Goods and Services Tax (GST)

January 01, 2025
Goods and Services Tax (GST)

Introduction 

Introduced in 1991, the Goods and Services Tax (GST) is governed by Part IX of Canada's Excise Tax Act (ETA). As a value-added tax system, GST is imposed at every stage of production, from the supply of raw materials to the sale to the final consumer. In certain provinces, including Ontario, the Harmonized Sales Tax (HST) was introduced by combining the federal GST with provincial sales tax, and both the GST and HST are administered by the Canada Revenue Agency (CRA). For simplicity, this article may refer to the combined tax system as GST/HST.

 

How Does GST Apply & Who Pays GST?

The GST applies to most goods and services in Canada, whether sold domestically or imported for consumption in Canada. GST is levied at a rate of 5% on the sale value of taxable supplies made in Canada, which are defined as supplies made in the course of commercial activities. The tax burden ultimately falls on the consumer, but businesses that are registered for GST/HST are required to collect the tax on behalf of the CRA.

Under subsection 165(1) of the ETA, every recipient of a taxable supply made in Canada is required to pay GST on the value of the consideration for the supply, which typically includes sales, transfers, barter, licensing, rental, or lease agreements.

 

Zero-Rated and Exempt Supplies

While most goods and services are subject to the 5% GST, there are exceptions:

  • Zero-rated supplies are taxable at 0%, such as groceries, prescription drugs, and exports. These supplies do not require GST/HST to be collected from the consumer, but businesses can claim Input Tax Credits (ITCs) on the GST/HST paid on goods and services acquired to provide zero-rated supplies.
  • Exempt supplies include services such as educational services or financial institution services. These supplies are not subject to GST/HST, and businesses providing them cannot claim ITCs on their purchases.

 

Registering for GST and Collecting GST

For businesses that make taxable supplies, registration for GST/HST is mandatory unless they qualify as small suppliers. A small supplier is a business whose taxable supplies are below $30,000 annually in the past four quarters. Small suppliers are not required to register for GST/HST, but they may choose to do so voluntarily to claim ITCs.

 

Businesses that are registered for GST/HST are required to collect the tax from their customers on every taxable supply they make. The amount of GST collected is remitted to the CRA, and businesses can claim ITCs for GST paid on their own business-related purchases.

 

Filing the GST Return & Remitting GST to the CRA

Once registered, businesses must file GST returns to report the amount of GST collected from customers. These returns help businesses calculate the difference between GST collected and ITCs claimed. If the business has collected more GST than it has paid, it must remit the difference to the CRA. Conversely, if a business has paid more GST than it has collected, it may be entitled to a refund.

Filing requirements vary based on a business's revenue:

  • Monthly: Businesses with annual revenue over $6 million must file monthly returns.
  • Quarterly: Businesses with annual revenue between $1.5 million and $6 million file quarterly.
  • Annually: Small businesses with annual revenue less than $1.5 million may file annually.

 

GST Misuse & Abuse

Despite the clear framework for GST, there are instances of misuse and abuse of the system. In cases of tax fraud or evasion, businesses or individuals may intentionally avoid remitting GST/HST to the CRA. The Criminal Code and ETA set penalties for such actions, which can include fines of up to 200% of the tax evaded and potential imprisonment.

Examples of GST abuse:

  • Businesses that collect GST from customers but fail to remit it to the CRA.
  • False claims for exemptions or ITCs, where businesses claim tax credits or exemptions they are not entitled to.
  • Underreporting GST collected from sales or inflating ITC claims for non-existent expenses.

 

Tax Tips – Voluntary Disclosures Program

Canada's tax system relies on self-reporting by businesses and consumers. The Voluntary Disclosures Program (VDP) allows taxpayers to correct past errors or omissions in their GST/HST filings. By participating in the VDP, businesses can avoid penalties and reduce the interest owed on overdue taxes.

If you suspect your GST/HST filings may be incorrect, it is advisable to proactively disclose any errors to the CRA under the VDP before an audit is initiated. The VDP offers businesses an opportunity to rectify issues and avoid more severe consequences.

 

Conclusion

The Goods and Services Tax (GST) is a key component of Canada's tax system, applying to most business transactions. However, businesses must navigate the complexities of registration, collection, ITCs, and remittance to ensure compliance with the Excise Tax Act and avoid penalties. For businesses facing difficulties with GST/HST compliance, understanding the full scope of the law and seeking professional guidance is crucial to ensure proper reporting, claim the appropriate ITCs, and avoid the serious risks associated with tax fraud or misuse.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

 

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