A business owner in Canada has a great deal to stay on top of. There are people to hire, suppliers to manage, marketing plans to create, and, of course, taxes to deal with. Among the various taxes, the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) can be a source of confusion. A business owner must collect, track, and remit this money to the government. This guide will walk you through the essential facts about GST and HST, from the basic rules to the more involved details that can help you save money and stay clear of trouble.
The Foundational Ideas of GST and HST
What are GST and HST?
The Goods and Services Tax, or GST, is a federal tax on most goods and services sold in Canada. The current federal rate is 5%. When a product or service is sold, the GST is added to the final price. The GST also applies to things that are not physical products, such as real property, certain intangible personal property like intellectual property rights, and digitized products downloaded over the internet.
Some provinces have combined their provincial sales tax (PST) with the federal GST to create a single Harmonized Sales Tax, or HST. If your business is in one of these provinces, you only charge and collect one tax on behalf of the government, which makes things simpler for your customers and for you. The Canada Revenue Agency (CRA) sees the business owner as a kind of trustee for the government. A business collects this tax on behalf of the government and then sends it to the CRA, either monthly, quarterly, or annually.
Understanding the Rates by Province and Territory
Depending on where a business operates in Canada, it will be subject to a different sales tax system. Some provinces use a single, harmonized rate, others use GST along with a separate provincial tax, and a few just have the federal GST.
The table below shows the tax rates for each province and territory.
| Province/Territory | GST % | PST/RST/QST % | HST % | Combined Rate % |
|---|---|---|---|---|
| Alberta | 5 | N/A | N/A | 5 |
| British Columbia | 5 | 7 | N/A | 12 |
| Manitoba | 5 | 7 | N/A | 12 |
| New Brunswick | N/A | N/A | 15 | 15 |
| Newfoundland and Labrador | N/A | N/A | 15 | 15 |
| Northwest Territories | 5 | N/A | N/A | 5 |
| Nova Scotia | N/A | N/A | 14 | 14 |
| Nunavut | 5 | N/A | N/A | 5 |
| Ontario | N/A | N/A | 13 | 13 |
| Prince Edward Island | N/A | N/A | 15 | 15 |
| Quebec | 5 | 9.975 | N/A | 14.975 |
| Saskatchewan | 5 | 6 | N/A | 11 |
| Yukon | 5 | N/A | N/A | 5 |
Zero-Rated vs. Exempt: A Crucial Difference
This is a very common point of confusion that can have a significant financial impact on a business. The terms “zero-rated” and “exempt” might sound similar but they have a key difference that affects your ability to claim money back from the government.
Zero-rated supplies are taxable at a rate of 0%. The important part is that a business that sells these supplies can still claim a refund for the GST or HST it paid on its business expenses. This is called an Input Tax Credit. Examples of zero-rated goods are basic groceries, most exports, and certain medical devices and prescription drugs.
Exempt supplies are not subject to GST or HST at all. The business does not charge the tax on these sales, and it cannot claim any GST or HST it paid on expenses that relate to these sales. Examples of exempt supplies include many healthcare services, educational services, and financial services.
The difference is critical for a business’s bottom line. Imagine a business that sells a zero-rated product but thinks it is an exempt supply. By misclassifying the product, the business might fail to claim the GST or HST it paid on its purchases, which means it would lose out on a refund from the CRA. This directly affects the company’s costs. A proper classification ensures a business can claim all the money it is entitled to.
Getting Your Business Registered
The $30,000 “Small Supplier” Rule
In Canada, a business is generally required to register for GST or HST if its total revenue from taxable sales exceeds $30,000 in a single calendar quarter or over four consecutive calendar quarters. It is a good idea to keep a close eye on your revenue, as registration becomes mandatory as soon as you pass that limit. This is a rolling total; it is not based on your fiscal year. The $30,000 limit includes revenue from all related businesses under the same ownership.
Why Register Even If You Don’t Have To?
