Is there VAT in Canada?March 16, 2023
When it comes to taxes, there are plenty that we pay in Canada. To just mention a few: property taxes, income tax and sales tax. On most items that you sell, purchase or earn, there is tax involved. That being said, these taxes don’t only occur in Canada, but all over the world. While all of these taxes are similar, some of them do go by different names. One of these taxes is sales tax, also known in many places as VAT or Value Added Tax. In Canada, we don’t call it VAT though. In Canada, our federal sales tax is called GST (Goods and Services Tax). Our provincial sales taxes are known as PST (Provincial Sales Tax) or QST (Quebec Sales Tax). Some people also refer to these as consumption taxes.
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In Canada, VAT numbers are also known as business numbers or GST numbers in Canada. This number is assigned to all businesses in Canada by Canada’s tax authorities, the CRA (Canada Revenue Agency). Basically how it works is this number is broken into 3 different sections: your business number, program type and reference number for the program account.
Here is an example: 123456789AB1234
- Business number: This is the first 9 digits of your GST number, also known as your tx ID number.
- Program type: The two letters after your 9 digit business number are the program identifiers.
- Reference Number: The last four digits are the reference number for the program type.
This is important because this number distinguishes you from other businesses. This is why it is given to you when you first register. Depending on which program account you use, the last 6 digits will change but the first 9 will always stay the same. They are individual to you.
The four major program accounts are:
- Corporate Income Tax
- Import/Export Charges
- Payroll Deductions
- Goods and Services Tax (GST)/ Harmonized Sales Tax (HST)
The only province that doesn’t include GST/HST in your business number is Quebec. This has to be applied for separately through Revenue Quebec.
What Goods Do You Pay VAT On?
In Canada, items that are considered intangible personal property are taxable goods. These taxable Supplies are:
- The sale of new homes
- The sale and rental of commercial real estate
- Car repairs
- Most advertising
- Legal services
- Accounting services
- Hotel accommodations
- Barber services
- Hairstyle services
- Taxi and ride-sharing services
- Soft drinks, candies, potato chips
What Goods are Tax Exempt
Goods in Canada that aren’t taxable or are taxed at 0% are:
- Basic groceries (milk, bread, vegetables)
- Agricultural products such as grain, raw wool and dried tobacco leaves
- Most farm livestock
- Most fishery products (fish that is used for human consumption)
- Prescription drugs
- Drug dispensing services
- Medical devices like hearing aids
- Exported goods (most that charge GST/HST once they have been exported)
- Lots of transportation services where the origin or destination is outside the country (Canada)
This is just the beginning though. There are lots of services that exempt tax as well. These are things like:
- Legal aid services
- Music lessons
- Child care services
- Most medical, dental and health care services
- Insurance premiums
- Sale of housing that was previously used as a residence
- Most services provided by financial institutions
- Most properties owned by charities and public institutions
- Property and services provided by most government bodies
- Domestic ferry services
- Long term residential rentals and condo fees
- A lot of educational services
Definition of GST in Canada and How it Works
As previously mentioned, GST is the federal government’s version of VAT. This federal tax is charged at 5% and is charged on most goods and services hence the name, Goods and Services Tax.
Along with some of the goods and services that are omitted from the tax, there are also certain people and organizations that are tax exempt. An example of this is under section 87 on the Indian Act.
In Canada, most people who are indigenous do not have to pay GST when they purchase goods and services on a reserve. In order to qualify as tax exempt, you just need to show your status card to prove you are tax exempt.
Definition of HST in Canada and How it Works
Some provinces in Canada charge HST (Harmonized Sales Tax) on goods and services instead of just GST. HST is GST and PST (Provincial Sales Tax) combined. This is a little confusing though, because not all provinces and territories charge tax this way.
In Canada, there are some provinces that don’t charge PST. This is why they have a separate GST rate of 5%. These provinces/territories are Nunavut, Northwest Territories, Yukon and Alberta. Other provinces like BC, Manitoba, Quebec, Saskatchewan charge GST and PST separately. The rest of the provinces and territories in Canada charge HST.
While whether you pay GST and PST separately or HST doesn’t make a difference in the percentage of tax you pay, it can make a difference to business owners. It will change how records are kept and taxes are charged.
Provincial VAT Rates
In Canada, every province has a different Value Added Tax rate (GST/HST).
|North West Territories||GST||5%|
|Newfoundland and Labrador||HST||15%|
|Prince Edward Island||HST||15%|
It is important to keep in mind that these sales tax rates aren’t charged on groceries. Basic groceries are charged at a rate of 0% in Canada. These are things like milk, bread and vegetables. Other goods are charged based on the province based on where the product is supplied too, not where it is purchased.
For example: If you are selling an item from your business in Alberta and it is being delivered in Nova Scotia, you would then charge 15% instead of 5%.
Input Tax Credit
If you have a GST number/ business number, you may have heard of Input Tax Credits (ITCs). This is a credit that you can apply for in order to get back any GST/HST that was either paid or payable on certain goods. This would be property or services that were acquired or brought into Canada or certain provinces. These goods must be used for consumption or supply while running your business.
In order to be approved for the input tax credit, you have to supply tax invoices to Canada’s tax authority, also known as the CRA. They need these invoices to prove that you are eligible for the credit.