December 07th, 2020

Sales Tax Obligations and Opportunities for Small Canadian Businesses
 Author: Vanessa Fisher

If you are a new company with plans to operate in Canada it is important to be aware of your sales tax obligations before you begin selling any goods or services within the country. This blog outlies the goods and services tax (“GST”) / harmonized sales tax (“HST”) regimes and walks through signing up for a GST/HST account online. Lastly, this blog explains how to collect and remit GST/HST to the Canada Revenue Agency (“CRA”) and provides guidance on the Input Tax Credit (“ITC”) system available to small Canadian businesses.
 
GST is a 5% tax applied to most items and services sold in all provinces and territories within Canada. Certain provinces (Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia and PEI) have combined their provincial sales tax with GST, utilizing a unique HST rate that is collected in the same way as GST.[1] When a business sells goods or services in Canada, they are required to add the applicable GST/HST rate to their selling price. The GST/HST is then collected by the seller at the point-of-sale and held until remitted to the CRA.
 
Businesses in Canada are not obligated to begin collecting and remitting GST/HST on their goods and services sold within the country until they are no longer considered a “small supplier” by the CRA. A business is no longer a small supplier once their revenue before expenses (that is, the company’s sales, not their profit) exceeds $30,000 in a single calendar quarter (three consecutive months), or over the last four consecutive quarters.[2] While collecting and remitting GST/HST is mandatory on sales that occur after this $30,000 threshold is passed, a small business can also elect to voluntarily register for a GST/HST account prior to this point and become eligible for Input Tax Credits (“ITCs”), a point I will return to.
 
How to Register for a GST/HST Account
In order to sing up for a GST/HST account, one must first apply for a Business Number (“BN”). A BN is a unique number assigned to your corporation that simplifies all your dealings with the CRA and is also necessary for filing corporate income tax, setting up payroll accounts, importing/exporting accounts, and GST/HST accounts. The registration for a BN also automatically creates an account for filing corporate income taxes.
 
The CRA’s business registration page[3] allows you to register your corporation with a BN at no cost. From there, you can create and add a GST/HST account (and any other accounts needed) on the same webpage. This process will also create a CRA e-portal for your business that allows you to update your corporate information, do your tax filings, and process payments to the CRA online.
 
How to Collect and Remit GST/HST
The GST/HST you charge your customers at the point of sale will depend on the GST/HST rate of the location where your customer is purchasing and receiving their order. The CRA calls this the place-of-supply.[4] For example, if your company is in Alberta and you sell an item of clothing for $10.00 to a customer residing in Toronto, you would need to apply the Ontario HST rate of 13% to the purchase price (for a total of $11.30), not the Alberta GST rate of 5%. In this scenario, Alberta is the place where the selling corporation resides, not the place-of-supply. However, if the customer physically comes to Alberta to purchase the clothing from a store in Alberta, the Alberta GST rate of 5% would apply to the purchase.
 
The CRA provides a useful Provincial Rates Table and GST/HST Calculator[5] to calculate what to charge on your sales to each province.
 
It is also important to note that Alberta, Nunavut, the Northwest Territories, and the Yukon have no provincial sales tax, and other provinces (as mentioned above) utilize an integrated HST, which means that only GST/HST is collected from sales in these provinces. British Columbia, Manitoba and Saskatchewan have a separate provincial sales tax (PST/RST/QST) and rules for collecting and remitting provincial sales tax are unique to the provinces. Provincial sales tax will not be considered in this blog, but obligations related to provincial sales tax should be investigated if your company ever plans to sell its products to customers in these provinces.[6]
 
Once you begin collecting and charging GST/HST (and any relevant provincial sales tax), you must also tell your customers that the sales tax is either included in pricing or will be added separately, and this information should be clearly indicated on your invoice with the rate being charged and your registration number.
 
Your business is also considered to hold GST/HST collected “in trust for the Crown” until you remit it to the CRA. This constitutes a kind of trust fund that comes into existence automatically when you collect sales tax from your customers. Failure to remit amounts collected to the CRA has serious consequences, so it is important to keep detailed records of your sales that supports the information you will send to the CRA when you file your GST/HST return at the end of each reporting period. [7]
 
Input Tax Credits and Zero-Rated Supplies
As mentioned, Canadian businesses are not obligated to begin collecting and remitting GST/HST until their sales exceed $30,000 in a single calendar quarter, or over the last four consecutive quarters. That said, for certain small businesses it might be worth voluntarily registering for your GST/HST account early, even if it is not required. One reason is to get a head-start on good record-keeping, as you will have to begin collecting and remitting GST/HST as soon as you register for your account. Volunteer registration also allows your business to make use of ITCs.
 
ITCs are basically a mechanism to offset your GST paid on expenses for the business against the GST collected from sales of the business. For example, if the GST/HST you pay on expenses incurred for your business was $1,000 for the reporting period, and the GST/HST collected from customers for your goods/services sold was $3,000, you can claim an ITC of $1,000 and therefore be required to remit back $2,000 to the CRA.
 
ITCs can be especially useful if you are registered for the GST/HST account and produce or sell zero-rated supplies. Certain goods and supplies are considered zero-rated by the CRA and therefore not subject to GST/HST charges on sales.[8] At the same time, a business selling zero-rated goods is still eligible to claim ITCs on the GST/HST paid or payable on purchases and operating expenses related to the commercial activities of its business.[9] In other words, a refund is available on GST/HST paid on certain expenses for the business despite not being required to collect or remit GST/HST to the CRA on sales. It is also advised to obtain professional advice from a lawyer and/or accountant to find out exactly what you can and can’t include as expenses in the business as this can be a complicated area to navigate.
 
Further Information
There is a wealth of information on the CRA website under the General Information for GST/HST Registrants [10] and GST/HST for Businesses [11] that provide further guidance on completing your GST/HST return and much more.

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[1] “Canada’s Harmonized Sales Tax Explained”, online: Investopedia <https://www.investopedia.com/terms/h/harmonized-sales-tax.asp>
[2] “Definitions for GST/HST (Small Supplier)”, online: Government of Canada <https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/definitions-gst-hst.html#smallsupplier>
[3] CRA Business Registration page:  https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/registering-your-business/bro-register.html
[4] “GST/HST rates and place-of-supply rules”, online: Government of Canada  <https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-collect-place-supply.html>
[5] GST/HST Calculator: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-collect-which-rate/calculator.html
[6] “Charging Provincial Sales Tax on Online Sales” <https://www.thebalancesmb.com/charging-provincial-sales-taxes-on-online-sales-2948448>
[7] “Charge and Collect the Tax - What to do with Collected GST/HST”, online: Government of Canada                                           < https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-collect-what-collected.html>

[8] “Zero-Rated Goods”, online: Government of Canada <https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/4-3/basic-groceries.html>
(also, in speaking with a CRA agent, I was told that coffee is only a zero-rated good as long as it is in bean or grind form and sold in packaged bags. If you brew the coffee and sell it, it becomes taxable for GST/HST purposes).
[9] “Input Tax Credits (ITCs)”, online: Government of Canada <https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/remitting-gst-hst-on-employee-benefits/input-tax-credits-itcs.html
[10] https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4022/general-information-gst-hst-registrants.html
[11] https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses.html