Some businesses with revenue below the $30,000 threshold choose to register voluntarily. This may seem strange. Why would a business take on an obligation when it does not have to? The main reason is the ability to claim Input Tax Credits (ITCs). This allows the business to get back the GST or HST it paid on its business expenses, and that can significantly reduce costs.
For a new business with low sales, but high start-up expenses such as buying equipment or inventory, voluntary registration can be a very smart move. In this situation, the business might have a “negative” tax position, meaning it paid more GST or HST on its purchases than it collected on its sales. By registering, the business can claim a refund from the CRA, putting cash back into its bank account at a time when it is most needed. For a growing business, this can be a great way to manage cash flow in the early stages.
The Registration Process Step by Step
If you determine that you need to register, or if you decide to do so voluntarily, the process is straightforward. Here are the steps to follow :
- Figure out your effective date of registration. This is the day you stop being a “small supplier.” If you are registering voluntarily, your effective date is usually the day you register.
- Collect your information. Have your Business Number (if you have one), legal business name, address, and a good description of your business activity ready. You will also need the personal information of all business owners, including names, Social Insurance Numbers, dates of birth, and postal codes.
- Register. You can register online through the CRA’s Business Registration Online (BRO) portal, by phone, or by mail. Online is generally the fastest way to get your GST/HST number.
- Start using your number. Once you have your unique GST/HST number, you must begin charging GST or HST on your taxable sales.
The Filing Process
Finding Your Filing Schedule
How often a business must file its GST/HST return depends on its annual revenue. The CRA has three different filing periods: annual, quarterly, and monthly. As a business grows, its filing obligations become more frequent. A business owner must pay attention to their revenue to be sure they do not miss a change in their filing schedule, which can result in penalties.
| Annual Revenue | Filing Frequency | Filing Deadline |
|---|---|---|
| Under $1.5 million | Annual | Three months after the fiscal year-end |
| $1.5 million to $6 million | Quarterly | One month after the end of each quarter |
| Over $6 million | Monthly | By the end of the following month |
How to File Your Returns
Filing a return is the process of reporting the GST or HST you collected and subtracting any Input Tax Credits you want to claim. The final amount is the “net tax” you either remit to the CRA or that the CRA refunds to you.
Most businesses must now file their GST/HST returns electronically. You can file online through your CRA Business account, or by using the GST/HST NETFILE service. You will need your Business Number, your access code, and the dates for the reporting period. You must enter all the amounts for your return and review it before submitting. Once you submit it, you should get a confirmation number that you should keep for your records. Some specific rebates can also be applied for electronically through the same system.
A Special Note on Non-Resident Businesses
For businesses outside of Canada that sell to Canadian customers, the rules have changed. As of July 1, 2021, non-resident vendors who supply digital products and services to Canadian consumers must register for GST/HST if their sales exceed the $30,000 small supplier threshold. This rule was put into effect to create a level playing field between Canadian businesses and foreign businesses.
If a business is non-resident and only makes sales of digital products and services to final consumers in Canada, it may be able to use a “simplified registration” process. A key detail to know is that businesses using this simplified system cannot recover Input Tax Credits. This makes it a different system from the one for resident businesses who can claim all eligible ITCs.
Getting Your Money Back: Input Tax Credits (ITCs)
What are Input Tax Credits?
Input Tax Credits are what allow a business to get back the GST and HST it pays on its business purchases and expenses. This is a fundamental part of the GST/HST system. To be eligible to claim ITCs, a business must be registered for GST/HST. The purchase must also be for a commercial activity.
For example, a marketing consultant buys a new computer for their work. The consultant pays the HST on that purchase. The consultant, as a GST/HST registrant, can then claim that HST back from the CRA as an Input Tax Credit on their next return.
A Detailed Breakdown of Eligible Expenses
There is a wide range of expenses for which you can claim an Input Tax Credit. Generally, if you can show the expense was for a business activity, you may be able to claim the tax back. Here are some common examples :
- Legal and accounting fees
- Rent, property taxes, and other leasing costs
- Insurance
- Office expenses
- Advertising
- Fuel and vehicle maintenance
- Salaries and wages
- Delivery and freight
A business must keep adequate records to be able to claim an ITC. You will need to keep sales and purchase invoices, receipts, and other records related to your business operations for at least six years.
