History
Prior to GST, there was a tax levied on manufactured goods. The service industry in Canada was much smaller than it is today, and manufacturing dominated the economy. This tax is also buried in the price of goods and is paid by producers. End consumers don’t see these taxes – like tobacco and gasoline excise taxes that still exist today. When the economy shifted towards services in the 1980s, the GST was brought in to impose a broader tax on goods at lower rates. This also means that overall tax revenue will increase.
GST/HST Applies to New Items
GST and HST are generally charged to new goods produced in the economy. This is why resale homes, used cars and used items do not charge HST. There is a risk that items that are frequently sold may be taxed repeatedly on the same transaction. While tax revenues may be higher in the short run, distortions in the economy will also be high as resale goods will become much more expensive and transactions in general will be less. Items deemed necessary for life are not subject to a GST/HST fee. This includes grocery store-bought foods. Meals prepared in restaurants are generally charged GST/HST as they are deemed unnecessary. Buying food in bulk is usually an exception to buying individual portions for this reason. There are also certain items that are exempt from GST/HST such as mortgages and insurance.
Consumers Pay GST/HST
Many goods are produced in stages. Usually there is a stage of material extraction carried out through a mine or well. This material is passed on to a fabricator who converts the material into a shape suitable for manufacture. A product is produced and may go through different processes before being finally sold to the final consumer. GST/HST is charged on every transaction, but will be returned to whoever paid for it unless the person paying the GST/HST is the end consumer. This avoids taxing the same item over and over again at each stage of the manufacturing process. Services can go through several stages as well if they are provided to businesses in stages before being delivered to consumers. A business that produces something and sells it to another business will pay GST/HST and then apply for a refund. When a business fills out a GST/HST form, it will enter the sales tax paid as an “Input Tax Credit” or ITC. This will effectively lower the GST/HST paid and the net result is what the company pays to the government.
Small Supplier Exception
Since tracking these taxes can be time-consuming, the government has allowed small businesses or “Small Suppliers” to avoid having to track GST/HST. On sales of $30,000 or less, GST/HST is not required unless you have signed up to do so. Registration rules follow in the next paragraph. At $30,000 worth of sales, this would be $3,900 worth GST/HST excluding fees and assuming Ontario rates. Most small businesses have expenses, and some provinces have lower sales tax rates.
Registration Rules
If you have gross sales of $30,000 or less as a business, you don’t need to register to collect GST/HST. Once you reach this threshold, you will be asked by CRA to do this registration. Otherwise, you will be deemed to be tax owed using your gross sales including GST/HST payable. The GST/HST amount will be withdrawn from your sale as if you had charged sales tax and not paid it. If you have sales under $30,000 per year and have signed up voluntarily, you will still need to collect and apply for GST/HST even if your sales are below the threshold.
Process For Business
If you have signed up to collect GST/HST, you must track all sales you make with sales tax as part of the price. If registered separately, you will add up all the GST/HST collected in the given period. For most businesses, the period is one year. If your business has a large number of gross sales, the frequency will be even greater – it could be quarterly or monthly. CRA will notify you when this threshold is crossed. You will complete a GST/HST return showing your gross sales, GST/HST collected, and Input Tax Credit. Input Tax Credit is GST/HST paid for your expenses which will then be deducted from the GST/HST collected. There will be a net result that is positive (you will pass the difference to the government) or negative (you will claim a refund from the CRA). This will be done every period even if no sales or no sales tax is collected. You have to file until you cancel your registration for closing the business, selling the business, declaring bankruptcy and so on.
