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(Monday, December 28, 2009)GST REGISTRANTS: ZERO RATED, EXEMPT AND TAXABLE
Summary
What is the difference between zero rated, exempt and taxable supplies for GST? How does it apply to my business?
Article
There are three distinct categories types for all goods and services sold in Canada for GST purposes. It is critically important that you know which type of revenue your business collects. If your business collects two different revenue categories such as taxable and exempt you must segregate all of your expenses along these two separate categories. You can only get the GST back on expenses incurred to supply the taxable goods and services; you can not get the GST back on purchases and expenses relating to supplying the exempt goods and services.
Goods and Services Tax (GST) is required to be collected and remitted on all taxable supplies made in a commercial activity in Canada. Most sales of Goods and Services are considered to be taxable unless they are exempt or zero-rated. The purchaser pays the tax and the supplier is responsible for collecting and remitting it to the government.
A commercial activity is a business, an adventure in the nature of trade (an intent to make money even if it is one transaction), and/or the sale of certain real property. Even individuals will be required to register if there is a reasonable expectation of profit. Small suppliers are not required to register for GST as long as their taxable sales do not exceed $30,000 in any four consecutive calendar quarters.
Sometimes it is an advantage to be registered, for you can receive a refund of all GST paid on expenses incurred - this is called input tax credits. For example, if you have made a significant purchase such as a vehicle and you are a commercial business registered for GST, provided you use the vehicle 100% for business, you will receive back all the GST that you have paid on your next GST report. However, if you are not registered then you are not eligible to claim input tax credits on any of the purchases that you make in your business.
Certain supplies of property made in a commercial activity in Canada are zero-rated. Entities involved in providing zero-rated taxable supplies are required to be registered for GST and are eligible to claim input tax credits. To be zero-rated means that although the supply is considered to be a taxable supply the rate of tax that applies to the supply is 0%. For example buying a prescription at a drug store – the pharmacy is carrying on a commercial activity and therefore the sales of supplies are considered to be taxable but because the supply is zero-rated no GST is collected. However the pharmacy is still entitled to claim input tax credits on the purchases of supplies it makes for the business. Some examples of zero-rated supplies are:
- prescription drugs and medical devices
- food other than beverage alcohol, snack foods, sweetened baked goods, restaurant meals and take-out food
- livestock, poultry, raw wool and certain agricultural produce
- fresh fish and other marine animals used for food
- machinery and equipment designed for use exclusively by farmers and fisherman
- certain leases of farmland in exchange for a share of the production form the land
- personal property and services exported from Canada
- international passenger or freight transportation
- supplies to diplomats, international organizations and members of visiting armed forces
- insurance for risks ordinarily situated outside Canada
- supplies to non-residents of financial services relating to deposits outside Canada or to loans for use outside Canada
- the supply of precious metals to refineries
- First Nations
Other supplies of property made in a commercial activity in Canada are considered exempt supplies. Being exempt is different than being zero-rated. Exempt means that GST is not required to be collected on the supply and because GST is not required to be collected on the supply this means that input tax credits cannot be claimed either. It also means that registration is not required. Some examples of exempt supplies are:
- health care, child care and legal aid services
- educational instruction provided by elementary and secondary schools, universities, public colleges, private secretarial schools and business colleges
- financial services other than zero-rates services
- sales of used residential housing and rentals of residential premises
- a broad range of supplies of a non-commercial nature by charities, non-profit organizations, municipalities, and federal and provincial governments
- certain financial services rendered to residents of Canada
- certain intra-group supplies between members of a closely related group where the group includes a financial institution
Probably the easiest way to determine whether your business is supplying taxable, zero rated or exempt goods and services is to assume that your services are taxable unless you supply a basic need such as food products (farmers and fisherman) in which case you are zero rated. If you business provides health care, financial services such as banking and investing or education services you are usually exempt. If the goods and services you sell fall somewhere in between it is best to check with Canada Revenue Agency (CRA).
