Whether you’re a corporate shareholder, business owner, or just a consumer, sales taxes affect you! Every time you buy a coffee at your local coffee shop or purchase new computer hardware for your startup you are paying taxes to a business that will eventually pass on those funds to the Government of Canada via the Canada Revenue Agency (CRA).
The Goods and Services Tax (GST) is a consumption tax charged on the supply of goods and services in Canada. It is an indirect tax, meaning that it is collected from the final consumer rather than from the producer or business. In some parts of the world, it would be referred to as a value-added tax (VAT).
The GST was introduced in 1991 by Prime Minister Brian Mulroney, replacing various federal and provincial sales taxes, such as the federal Manufacturers’ Sales Tax (MST), which had previously been levied on goods manufactured or produced in Canada.
Broadly speaking, the GST rate in Canada is set at 5%, though it’s important to note that the total tax you may pay for goods and services may vary depending on what province you live in. For example, British Columbia has a combined GST and Provincial Sales Tax (PST) of 5% and 7%, respectively, meaning that a total of 12% is added to all applicable transactions.
Great question! They are abbreviations for:
As another example of taxation rates, Nova Scotia has a Harmonized Sales Tax (HST) rate of 15%, which is effectively GST blended with a PST for the higher percentage. At 15%, taxable sales will have fifteen cents added for each transactional Canadian dollar.
As a business owner, if you cross the small supplier threshold of $30,000 CAD revenue in a calendar quarter or four consecutive quarters (ie. twelve months) you need to register for a GST number. If you already have a business number with the CRA, you’ll just be opening a tax account on that business (for example, with the code RT0001 tacked onto the end).
In some cases, a business must apply for GST when they begin operations - we recommend doing your research or consulting a bookkeeping or accounting expert if you are thinking about starting a business (send us an email at firstname.lastname@example.org)!
When businesses start collecting GST, they are also able to counteract the financial load of collecting and carrying a GST balance with Input Tax Credits (ITC). ITCs allow you to subtract the GST you have paid on supplies over the course of business from the GST you have collected from your clients on behalf of the government.
For example, if you bought a new desk for $500 and paid $25 in GST on that desk, the $25 would be credited against your GST balance owing.
The simplified math of how GST filings work is:
GST collected from customers
MINUS: GST paid on supplies (ITCs)
Remittance (or refund) due
Invoiced Clients for $1,000 = $50 GST
Bought computer for $500 = $25 GST
Remittance due to the CRA = $25
Businesses can also voluntarily register for GST, allowing them to charge it on their invoices despite not passing the thirty-thousand dollar revenue threshold. This also allows you to recapture ITCs against the GST you collect from your clientele.
In most cases, the invoice or customer payment that pushes you over the revenue threshold will be subject to GST, with all sales following that date to be taxed moving forwards. We recommend adding your GST registration number (which in many cases will be similar to your CRA business number) to your invoices when you tack on the 5% sales tax so that your clients are not kept in the dark!
Fortunately, it’s easy! You can register online, by telephone, or by mail via the CRA.
Per the CRA:
You generally cannot register for a GST/HST account if you provide only exempt supplies.
You have to register for a GST/HST account if both situations apply:
- You make taxable sales, leases, or other supplies in Canada (unless your only taxable supplies are of real property sold other than in the course of a business)
- You are not a small supplier
Exempt supplies include a few things like: housing, healthcare, educational services, banking services, etc. The CRA lists a dozen or more things on their website but if you are unsure whether you provide only exempt supplies it is a good idea to talk to them directly before making any decisions or assumptions as to whether or not you might be required to register for GST.
On the other end of the spectrum, there are also zero rated supplies. Zero-rated supplies are a little different from exempt supplies - for example, most grocery items in Canada are typically exempt from GST but you may be eligible to claim ITCs if you did happen to pay any sales tax for those items. We won’t dive too far into this topic here for the sake of brevity!
Simply put, the federal Canadian government requires all businesses to register for GST if their annual revenue is over $30,000 CAD.
If the CRA has determined that a business needs to register for GST (ie. you are no longer considered a small supplier), they will send a notice to the business owner to inform them about the requirement. The business owner will have a certain amount of time to comply and/or discuss their situations and what is required of them.
As for the types of punishments and/or monetary risk at play: the CRA levies financial penalties against businesses that do not register, file, or remit GST, and typically the penalty will be calculated based on the GST balance owed, with interest accrued over time.