How does the GST-HST work?

History

Before the GST, taxes were applied to manufactured products. The service industry in Canada was much smaller than it is today, and manufacturing dominated the economy. This tax was also buried in the price of goods and was paid by manufacturers. The end consumer did not see this tax, like the excise taxes on tobacco and gasoline that still exist today. As the economy was shifting towards services in the 1980s, the GST was introduced to tax a wider range of items at a lower rate. This also meant that overall tax revenue would increase.

GST / HST applies to new items

GST and HST are generally charged on new items produced in the economy. This is why resale houses, used cars, and second-hand items are not charged HST. There is a risk that items sold frequently will be taxed repeatedly in the same transactions. Although tax revenues could be higher in the short term, the distortion in the economy would also be high as resale items would be much more expensive and overall transactions would be lower. Items deemed necessary for living are not charged GST / HST. This would include food bought from supermarkets. Food prepared in a restaurant is generally charged GST / HST as this would be considered unnecessary. For this reason, buying food in bulk is generally exempt compared to buying individual servings. There are also specific items that are exempt from GST / HST like mortgages and insurance.

Consumer pays GST / HST

Many products are manufactured in stages. Generally, the material extraction stage is carried out through mines or shafts. This material is passed on to a manufacturer who converts the material into a suitable form for fabrication. A product is manufactured and can go through different processes before it is finally sold to the final consumer. The GST / HST is charged on each transaction, but will be refunded to whoever paid it, unless the person paying the GST / HST is the end consumer. This avoids taxing the same item many times at each stage of the manufacturing process. Services can also go through multiple stages if they are provided to businesses in stages before being delivered to the consumer. A company that makes something and sells it to another company would pay the GST / HST and then request its refund. When the business fills out its GST / HST form, it would enter the sales tax paid as an “Input Tax Credit” or ITC. This would effectively reduce the GST / HST you are paying and the net result would be what the company pays to the government.

Small vendor exemption

Since these taxes can be time-consuming to track, the government has allowed smaller companies or “small suppliers” to avoid having to track GST / HST. For sales of $ 30,000 or less, it is not necessary to submit the GST / HST unless you have signed up to do so. The registration rules follow in the next paragraph. On sales worth $ 30,000, this would equal $ 3,900 in GST / HST excluding expenses and assuming the Ontario rate. Most small businesses have expenses, and some provinces have a lower sales tax rate.

Registration rules

If you have gross sales of $ 30,000 or less as a business, you would not have to sign up to collect GST / HST. Once you reach this threshold, the CRA will ask you to complete this registration. If you don’t, you will be deemed to owe taxes using your gross sales, including the GST / HST you owe. The GST / HST amount would be subtracted from your sales as if you had been collecting sales tax and had not paid it. If you have sales below $ 30,000 per year and have voluntarily signed up, you must still collect and submit the GST / HST even if your sales are below the threshold.

Process for companies

If you have signed up to collect GST / HST, you will need to keep track of all sales you make with sales tax as part of the price. If it appears separately, it would add up all the GST / HST collected in a given period. For most companies, the period would be one year. If your business has a large amount of gross sales, the frequency will increase; it can be quarterly or monthly. The CRA would inform you when these thresholds are crossed. You should complete a GST / HST statement indicating your Gross Sales, GST / HST Collected, and Tax Credits Supported. Supported tax credits are GST / HST paid on your expenses, which would then be deducted from the GST / HST collected. There would be a net result that would be positive (remit the difference to the government) or negative (claim a refund from the CRA). This would be done every period, even if no sales or sales tax is collected. You would have to apply until you cancel registration due to business closure, business sale, bankruptcy filing, etc.