Basics of Sales Tax

 

The GST/HST and QST are governed by a complex set of rules and regulations as set out by the excise tax (ETA). This article is a good starting point to understanding these rules.
Fundamental terms for the sales tax

Basic Charging Provision

The liability to pay sales tax is laid out in the basic charging provision. This provision essentially stipulates that the recipient of a “taxable supply” must pay the prescribed GST/PST/HST on that supply.

Taxable supply

A “taxable supply” is defined as a supply that is made in the course of a “commercial activity”. A “commercial activity” can be described as providing goods, services or leasing property in the course of a business activity.

Zero-rated supplies

Zero-rated supplies are considered taxable supplies but are taxed at 0%. The reason for this is for providers of the supplies to be able to recoup the sales tax they have paid when making purchases to produce the supply (input tax credits). Some examples of zero-rated supplies are:
• Prescription drugs
• Basic groceries (example fresh produce and non-processed foods)
• Agricultural and fishing products
• Goods and services exported from Canada
• Foreign travel when the destination is outside Canada

Exempt Supplies

Exempt supplies are not subject to sales tax and are considered non-taxable. The provider of exempt supplies cannot claim any input tax credits. Examples of exempt supplies are:
• Health and dental care (excluding cosmetic)
• Financial services
• Sale of real estate property (land and building excluding new developments)
• Education fees that lead to a diploma
• Childcare services
• Most services provided by charities and not-for-profit organizations

Small supplier

Any person who provides a taxable supply is under obligation to register with CRA to collect sales tax under the ETA. However, there are exclusions to this rule, the most common one being the small supplier provision.
Under this provision, a person will be considered a small supplier if in the last four calendar quarters (they do not have to be in the calendar year), taxable supplies provided have not exceeded $30,000. This is what is commonly referred to as the “last four calendar quarters test”. If the $30,000 threshold is passed under this test, the person must begin collecting sales taxes on the first day of the second month following the end of the quarter.

Example:
Months                                   Taxable Supplies
October to December 2017   $3,000
January to March 2018          $12,000
April to June 2018                  $7,000
July to September 2018         $12,000
October to December 2018   $25,000
January to February 2019     Required registration in February

In this example, the supplier is considered a small supplier up to December 2018. However, since the $30,000 threshold is passed in the October to December 2018 quarter, this supplier will be required to register with the authorities to collect sales tax as of the 1st of February 2019.

There is an exception to the “last four calendar quarters test”, and that’s the “calendar quarter test”. This test will be triggered if in one calendar quarter, the supplier goes over the $30,000 threshold. In that case, the supplier is required to register immediately beginning from the sale that caused the threshold to be passed.
Questions that help determine a taxable supply
To determine if the sales tax is applicable to any transaction, four fundamental questions must be asked:

Who makes the supply?

Determining who is the supplier will have an impact on the place of supply. One of the most important considerations when answering this question is the residence of the supplier. The residence of the supplier can affect what is ultimately the place of supply.

What is being supplied?

The rules that pertain to the place of supply will also depend on what type of supply is being provided. Also, zero-rated supplies are applied differently depending on the supply. The different types of supplies are:
• Tangible personal property
• Intangible personal property
• Real property
• Services

Where is the supply delivered?

This question will be based on the place of supply rules. For a supply to be taxable under ETA, it must be considered as delivered in Canada.

Who is receiving the supply?

Determining who is receiving the supply is directly related to exemptions. Some organizations, such as Native bands and certain governmental entities, are not required to pay sales tax. Others might be subject to the zero-rated rates.
ETA lays out the place of supply rules. As a rule, sales tax applies only to supplies made or deemed made in Canada.

Source: TaxNetPro

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