The Scoop on Sales Tax
Hello All,
As we are firmly into tax season, I thought it would be useful to delve into the endlessly exciting topic of sales tax. I have several blog posts and videos about (GST/HST and QST) sales tax which I will link to below, including an FAQ about GST/HST and QST (which I have just updated). In this article, I will provide some context that might be useful.
Sales taxes in Canada in it’s original form was introduced during the Great Depression The federal government introduced a "manufacturer's sales tax" (MST) in 1920 to bolster their revenues during a challenging time. The tax was levied on the sale of goods by manufacturers and was primarily intended to be a hidden tax, that was indirectly paid by consumers.
In 1990, Brian Mulroney (RIP) and his government decided to change the way sales tax was charged by making it more transparent and efficient than the MST. They introduced the GST, a value-added tax (VAT), that was levied on most goods and services in Canada and was initially set at 7%. Over the years, the GST was reduced to 5% while some provincial governments sought to harmonize their own sales taxes with the GST thereby making the regulatory, reporting and remitting process significantly simpler.
A sales tax is essentially a consumption tax imposed by the government on the sale of goods and services i.e. the purpose of it is to be paid by the final consumer of a product or service. It is one of the most common forms of taxation worldwide and is a significant source of revenue for governments. In Canada, the sales tax is collected at every stage of production and distribution even though the tax is only meant for the final consumer. The implication of this is that businesses have to collect sales tax on their sales (with a few exceptions such as groceries and healthcare) and by the same token are also allowed to claim back sales taxes paid on expenses incurred since they are not the final consumers of the product or service. Consequently, every business that is registered for GST/HST (and QST) is acting as an agent of the government.
As it stands, Canada has one sales tax - GST- that applies to all provinces. Each province then determines its own sales tax rate and decides whether they want to harmonize it with the GST or have their own regime. Currently, Ontario, PEI, NB, NL and NS have a harmonized sales tax while SK, MT and BC have their own provincial sales tax process that is unconnected to the federal GST and has different rules. Alberta is the only province that has no provincial sales tax. And then there is Quebec, unsurprisingly, where the Quebec Sales Tax is part of the GST/HST regime, but charged and reported separately.
If you have sales from a business or self employment, you must familiarize yourself with the rules as they apply to you. And while it may not seem like it, the sales tax regime in Canada is fairly straightforward unlike the US where there are over 13,000 sales tax jurisdictions (many of which with multiple rates). Thankfully, we don’t have to deal with that.
Related Articles
A couple of posts on GST/HST. Within each post you will find links to other posts that might be relevant.
Frequently Asked Questions About GST/HST By Business Owners
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