Dean Blachford, Tax Litigation Lawyer
Valentine Gurfinkel, Student-at-law
For tax purposes, goods and services bought and sold in Canada fall into three categories: Taxable supply, Exempt supply and Zero-rated supply.
The type of supply a business sells profoundly affects its tax liabilities and benefits. Too many businesses run into trouble with the Canada Revenue Agency (CRA) because they do not fully appreciate the type of supply they sell.
In this article, we explain the differences between the three types of supply and the impact they have on businesses.
A business supplies a taxable supply when it sells a good or service to which the federal Goods and Services Tax (GST) or the Harmonized Sales Tax (HST) apply. The HST is a kind of two-in-one tax adopted by a handful of provinces (Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador) that combines the federal GST and a provincial sales tax into a single tax collected by the CRA. Provinces without an HST impose and collect their own provincial sales taxes, distinct from the federal GST. Currently, the federal GST is 5% and the Ontario HST is 13%.
A business selling a taxable supply with a revenue of at least $30,000/year is required by law to collect and remit the full GST/HST to the CRA. It is the business, the seller of the taxable supply, that is liable for the GST/HST taxed on its goods and services—not its customers.
On the plus side, a business selling taxable supplies is eligible to claim Input Tax Credits (ITCs) on expenses related to its taxable supplies. ITCs are the mechanism through which businesses are reimbursed for the GST/HST they pay in the course of their business.
A business supplies an exempt supply when it sells a good or service to which the GST or the HST does not apply. Examples of exempt supplies include used residential properties sold by someone other than the builder, rentals of residential complexes for more than a month and non-cosmetic dental work. Various healthcare, educational and governmental services are also considered exempt supplies.
A business selling an exempt supply does not need to worry about collecting and remitting any associated GST/HST to the CRA. However, a seller of exempt supplies also cannot claim ITCs on the exempt supplies. In certain circumstances, a business may be able to claim a Public Service Bodies’ rebate in lieu of the ITC.
A business supplies a zero-rated supply when it sells a good or service that is taxed at the rate of 0% GST/HST. Some examples of zero-rated supplies include basic groceries, such as milk and produce, prescription drugs and assistive medical devices.
A business selling zero-rated supply, like that selling an exempt supply, does not have to collect and remit GST/HST on the supply, since there is nothing to collect. However, because zero-rated supplies are technically still taxable (just taxable at 0%), suppliers of zero-rated supply can still claim ITCs on associated expenses and receive a refund on the HST they paid on those expenses.
The rules around the categorization of goods and services into Taxable, Exempt, and Zero-rated supplies are notoriously confusing. The CRA routinely miscatagorizes businesses’ goods and services, improperly imposing additional taxes and penalties in the process.
At HazloLaw – Business Lawyers, we have extensive experience navigating the complex rules of supply categorization and successfully resolving disputes with the CRA over the remittance of GST/HST and the eligibility of tax credits.
If you have been reassessed by the CRA on the remittance of GST/HST or the eligibility of your tax credits, please contact Dean Blachford to discuss your options.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Dean Blachford today. 613-747-2459 ext.310, [email protected]