Understanding the difference between GST, HST, and PST in Canada can be a challenge. Sales tax alone can be a difficult subject to grasp, but dealing with 3 different types in one country certainly adds to the complexity. Despite how confusing it may be, companies that do business in Canada need to understand the important details surrounding GST, HST, and PST. Not understanding this can lead to poor financial performance and potential penalties for businesses that conduct business in Canada.
GST, HST, and PST in Canada are the three types of sales taxes levied in Canada. GST and HST are administered and enforced by the CRA (Canada Revenue Agency). PST is handled through the individual revenue agencies of each province in Canada that collects PST separately. The tax that’s collected varies from province to province.
The information below is provided to give general guidance on the definitions and differences between each type of sales tax collected in Canada*. Knowing the ins and outs of the sales tax system in Canada will help businesses be successful and remain in compliance with tax regulations.
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For residents living in Canada that aren’t business owners, understanding the sales tax system is likely not a top priority. Visitors to Canada will probably share this sentiment as well. Of course, when visiting Canada you’ll want to know what tax rate to expect when you pay for things. However, beyond this general knowledge and awareness, there’s little reason to develop a deeper understanding of the overall system.
On the other hand, business owners in Canada (especially small business owners) need to know many important rules regarding sales tax to ensure they’re in compliance. Failing to comply with tax regulations set forth by the Canadian or provincial governments can lead to severe penalties. Even though sales tax isn’t typically applied on exported goods from Canada, foreign companies should still have a basic understanding of Canada’s sales tax system. There may be some situations in which a foreign company is responsible for paying sales tax in Canada.
GST, or Goods and Services Tax, is a tax in Canada that is collected on the purchase of nearly all goods and services throughout Canada. As of September 2019, the GST rate was 5%. The GST applies to all provinces in Canada regardless of other sales taxes levied within the individual provinces. The first federal form of GST for Canada was implemented in 1920.
The rate of GST is levied in all Canadian provinces either separately along with the PST, or included within the HST. However, in 2019, the GST was the only sales tax levied in 4 Canadian provinces. These provinces are:
This means that residents of these 4 provinces experience far less sales tax than those in other territories.
The Harmonized Sales Tax, or HST, is a combined sales tax consisting of the GST and PST within a province. HST rates differ in each province since it’s a combination of the 5% GST throughout all of Canada and the different PST rates for each province or territory. HST was first introduced in Canada in 1997 in the provinces of Newfoundland & Labrador, Nova Scotia and New Brunswick. When HST was first implemented, the GST for Canada was 7%. Since then, there have been adjustments to both the GST and PST within each province, which in turn has affected the HST.
On the surface, the HST creates a more simplified sales tax system for the provinces that employ it. Before HST, business owners responsible for filing taxes would need to complete additional paperwork to satisfy the needs of both the GST and PST. Since HST is fully managed and administered by the Canada Revenue Agency, business owners have less paperwork to keep track of and complete.
Presently, the following provinces implement HST at these rates:
Upon further inspection, though, there’s more to the HST than simply combining the Goods and Services Tax and the Provincial Sales Tax.
The additional changes that occur when switching to an HST system include:
Due to this multitude of changes, adoption of the HST isn’t a simple process. Citizens, business owners, and lawmakers alike take sides on their support or opposition of the HST. The issue was particularly contentious for the province of British Columbia from 2010 to 2013. In addition to the 3 original provinces that adopted the HST, Ontario and British Columbia also approved the system in 2010. This approval occurred despite some reports showing as much as 90% of citizens in the two provinces opposed the new system.
Opposition in British Columbia didn’t waver after the HST was in place. In 2011, citizens voted to revoke the HST and return to the two-tax system of the GST and PST. This change took place in 2013.
As of September 2019, not all provinces have adopted the HST system.
The provinces in Canada that operate under the HST are:
Prince Edward Island became the newest adoptee of the system, when it was implemented in April of 2013. While there’s certainly the possibility of more territories converting to the HST in the future, it won’t be without careful consideration. British Columbia proved that it’s also within the realm of possibility to switch back from the HST system. Lawmakers in Canada are constantly reevaluating and looking at the sales tax system to determine if changes should be made.
Provincial Sales Tax (PST) is a sales tax that applies to goods and services and is unique to each province/territory in Canada. The PST rate and the goods and services that are eligible and exempt from PST vary from province to province. PST rates range from 6-10% depending on the province.
In 2019, only 4 provinces charged PST and GST separately. These 4 provinces are:
The remaining territories incorporate their PST within the HST or charge no PST at all. While PST is levied in Manitoba and Quebec, the term PST isn’t actually used. In Manitoba, PST is referred to as RST (Retail Sales Tax), while in Quebec it is QST. Other than the name difference, it operates the same as PST.
