You’re Doing Business in Canada, Do Your Homework
on the GST
is a sales tax not a sales tax? When it’s called a
Goods and Services Tax (GST), and it’s collected by
the Canadian Revenue Agency (CRA).
With the exception of tourists who pay GST on most purchases
while visiting Canada, most Americans—including many
business owners—never encounter the tax and have no
idea how it works. That’s changing as more and more
American companies do business, or consider doing business,
north of the border.
According to the Congressional Research Service, the total
U.S. merchandise trade with Canada in 2006 was worth $303.4
billion, making the GST on U.S. companies a substantial
potential revenue stream for the Canadian government.
The GST is becoming a fact of life, and the better American
companies understand it, the better they can plan strategies
to reduce its impact. But the question remains: What is
the GST? How does it work? Are there strategies for minimizing
Those are all good questions. Here are some general answers
that hint at the complexity of the GST.
What is the GST?
Our northern neighbors can disguise it with a different
name, but the GST is fundamentally a national sales tax.
The tax is charged on the sale of most goods and services,
it is paid by the buyer, and it is collected and remitted
to the CRA by the seller. Sounds simple enough. But as with
most taxes, there are numerous exceptions, exemptions, special
circumstances, deductions and rebates that complicate matters.
The current GST is a flat 6 percent. Most individuals and
businesses are subject to the tax on every transaction.
Canadian provincial governments also collect a separate
Provincial Sales Tax (PST). Three provinces (Nova Scotia,
New Brunswick and Newfoundland) have combined their PST
with the GST to create what is called a harmonized sales
tax (HST). That rate is currently 14 percent, with 6 percent
going to the federal government, and 8 percent going to
the provincial government.
If that’s not confusing enough, the Ministère
du Revenu du Québec (MRQ) administers both the GST
and the HST in that French-speaking province, so there are
separate forms and paperwork to contend with when buying
or selling there.
How Does the GST Work?
Virtually every individual and enterprise, Canadian or foreign,
must pay the GST on most goods and services supplied or
imported into Canada. GST/HST registrants (those deemed
to be selling taxable goods and services in Canada through
carrying on commercial activities within Canada) are required
to collect and remit the tax. The main exception to registration
is a “small supplier,” which is defined as a
sole proprietor, partnership or corporation whose annual
taxable revenues before expenses are $30,000 or less in
the last four consecutive quarters, or in any one single
quarter. Charities, nonprofit organizations, municipalities
and universities qualify as small suppliers if their total
annual revenues before expenses are $50,000 or less.
There is an exception to the exception—taxi and limousine
drivers must always register for the GST.
There is a relatively small group of goods and services
that are exempt from the GST. These include most health,
medical, and dental services performed for medical reasons
by licensed physicians or dentists; bridge, road, and ferry
tolls; most educational services such as courses at vocational
schools and leading to certificates or diplomas; most services
provided by financial institutions; and residential rent.
A company that is required to collect and/or pay the GST
must register with the CRA (or the MRQ in Quebec). A company
or individual that provides only GST exempt goods and services
does not have to register. Small suppliers also do not have
to register as long as they continue to qualify for the
When registration is required, it must take place no more
than 29 days after the business exceeds the small supplier
threshold or begins selling non-exempt goods and services.
Registration can be completed by phone, online or by mail.
Registrants receive a Business Number that is used for all
future dealings with the CRA.
Are There Strategies to Minimize the GST?
The GST was designed to be cost-neutral for most businesses.
This is achieved by providing a broad refund system of input
tax credits (ITC) for GST paid to suppliers or on imports.
But, as with any tax system, complexities exist that can
restrict claims, and not all GST paid is creditable. Typically,
GST paid on the cost of goods and services acquired in the
course of commercial activities—in layman’s
terms, business expenses—is recoverable. These expenses
include operating expenses such as rent, utilities, office
supplies, a portion of meal and entertainment expenses,
expense reimbursements paid to employees and partners, and
most purchases of capital property. The main expenses that
do not give rise to an ITC are those on items bought or
imported for personal use.
ITCs may only be recovered by businesses that register for
GST purposes, which is why all companies incurring expenses
subject to GST or importing goods into Canada—even
those that would qualify as a small supplier—should
consider registering. Failing to recover appropriately creditable
GST is both a cash cost and a profit and loss expense.
Do Your Homework
It’s no secret that many Canadian citizens and businesses
dislike the multiple layers of sales taxes, although most
have resigned themselves to working within the GST’s
complicated rules. If American companies doing business,
or considering doing business in Canada, feel overwhelmed
or just want to make sure they get it right, the best advice
is to seek professional assistance.
Clifton Gunderson has secured strategic resources that allow
U.S. companies to cut through the complex collection and
reporting procedures, and meet all of their tax obligations
without leaving any money on the table. We can also conduct
studies for companies already doing business in Canada to
identify overpayments and file rebate requests.
To do your own research on the Canadian GST, visit www.cra-arc.gc.ca.
For information accounting for Canadian taxes and other
issues, contact your local Clifton Gunderson office or call