

Financial institutions are required to file an annual information schedule, Form GST111, Financial Institution GST/HST Annual Information Return.

Penalties

If a person fails to pay or remit an amount of tax when due, inter­est (at a rate prescribed by law) is payable on the amount unpaid or not remitted. Interest is compounded daily.

A person who fails to file a return when required is liable to pay a penalty equal to 1% of the outstanding balance plus 0.25% per month for each complete month the return is outstanding, up to a maximum of 12 months.

A person who fails to comply with a demand to file a return for a period or transaction is liable to a penalty equal to CAD250.

A person who knowingly, or under circumstances amounting to gross negligence, makes or participates in making a false state­ment or an omission in a return or other document is liable to a penalty equal to the greater of the following:

  • CAD250
  • 25% of the amount underdeclared or overclaimed

Other administrative penalties may also apply. In addition, tax advisors may be subject to penalties for false statements made for tax purposes. These penalties are often referred to as third-party civil penalties and, depending on the circumstances, can be sub­stantial.

Criminal penalties may also apply in certain circumstances.