Knowing what each type of sales tax is and the difference between them is only part of the equation. For most Canadian residents, having a basic understanding of the sales tax system that’s applicable in the province they live in is sufficient. Business owners, however, must have a deeper level of awareness when it comes to the relevant sales tax in their territory. As noted earlier, a lack of knowledge can potentially lead to costly errors and financial penalties for business owners.
When it comes to what business owners need to know beyond the basics of Canadian sales tax, there’s a short, but important list. The need to know questions include:
Finding the answers to these questions will help business owners ensure they’re in compliance with tax laws and regulations. Residents and foreign companies also benefit from knowing the answers to a couple of these questions as well. Listed below are the answers to these questions.
During the course of doing business with foreign companies, it's likely you'll need to fill out a NAFTA Certificate of Origin at some point. To learn more about Canada's version of this form, check out our blog that discusses Canada's NAFTA Certificate of Origin.
The first step in the sales tax process in Canada is obtaining the proper certification to be able to collect GST, HST, and/or PST. This process starts by applying for a BN (Business number) with the CRA (Canada Revenue Agency). This is required because regardless of where you operate or where your customers purchase from, GST will be applicable. To obtain a BN from the CRA, Form RC1 needs to be completed. Once a business number is obtained a business can begin charging and collecting sales tax. The business number allows businesses to charge and collect both GST and HST; there isn’t a separate form for both.
In addition to registering to collect sales tax, there are optional sections within the same form that will allow businesses to initiate other programs as well. These other programs include import-export, payroll deductions, corporate income tax, charity and more.
For many businesses in Canada, more forms will need to be completed to satisfy other sales tax requirements. Businesses that are located in a province that separately charges and collects PST will need to complete additional documentation. Additionally, businesses that don’t have a physical location in a PST province, but sell goods or services to customers in one of these provinces is required to register with that province to collect PST. Some businesses, like online e-commerce retailers, may need to register in all PST provinces. For instance, an online clothing store based in Alberta (a territory that only charges GST), that sells clothes to all of Canada, including Manitoba (a province that charges GST and PST) would need to register for PST in Manitoba.
The additional forms required to register for PST(RST in Manitoba and QST in Quebec) in other provinces are listed below:
The only exception to required registration for businesses is the small supplier rule. The small supplier rule in Canada dictates that a business can be exempt from registering for the GST/HST. A business is considered a small supplier if the total revenue of the last four quarters is $30,000 or less. In this instance, the CRA classifies a quarter according to a standard calendar quarter, rather than a fiscal calendar. The rules vary slightly when it comes to designating a charity as a small supplier. For example, the revenue threshold is $50,000 and charities don’t have to register in their first year of operation, regardless of total revenue.
The rules can be different for a foreign company operating in Canada. For more information, check out our article Becoming a Non-Resident Importer in Canada.
Reporting of sales tax information to the CRA and/or local provincial revenue department is obviously a necessity. Failure to properly follow the guidelines for reporting and remitting payment can result in significant fines and penalties. Since the rules on reporting aren’t the same for all businesses, owners need to know which group they fall into and how they need to handle their returns. Most of the rules are organized based on the amount of annual revenue generated from taxable goods or services. For example, businesses that generate $1.5M or more in taxable revenue must file their returns electronically.
In terms of reporting periods, annual revenue is the deciding factor.
All businesses are assigned a reporting period when they receive their BN. It’s possible that the assigned reporting period is different from the general standards listed above. If a business wants to change their reporting period, they can submit a request to the CRA or local provincial authority. It’s worth noting that a business can only submit returns more frequently than the standard period and not less frequently
Unless the CRA directly sends you a paper copy of a return to complete, it’s safe to assume that you’re required to submit electronically. It’s likely that in the future all returns will need to be submitted electronically. There are some situations in which a particular type of electronic filing is required. If you’re unsure about how or when to file your returns, the CRA or local revenue authority can provide the needed information once your provide them with your BN.
In short, the end consumer is generally responsible for paying sales tax in Canada. The amount that customers pay will be based on their geographical location. For traditional in-shop purchases, the tax rate(s) of the province that the shop is located in will apply. Transactions that occur across province lines follow a different rule. The location of the purchaser, not the supplier, determines the rate of sales to be charged. For example, if a customer in Nova Scotia purchased 70 pallets of products from a business in Alberta, the customer would pay HST at the Nova Scotia rate, rather than GST at the Alberta Rate.
When importing products from other countries, business owners are responsible for paying the GST or the GST portion of the HST depending on where the province that the goods are being imported into. Ultimately, this cost is typically passed onto the end consumer, but business owners are responsible for the up-front cost of importing the goods. Tax credits do come into play in the case of importing, which we discuss below.
There aren’t many exceptions when it comes to paying sales tax in Canada. The exceptions and situations in which individuals don’t need to pay sales tax are outlined below. Keep in mind that the information below applies to GST/HST. Provinces that charge PST separately follow different guidelines in terms of exemptions.