Special Rules for Meals, Entertainment, and Vehicles
Some expenses have special rules that can be confusing. It is important to know these details to make a correct claim.
- Meals and Entertainment: The general rule for meals and entertainment is that you can only claim 50% of the GST/HST paid as an Input Tax Credit. This is true for things like a business meal with a client or travel meals. There are some exceptions where you can claim 100% of the expense, perhaps if the meals were provided as compensation to customers or for a company-wide party (up to six a year). You must also know that while you might record the full amount of an expense in your books, the tax credit is limited.
- Passenger Vehicles: This is another area with a specific set of rules. The amount of ITC you can claim for a passenger vehicle depends on how much you use it for business. If a vehicle is used for business 90% or more of the time, you can claim 100% of the ITC, but there is a capital cost limit. For 2025, the limit is $38,000 plus taxes. If business use is 10% or less, you cannot claim any ITC. For business use between 10% and 90%, the ITC claim is based on the capital cost allowance (CCA) claimed for the year. This requires a careful calculation and a good understanding of tax rules, as a miscalculation could lead to an incorrect ITC claim and a CRA audit.
Staying Clear of Trouble with the CRA
Common Issues That Trigger an Audit
The CRA may conduct random audits, but most audits are triggered by certain red flags. The CRA cross references data from various sources to find potential issues. Knowing what they look for can help you stay on the right side of the rules. The table below lists some common triggers and ways to prevent them.
| Audit Trigger | Mitigation Strategy |
|---|---|
| Frequent Refund Claims | Keep detailed documentation for all purchases and ITCs. Be sure to differentiate between personal and business expenses. |
| Discrepancies Between Tax Filings | Reconcile your GST/HST sales figures with your income tax figures before you file your returns. |
| High ITCs Compared to Revenue | Only claim ITCs on real, business-related purchases. Keep every receipt and invoice. Do not claim for personal expenses. |
| Incorrect Invoices | Be sure that your vendor invoices include all the correct information to support your ITC claims. |
| Unreported Cash Sales | Keep a perfect record of all sales, even cash sales. The CRA pays close attention to cash-based businesses. |
Penalties for Late Filing and Payments
If a business files a GST/HST return late or makes a late payment, the CRA will charge interest. There is also a penalty for filing late. The penalty is 5% of the unpaid tax, plus an extra 1% for each full month that the return is late, up to a maximum of 12 months.
If a business has a history of late filing, it can be subject to a higher “repeat offender” penalty. The penalty in this case is 10% of the unpaid tax, plus an extra 2% for each full month the return is late, up to 20 months. Penalties and interest can add up quickly. There are some situations where you may be able to ask the CRA to waive penalties or interest, such as in the case of a serious illness or a natural disaster.
The Importance of Record Keeping
Even when you file your returns electronically, you must keep all of your records in case the CRA asks to see them. This includes things like sales and purchase invoices, receipts, and other documents that support your returns.
The CRA can request these documents at any time. If you do not have the proper documentation to support an ITC claim, the CRA can deny it. This can result in you owing back taxes, along with penalties and interest. Good record keeping can prevent a costly audit. The rules require you to keep most of your records for at least six years from the end of the year to which they relate.
The Bottom Line and How We Can Help
GST and HST are a part of doing business in Canada. A business must know its obligations: charge the right rate, register when required, file on time, and keep excellent records. It is also important to claim all the Input Tax Credits you are entitled to, as this can have a direct and positive impact on your cash flow.
While this guide covers the most important points, managing GST and HST can still be a complex and time consuming process. Misclassifying an expense, missing a filing deadline, or making a small error in your return can result in financial penalties. A professional can help you stay on top of your obligations, correctly classify your supplies, and keep your records in order. This can reduce the risk of an audit and ensure you are getting all the credits you are entitled to. The team at Ingenious Professional Consultant is here to help you get this right.
