As a Canadian business owner, a person may be required to charge sales tax on the goods and services that they sell or provide. The sales tax percent varies from province to province. Because the tax acts as a value-added tax, the taxpayer may be able to claim a tax credit for the sales tax paid on items used in the business.
The following is a brief overview of what business owners in Canada should know about the Goods and Service Tax (GST), Provincial Sales Tax (PST), and Harmonized Sales Tax (HST).
Canada Goods & Service Tax (GST), Provincial Sales Tax (PST), or Harmonized Sales Tax (HST)
Depending on the province or territory in which the business operates, the business owner may need to collect either:
- A combination of GST and PST
- GST only
- HST
HST combines PST with GST to create one tax.
Each province has its own sales tax rate.
Canada GST and PST or HST Tax Rates
Currently, the Federal GST rate is 5%. If a business operates in the province of Alberta or in one of the three territories (Northwest Territories, Nunavut or the Yukon), they do not need to collect sales tax on goods and services beyond the 5% GST.
Some provinces charge a separate PST. Taxpayers who operate in these provinces will be required to register for a tax account within that province. Separate filing will be required to report and remit the PST. Provincial sales tax rates as follows:
- British Columbia: 7% provincial sales tax (PST) on retail price only
- Manitoba: 8% retail sales tax (RST) on retail price only
- Quebec: 9.975% Quebec sales tax (QST) on retail price only
- Saskatchewan: 6% provincial sales tax (PST) on retail price only
Other provinces combine PST with the GST. In these places, the business owner needs to collect 5% GST as well as provincial sales tax and remit the two taxes together to Canada Revenue Agency (CRA). Provinces in Canada that collect HST are:
- New Brunswick: 15%
- Newfoundland and Labrador: 15%
- Nova Scotia: 15%
- Ontario: 13%
- Prince Edward Island: 15%
When businesses sell and ship or deliver taxable goods and services to out-of-province/territory customers, the sales tax that applies in the customer’s province or territory is generally applicable.
An online seller, who sells across Canada, will need to collect GST calculated on the percentage applicable in the province the buyer resides.
Most retail goods and services are subject to GST/HST; however, some supplies, such as basic groceries, prescription drugs, most livestock and many agricultural and fishery products are zero-rated. This means that GST/HST applies to them, but at a rate of 0%.
Other supplies, such as most health, medical, and dental services performed by licensed physicians or dentists for medical reasons, child care, residential rentals and music lessons are GST/HST exempt.
The basic difference between zero-rated taxable business activities and GST-exempt goods and services is that the business owner can claim input tax credits for those that are zero-rated, while they cannot claim input tax credit for those that are exempt (see below).
Canadian GST or HST for Foreign Customers (outside of Canada)
If a Canadian business sells goods or services to customers outside of Canada, they are not required to collect GST/HST or PST, provided they take delivery of the goods or services outside of Canada. The service must be wholly used outside of Canada. If non-resident customers, such as tourists, make purchases within a Canadian province or territory, they are required to pay the GST/HST and PST.
In some cases, they may be eligible to receive a GST/HST rebate. For input tax credit purposes, these goods and services are considered zero-rated taxable goods or services.
Canada Input Tax Credits
Business owners can recover GST/HST that they pay or owe on purchases and expenses related to GST taxable business activities in the form of input tax credits. Input tax credits are then netted against the GST/HST that the business collects during each reporting period.
When claiming input tax credits, it is important to know exactly what qualifies. Generally speaking, if the buyer does not use the item they are purchasing directly for GST taxable business purposes, they cannot claim an input tax credit for it.
Calculating and complying with Canadian GST and HST can be complex, especially for someone who has recently started a business with no prior experience in collecting GST/HST. Therefore, it is highly recommended that business owners consider consulting a Canadian tax expert before proceeding with carrying out business activities. While, a cross-border tax expert’s advice should be taken if the Canadian business owner wishes to cater to customers in the U.S. and other nearby countries.
Learn more about GST/HST Implications when Exporting or Importing Goods in Canada
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
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