Some Provincial Government Employees
In general, employees of government organizations are required to pay sales tax. However, there are some situations where these individuals can be exempt.
The conditions that must be met in order to be exempt are listed below:
Only if the above conditions are met, can a business exempt an individual from paying sales tax. Business owners are advised by the CRA to keep records of certification documents to go along with tax free transactions. It’s possible that the CRA will review tax free purchases to verify compliance.
First Nations Individuals/Indians
Indians in Canada (sometimes referred to as First Nations people) are eligible for sales tax free purchases in some cases. This often comes down to how the purchase is used and whether it occurs on or off of a reserve.
Purchases of goods and services by Indians are free of sales tax if:
The above scenarios are contingent on the individual purchasing the goods or services having valid documentation stating their eligibility for tax free status as an Indian. Similar to the record keeping recommendation for tax-free purchases by a provincial government, the CRA insists on the same for tax-free purchases by First Nations individuals.
Special rules apply in Ontario due to a relief plan included in the Retail Sales Tax Act of Ontario. The relief plan provides Indians with valid documentation a point of sales rebate when purchasing goods off of a reserve while in Ontario. Full details of the relief plan are available here.
Foreign Companies Importing Canadian Goods
When selling and shipping goods to companies outside of Canada, no sales tax is charged. Even though the goods are still taxable, they’re taxed at a rate of zero which means no tax is charged. This is a positive for foreign companies looking to do business with Canada. Even moreso, companies that export goods are sometimes eligible for income tax credits on these goods even though they aren’t taxed when exporting.
If you conduct business with companies outside of Canada, some of the details can be confusing. Use the links below to read a few of our other articles that can provide some clarity on the subject.
Business owners need to know which products and services they cannot charge sales tax on. Making a mistake and charging sales tax on something that’s either zero-rated or exempt can become a significant problem. With that being said, it’s important to make a distinction between exempt and zero-rated. Both zero-rated and exempt goods and services are free from sales tax. For reporting and rebate purposes, there’s an important difference. Exempt goods and services are generally not eligible for input tax credits, while zero-rated goods and services typically are eligible. Only public service bodies- non-profit organizations, charities- are eligible for tax credits on exempt goods and services.
The list below is an example of goods and services that are exempt from sales tax in Canada:
Examples of zero-rated goods and services are:
A full list and explanation of zero-rated and exempt goods can be found here on the Canada Revenue Agency’s website. It’s important to note that in provinces that charge PST (British Columbia, Manitoba, Quebec, and Saskatchewan) there may be different rules that apply to the PST portion for zero-rated and exempt goods. It’s important to consult a tax professional regarding which goods or services offered by your business should have sales tax applied.
Business owners in Canada can take comfort in knowing that it’s likely you’re eligible for input tax credits, or ITC’s. Claiming ITC’s can have a significant positive impact on the overall tax burden of a business. For most businesses, this will mean less tax is owed to the CRA. However, for some this can potentially lead to receiving a tax refund in rare cases.
Before business owners claim ITC’s it’s important to be aware of the requirements and process that needs to be followed. While being granted ITC’s is a plus, missing vital steps in the process can lead to costly errors. For example, incorrectly claiming ITC’s on a tax return can trigger a thorough audit by the CRA. Blatant errors found during an audit have the potential to bring about pricey fines.
Luckily, the steps required to properly file for and receive ITC’s aren’t too complicated. Take a look below at each of the steps in the process.
First and foremost, in order to be able to claim ITC’s, your business needs to be registered for the GST/HST. As noted earlier, this can be accomplished at the same time when obtaining a BN from the Canada Revenue Agency.
When it comes to which goods and services are eligible for ITC’s, there are important factors that need to be confirmed first.
Listed below are a few general guidelines that need to be followed to determine if goods qualify for an ITC
Additional rules and restrictions can apply when ITC’s involve financial services, real estate, and multiple companies.
Typically, the full amount of GST/HST paid for goods used for your business can be claimed through ITC’s. Of course, like most rules there are exceptions. Many of these exceptions come into play when a product is only partially used for commercial activities.
After you’ve collected taxes, it’s time to forward that money onto the CRA. If you’re a small business, the onus is on you to have saved the taxes you collected. Hopefully you still have it, and don’t have to scrounge it together in order to pay the government. The proper term for forwarding this money to the CRA is to remit payment.
For each different kind of tax, you will need a separate account, although there is a single registration process for both the GST and HST. After that is taken care of, you can choose to pay the taxes monthly, quarterly or annually, depending on which period you initially file in.
You can wire the money electronically, have your bank issue a check or send the payment by mail. Any payment over $50,000 cannot be sent by mail and will have to be remitted electronically or by your bank.
As far as PST goes, if you are in Quebec, Saskatchewan, Manitoba or British Columbia, you will need to file with the appropriate provincial government.
Whether you’re a U.S. based company shipping products to Canada or a Canadian business importing goods from the U.S., we can help you.
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