The GST/HST regime is based on the concept of supply, which is essentially the sale of a good or the providing of a service. The tax treatment of each supply is determined by where it falls in the three possible categories of supplies: taxable, exempt, or zero-rated. Understanding how your supplies are categorized is important to ensure that you charge the correct tax to your customers and claim the appropriate input tax credits in your returns.
Taxable supplies are the most common supplies under the GST/HST regime. Most property and services supplied or imported into Canada are taxable supplies. Essentially, if the supplies you make are not specifically exempt or zero-rated, then, by default, they’re taxable. Common examples of taxable supplies include new housing, real property, automobiles, clothing, legal and accounting services, and hotel accommodations. If your business makes taxable supplies of more than $30,000 annually, you must register for the GST/HST and charge it to your clients. You’ll also be able to recover the GST/HST that you pay on the purchases you make in the course of your business as input tax credits.
As the name implies, exempt supplies are exempt from the GST/HST. As such, if you make exempt supplies, you do not have to charge the GST/HST to your customers. However, you won’t be able to claim input tax credits on the purchases you make. Exempt supplies are specifically listed in the Excise Tax Act, which contains the GST/HST provisions. You should check to see if any of the exemptions apply to your particular business. Examples of exempt supplies include sale of used housing, long-term rental of apartments and condominiums, most health, medical, and dental services, child care services, school fees, most services provided by financial institutions, and insurance policies.
While they are treated as a separate category, zero-rated supplies are actually taxable supplies where the rate of the GST/HST is 0%. As such, you theoretically charge the tax, but at a zero rate. You’ll be able to claim input tax credits on the GST/HST that you pay to make the supplies. Zero-rated supplies are usually related to basic necessities of life. Common examples include the supply of basic groceries such as milk, bread, and vegetables, agricultural products such as grain, raw wool, and dried tobacco leaves, most farm livestock, most fishery products, prescription drugs and drug-dispensing services, certain medical devices such as hearing aids and artificial teeth, and feminine hygiene products. As a rule, exports are also zero-rated. Even if the goods and services that you export would be taxable in Canada, they are zero-rated when exported. As well, many transportation services where the origin or destination is outside Canada are zero-rated. It’s very important to know the type of supply that your particular business makes so you’ll know if you need to register for the GST/HST and charge it to your clients and so you’ll know the input tax credits that you’re entitled to so you can maximize your claims.