Current GST/HST procedures are difficult to understand and impose significant reporting and remittance obligations on sole proprietors, small and medium-sized businesses, and large corporations alike. In order to thrive under the GST/HST system, companies must understand their tax classification under the Excise Tax Act. There are three main classifications of supplies in the Excise Tax Act: taxable supplies, zero-rated supplies and exempt supplies. In the context of GST/HST, “supply” refers to goods and services produced by businesses and supplied by any means to end-users, in other words, “sales of goods and services.”
This article will compare, and contrast zero-rated and exempt supplies and their respective tax obligations and planning alternatives. If you’ve said to yourself, “GST/HST system is very complex,” you would be right. However, we are a leading Canadian GST/HST tax law firm that deals with GST/HST issues daily, and we’re here to advise and assist you in maximizing your GST/HST under this act. In the meantime, we’ve compiled some definitions and tips to help you navigate the rules surrounding zero-rated and exempt supplies for GST/HST.
Zero-rated Supplies and Excise Tax
“Zero-rated supply” is recognized in subsection 123(1) of the Excise Taxation Act. Manufacturers of zero-rated supplies are not required to collect GST or HST on their sales, but they can for any GST/HST spent during the production of the exempt supply. Prescription medications and biologicals, medical orthotic technologies, sanitary products, regular commodities, livestock and aquaculture, trade, transportation services, and business and insurance services are among the products or services listed in 123(1). Though the justifications for each of the above categories are varied, it is evident that each group features specific products and/or services that society deems essential. What’s more, is that there are tax incentives associated with zero-rated deliveries; however, a more detailed explanation of the Excise Tax Act is required. Feel free to connect with us today to receive information and clarification on tax incentives related to zero-rated deliveries.
The recipient of a “taxable supply” (usually the customer) is charged GST/HST at the applicable provincial tax rate. That is, the final consumer must pay GST/HST. Zero-rated supplies are taxed and subject to all applicable rules. According to subsection 123(1), “taxable supply” means “a source made as part of a trade and commerce,” which includes “any business or venture in the area of commerce carried out for profit.” These rules also define a business as one that produces zero-rated goods.
Claiming zero-rated products as business activities allows for tax planning opportunities. According to Section 169 of the Excise Tax Act, GST/HST registrants can claim business income for every GST/HST paid if the GST/HST was obtained to make a supply in your commercial operations. Therefore, the producer of a zero-rated supply is refunded all GST/HST paid on the commodities and/or services used to create the zero-rated supply. While a company that manufactures and sells prescription medication is not obligated to collect GST/HST on medicine sales, it can claim ITCs for GST/HST paid on the inputs (supplies and services) used to create the medication.
Supplies Exempted from Tax
“Exempt Supply” is described as a “taxable supply” in subsection 123(1) of the Excise Tax Act. Supply companies are free from GST/HST remitting, they can’t claim “input tax credits” (ITCs) for any GST/HST spent on the exempted stock manufacturing. Medical, education, childcare and personal care, legal assistance, humanitarian services, legal aid, banking sectors and public sector bodies are not included in 123(1). Yet, boat, roadway and other real estate supplies are all mentioned in 123(1). Aside from real estate, the items in 123(1) are human-rights services that are deemed improper to tax in Canada.
Despite exempt enterprises not having to collect or remit GST/HST, some potential drawbacks exist. The Excise Tax Act clearly excludes exempt supplies from the definition of business activity. So, a doctor who spends tens of thousands of dollars refurbishing commercial real estate for his medical practice will not be eligible for GST/HST ITCs.
Because of the intricacies of zero-rated and exempt supplies for GST/HST, your business needs to keep precise records, especially because it is also possible for companies to involve all 3 taxable, zero-rated and exempt supplies. The last thing you need is to be unexpectedly taxed GST/HST to be paid out to the CRA. For example, an optometrist’s prescribed optics and contact lenses are zero-rated products, whereas non-prescription sunglasses are taxable supplies liable to GST/HST remittance to the CRA. These fine details can be easily misconstrued.
To maximize the Excise Tax Act’s benefits while complying with GST/HST requirements, your firm needs to understand how it is classified within the GST/HST system currently in place. Not only that. You will need to know whether or not your business can claim ITCs for GST/HST paid on zero-rated supplies or if you are an exempt supply producer excused from the reporting obligations associated with taxable supplies. Our Canadian GST/HST tax accountants can help you analyze your company’s operations, assess your Excise Tax classification, and determine your tax planning options and benefits to prepare you for tax time.
The content of this blog/article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Our firm does offer a FREE initial consultation (30 minutes).