What You Need To Know About GST
The Goods and Services Tax (GST) is a tax which is paid every time we buy a product or service. Another name for GST is sales tax or value added tax. This means that every time value is added to any product or service, a tax is levied. Value added tax is one of the three main tax sources for the Canadian government, together with payroll and income tax.
Federal vs Provincial
While this tax is imposed in some way in most countries, in Canada it consists generally of a federal and provincial component. A notable exception is Alberta and the territories where only the GST is applied. In some provinces like Ontario, the two taxes are combined into a harmonized sales tax, or HST. In other provinces like Quebec, the two taxes are separate. The GST on it’s own is currently 5% of most products and services while in Quebec the Quebec sales tax (QST) is 9.975%.
Individuals vs Businesses
While individuals are impacted by having to pay higher prices on various products and services, businesses are obligated to collect the sales taxes and remit them to the relevant government. The amount which must be paid to the government can be reduced by GST paid by the business for supplies. Lower income individuals receive a quarterly GST tax credit payment to offset some or all of the GST they pay.
When should a business start paying GST?
Any business which makes $30,000 in revenue in one quarter or cumulatively over a 12 month period, must start collecting and paying sales tax on the first day of the second month after the quarter that the $30,000 was reached. Often it is worthwhile for a company to register for a GST number even before the 30,000 is reached, as they can potentially get credit for the GST spent on supplies.
GST Payment Process
Businesses that collect and remit GST must keep track and record of all of their GST collected on sales as well as receipts for expenses paid. The amounts are netted each GST period whether it’s monthly or quarterly and then it is reported either online or on paper with remittance slip and a check is written (or received) to (from) the government.
Taxable Supplies Vs Exempt Supplies Vs Zero Rated Supplies
There are three categories of supplies:
Most supplies are taxable and GST is both collected and paid on them. This includes most commercial activity, so if an item is not in the other two categories they are probably in this one. An exceptional case is meals and entertainment which you can only claim 50% on when deducting as a taxable supply.
GST is not collected or paid for supplies that are exempt. This means the expenses cannot be claimed by a business to reduce their GST owed to the government. Examples are:
- Financial services (ex bank fees)
- Purchases made outside Canada
- Medical and dental services
- Residential rent (excludes commercial rent)
- Educational services
- Daycare services
Zero rated supplies
Zero rated supplies are not paid GST on, but businesses can use the expenses as credit to lower their GST owed to the government. Examples are:
- Basic groceries (includes fruits and vegetables etc, excludes snack, liquor, soda, candy etc)
- Prescription drugs (excludes over the counter medication like Tylenol, vitamins, band aids etc)
- Medical devices (includes glasses, contacts, wheelchairs, walkers, canes etc)
If you have a business, it is wise to keep on top of what is owed and what can be deducted as this can result in stiff penalties. A professional should be consulted to determine the taxable status of the products or services you sell and buy.
Or you can just move to New Hampshire where the sales tax rate is zero.