A comprehensive guide to GST in Canada

Every business in Canada has to deal with taxes at some point or another, but they don't always have to be difficult to manage! Amongst the essential taxes in Canada is the Goods and Services Tax, which is a federal tax with several rules and regulations surrounding it. Worry not, for we've broken it down to the basics to simplify everything related to the GST for you -- right from the definition to the due dates and penalties. Dive into this guide to know more!  

What is GST?

The GST is a 5% value-added tax that is applied to the sale of goods and services in Canada. This tax is also applicable to real property (such as land and buildings), digital products (including e-books, images, and more), and intangible personal property (such as software and trademarks).

This tax is administered by the Canadian Revenue Agency (CRA) applies across Canada, and is often combined with other taxes. When the GST is combined with the Provincial Sales Tax (PST), a tax called Harmonized Sales Tax (HST) is levied. The HST is also applicable to similar goods and services as GST, and follows similar rules. However, some provinces (Alberta, Northwest Territories, Nunavut, and Yukon) use only 5% GST as their tax.

Kinds of supplies in Canada

Taxable supplies

Taxable supplies are those that are sold at the GST rate of 5%. Such supplies include the sale of housing and commercial property, soft drinks and snacks, clothes, advertising services, and more.

Note: If you sell real property (such as land or buildings), you have to charge and collect GST, even if you haven't registered for GST. However, the buyer may have to pay taxes directly to the CRA if:

• They have registered for GST or

• You're a non-resident or

• Both of you have made a type 2 election on Form GST22.

Zero-rated supplies

These are supplies that are sold at the rate of 0% GST. They include groceries, livestock, agricultural products, prescription drugs, exports, and freight transport such as:

■ transporting goods from a place outside Canada to within Canada (inbound freight movement)

■ transporting goods from Canada to a place outside the country (outbound international freight movement) when the service charge is $5 or more.

GST/HST will not be charged on zero-rated supplies, but you can claim ITCs for the GST/HST paid or payable on property and services acquired to provide these supplies.

Exempt supplies

Exempt supplies refer to those that are exempt from GST altogether, which means that you cannot claim ITCs on purchases made or expenses incurred to provide these supplies. If you provide only exempt supplies, you cannot register for GST.

Exempt supplies include medical services, educational services (such as vocational school courses and tutoring services), rentals for residential accommodation, services by financial institutions, tolls for bridges, roads, and ferries.

Note: While the sale of real property is generally taxable, there are some sales of real property that are GST exempt.

Who collects and pays Canada GST?

GST in Canada works through a reverse charge mechanism, where the buyer has the responsibility of paying GST. All buyers have to pay GST, unless they're Indians or belong to some provincial or territorial governments. Indians must present you with proof of registration under the Indian Act to purchase goods or services without paying the GST/HST.

As the GST-registered business owner or seller, you have to charge and collect GST at the time of sale and remit it with the CRA. So, for instance, when you buy raw materials from your wholeseller, you will pay GST to the wholeseller, and charge the same GST while making the sale to your customer.

In case you don't collect tax from someone who actually owes you GST but doesn't pay (for instance, by providing false claims of exemption certificates), you will still have to account for the tax that you should've collected.

Thus, the buyer is responsible for paying tax, while the seller is responsible for collecting and remitting the tax.

Eligibility to register for GST   

If you fall under the following criteria, you will have to register for GST:

• You provide taxable (including zero-rated) supplies in Canada, including digital products and sales made by digital platform operators.

• You are a small supplier carrying on a taxi or ride-sharing businesses. All other small suppliers don't have to register.

You don't have to register if you are:

• A non-resident uninvolved in business in Canada

• A non-resident selling real property in Canada other than in the usual course of a business

• A small supplier

• If you've registered for GST, you will be considered to be a HST registrant as well.

A small supplier is:

a) a sole proprietor / an individual in a partnership or a corporation with a total revenue of $30,000 or lesser in a calendar quarter and in the previous four consecutive calendar quarters.

b) a public service body with a total revenue of up to $50,000 in a calendar quarter and in the previous four consecutive calendar quarters.

However, if you're a small supplier selling admission tickets (for a place of amusement or an event) or sponsoring a convention in Canada with more than 25% of the delegates being residents of Canada, you will have to register for GST.

