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Basics of Sales Tax
From tax expert Gerry Vittoratos
April 08, 2019
The GST/HST and QST are governed by a complex set of rules and regulations as set out by the excise tax. 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 is written in Part IX, Subsection 165(1) of the Excise Tax Act (ETA). It essentially stipulates that the recipient of a “taxable supply” must pay the prescribed GST/PST/HST on that supply.
A “taxable supply” is defined as a supply that is made in the course of a “commercial activity” [ETA 123(1)]. A “commercial activity” of a person can be summarily described as providing goods, services or leasing property in the course of a business activity [ETA 123(1)].
These 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
The full list of zero-rated supplies can be found on Schedule VI of Part IX of the ETA.
These supplies are not subject to sales tax, and are considered non-taxable. Due to this, the provider of the supply 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
- Child care services
- Most services provided by charities and not-for-profit organizations
The full list of exempt supplies can be found on Schedule V of Part IX of the ETA.
Any person who provides a taxable supply is under obligation to register with the authorities to collect sales tax under subsection 240(1) of the ETA. However, there are exclusions to this rule, the most common one being the small supplier provision [ETA 166].
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 [ETA 148(1)]. 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.
October to December 2017
January to March 2018
April to June 2018
July to September 2018
October to December 2018
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” [ETA 148(2)]. 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 (deemed to be registered) beginning from the sale that caused the threshold to be passed [ETA 148(2)].
Questions that help determine a taxable supply
To determine if the sales tax is applicable to any transaction [ETA 165(1)], four fundamental questions must be asked:
Who makes the supply?
Determining who is the supplier will have an impact on the place of supply (see below). 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 (see below).
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 (see above) are applied differently depending on the supply. The different types of supplies are:
- Tangible personal property
- Intangible personal property
- Real property
Where is the supply delivered?
This question will be based on the place of supply rules (see below). For a supply to be taxable under ETA 165(1), 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.
Section 142 of the ETA lays out the place of supply rules. As a rule, sales tax applies only to supplies made or deemed made in Canada.
Taxable supply in Canada
Subject to sections 143 (supply by non-resident), 144 (supply before release) and 179 (drop shipment - deemed supply non-resident) of the ETA, a supply is deemed to be made in Canada if:
- For a tangible personal property, the property is, or is to be, delivered or made available in Canada to the recipient of the supply [ETA 142(1)a)]
- For a tangible personal property otherwise than by sale (e.g., lease, rental), possession or use of the property is given or made available in Canada to the recipient of the supply [ETA 142(1)b)]
- For an intangible personal property, it can be entirely used in Canada [ETA 142(1)c)]
- For a real property or of a service in relation to real property, the real property is situated in Canada [ETA 142(1)d)]
- For any other service, the service is, or is to be, performed in whole or in part in Canada [ETA 142(1)g)].
In the next article, we will dive deeper in the technical aspects of the sales tax, more specifically what constitutes residence, non-resident supplies, interprovincial transactions and specific cases.
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