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Issue 7

If You’re Doing Business in Canada, Do Your Homework on the GST

When 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 the GST?

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 exemption.

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 1-888-CPA-FIRM.


Any tax advice included in this communication is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by Clifton Gunderson LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Clifton Gunderson LLP or other tax professional prior to taking any action based upon this information. Clifton Gunderson LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

If you would like to contact us for more information, please call us at
1-888-CPA-FIRM or email us at TaxNews@cliftoncpa.com.

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