Whenever your business crosses the small supplier threshold amounts mentioned above, you will be liable to register for GST. If your revenue crosses the threshold amount in one calendar quarter, you will be considered a registrant from the very day that you crossed it and should collect the GST on the sales that made you cross the threshold amount. From then, you have to collect GST and should ensure that you're registered within 29 days from that day.

Note: Digital economy businesses, including digital platform operators, also have to register, charge, and collect GST. GST registration is not allowed for sponsors of foreign conventions in Canada, unless sales of books, posters, or other items are made.

Voluntary registration

You can voluntarily register for GST if:

■ You're engaged in business in Canada;

■ You're a non-resident who regularly places orders for goods (except prescribed goods such as precious metals) to be exported or delivered to Canada;

■ you're a non-resident who supplies services to be performed in Canada; or

■ you're a non-resident who supplies intangible personal property such as intellectual property in Canada.

If you're registering voluntarily, you have to stay registered for at least one year, and must charge, collect, and remit the GST on your sales. By doing so, you can claim input tax credits for the GST paid on your business purchases.

How to register:

First, ensure that you have a Business Number (BN), which acts as an identity proof for your future transactions. If you're incorporated, you may already have a BN and a corporate income tax account. If otherwise, log into CRA's website and follow these steps to get a BN.

To register for GST, you'll first need to apply to the CRA. Upon approval, the CRA will issue a Business Number (BN) to you. It's worth noting that while incorporation is a common step in the process, it is not mandatory. In some cases, businesses may have already obtained a BN without formal incorporation. Additionally, the CRA may require a security deposit if your business doesn't have a permanent establishment in Canada and makes sales in the country solely through another person's permanent establishment. Alternatively, they may request an insurance policy valued at 50% of your anticipated annual sales. However, this requirement can be waived for companies whose annual sales are less than $100,000

Collecting GST

Once you've registered, you need to collect GST at the rate of 5% whenever you make taxable sales. You have to let your customers know whether GST will be applied to their purchases, through cash receipts, invoices, or any sign at your store. For taxable supplies (other than zero-rated supplies), you have to state one of the following:

• If only the price is mentioned, you have to state that the GST amount is included in the total price

• If otherwise, you have to mention the price and the GST amount separately

Once you've collected the tax, you'll have to remit the amount to the CRA while filing your GST returns. At this time, you can deduct your Input Tax Credits (ITCs) from the GST you charged your customers. The final amount would be your net tax.

If your customers have also registered for GST, you have to mention the details accordingly on the invoices and receipts, so they can use it while submitting their claims for ITCs. The same process applies to you as you can use invoices from your business purchases to support your ITC claims.

Input Tax Credits in Canada

As a registrant, you can recover the GST paid on your business purchases and expenses by claiming ITC while filing returns. In case you have ITCs that were unclaimed, you can claim those on a future GST return. However, you cannot claim ITC for supplies made before you became a registrant.

There are some purchases and expenses for which you cannot claim an ITC, such as capital property and membership fees for clubs.

For most registrants with an annual revenue below $6 million, the time limit is 4 years. However, the time limit is 2 years for financial institutions and businesses with an annual revenue crossing $6 million for each of the two preceding fiscal years.

GST for drop shipping

If you're an unregistered non-resident supplying goods to customers in Canada, you may first have to buy those goods from a GST registered Canadian supplier and request them to deliver the goods to your customer in Canada on your behalf. This process is called dropshipping and has its own GST rules.

The Canadian supplier delivering to your customer may also be involved in commercial processes (manufacturing, processing, repair, or storage) on the goods before delivering them to the final customer. 

When a GST registered supplier in Canada delivers your goods to a GST registered customer, the latter must issue a drop-shipment certificate to the former, so that tax won't apply to the sales.

If a GST registered supplier in Canada delivers your goods to an unregistered customer, you will have to pay the GST when the former delivers the goods to the latter.

GST due dates and reporting periods

When you register for GST, the CRA will assign a reporting period to you, based on your annual revenue from taxable sales in Canada in your previous fiscal year. These sales include zero-rated supplies, and those of your associates (in case you're in a partnership).

When calculating this amount, do not include revenue from:

■ Exports

■ zero-rated supplies of financial services

■ taxable supplies of capital real property

■ goodwill.

While the reporting period is generally assigned by the CRA, you can opt for a more frequent reporting period. Here's a table that displays the reporting period you can choose, instead of the assigned one.

Assigned and optional reporting periods

Due dates

If your reporting period is monthly or quarterly, you have to file your GST return and remit any amount you owe by the month following your reporting period. If your reporting period is annual, you have to file your GST return and remit any amount owing by the third month following the end of your fiscal year.

However, there are a few exceptions:

Your GST payment will be due by April 30 if:

■ you're an individual with business income for income tax purposes;

■ you file annual GST returns; and

■ your fiscal year ends on December 31.

Your GST payment would be due by April 30, but returns can be filed by June 15.

To change your assigned reporting period, you can login to the CRA website and make the changes directly.

How to calculate net tax

For each GST reporting period, you need to calculate your net tax and report it on your GST return. To do so, calculate:

■ the GST collected during the reporting period

■ the GST paid for your business purchases and expenses for which you can claim an input tax credit.

The net tax would be the difference between these two amounts, including adjustments. If the GST paid is more than the GST you charged or collected, you can claim a refund of the difference.

If you're an annual filer and your net tax for a fiscal year is $3,000 or more, you have to make installment payments throughout the following fiscal year. These quarterly payments (usually amounting to one quarter of your net tax from the previous year) have to be paid one month after the end of each of your fiscal quarters.

How to file GST returns

You can file returns via Netfile (online), telefile (telephone), and Electronic Data Interchange (EDI: The electronic means of filing Form GST34 return). Each fiscal year, the CRA will send across a package with the following documents to help you file your GST return:

• A sheet displaying the reporting periods and due dates for your business

• An access code for filing your returns online via GST netfile or by phone using GST telefile.

• Remittance vouchers to use for making payments at your financial institution

To fill out your GST return, you will need information about the following:

• your sales (including exempt and zero-rated supplies) and other revenues

• the GST you charged your customers (even if it wasn't collected)

• the GST paid and payable by you

Some of the other information that would be asked would be details such as installments paid during the year, adjustments to your net tax (such as recovery of bad debts), and transitional information relating to new housing in Ontario, Nova Scotia, New Brunswick, or Newfoundland and Labrador.

Ensure that any amount you may have entered in a previous return is not included in the present return.

GST returns can be filed offline via mail, and payments can be made at a financial institution. However, it's mandatory for some registrants to file online, such as:

■ GST registrants (aside from charities) with an annual revenue of more than $1.5 million from taxable sales

■ Registrants who have to recapture ITCs for the provincial part of HST

■ Builders impacted by the transitional housing measures in British Columbia, Ontario, and Prince Edward Island

Registrants with their accounts administered by Revenu Québec don't have to file online, but most others have to file online. If you are required to file online and don't do so, penalties will apply.

For more information, check out Mandatory electronic filing.

Filing returns by mail

If you aren't required to file online, you can mail your return and payment to the address shown on the return. If you filed using Netfile or Telefile, you can also choose to pay by check or money order. However, you must include Form RC158 (the form used to send payments along with returns) and the netfile/telefile remittance voucher with your payment when you send it to the CRA.

GST returns for non-residents  

If you are a non-resident, fill out your GST return and remit your dues in Canadian dollars.

If you want to make the payment in your currency, the exchange rate for converting the payment to Canadian dollars will be decided by the financial institution processing your payment, and may vary from the exchange rate that the CRA uses.

Filing the final GST return  

When you cancel your registration, you will have to file two returns for two separate reporting periods:

• A return for a reporting period ending on the day before you cancel your registration

• A second return for a reporting period beginning on the day you cancelled your registration till the last day of that month. This return is needed only if you have tax to remit for that period.

Conclusion

While the rules surrounding Canada GST may seem extensive, you can ace your tax compliance by going through the main pointers mentioned above, and by using powerful software like Zoho Books that makes your business accounting and taxing processes so much more efficient and quick. With a tool equipped to simplify your tax requirements, your business can move forward and grow with ease.