What Is VAT in Canada? A Breakdown of GST, HST, and PST

Canada operates a multi-layered consumption tax system, primarily featuring a Value-Added Tax (VAT) structure. This VAT is levied at each stage of production and distribution, ensuring that tax is applied to the value added at every step of the supply chain. The Canadian system is largely composed of the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST). These taxes serve to generate revenue for public services and are designed to be neutral for businesses, with the ultimate tax burden intended to fall on the final consumer.

The Canadian VAT System: GST, HST, and PST

The Goods and Services Tax (GST) is the federal component of Canada’s VAT, applied at a rate of 5% across most goods and services nationwide. This federal tax forms the base of the country’s consumption tax framework. While the GST applies federally, some provinces integrate it with their provincial sales taxes to create a single, combined tax.

The Harmonized Sales Tax (HST) represents a combination of the federal GST and a provincial sales tax, simplifying collection for businesses and consumers in participating provinces. Provinces that have adopted the HST include New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island. The HST rates vary by province; for instance, Ontario has a 13% HST rate, while other participating provinces apply a 15% rate.

In contrast, other provinces maintain a separate Provincial Sales Tax (PST) that is not part of the harmonized system. British Columbia, Manitoba, and Saskatchewan each levy their own PST in addition to the 5% GST. Quebec also has its own Quebec Sales Tax (QST), which operates similarly to a PST. Unlike GST/HST, PST is a retail sales tax, applied only at the final sale to the consumer, and is not recoverable by businesses through input tax credits.

Input Tax Credits (ITCs) allow businesses registered for GST/HST to recover the tax paid on purchases and expenses used in their commercial activities. This mechanism ensures businesses are not burdened by the tax.

Operational Mechanics for Businesses

The “small supplier threshold” determines when a business must register for GST/HST. A business must register if its total revenue from taxable supplies, including zero-rated supplies, exceeds CAD $30,000 in any single calendar quarter or over the last four consecutive calendar quarters. Businesses can choose to register voluntarily even if below this threshold, which allows them to claim ITCs on their business expenses.

Once registered, businesses charge GST/HST on their sales. The applicable rate depends on “place of supply” rules, which determine the province where the supply is made. For goods, if delivered to the recipient’s province, that province’s GST/HST rate applies. For services, if the supplier obtains the recipient’s Canadian address, the tax is charged based on that province.

Businesses claim Input Tax Credits (ITCs) to recover GST/HST paid on eligible business expenses incurred in commercial activities related to making taxable or zero-rated supplies. Proper documentation, such as invoices, is essential to support ITC claims. ITCs reduce the amount of GST/HST a business owes to the Canada Revenue Agency (CRA) or can result in a refund if ITCs exceed the collected tax.

Zero-rated supplies are taxable at a 0% rate, meaning no GST/HST is charged to the customer. Businesses can still claim ITCs for tax paid on inputs used to make these supplies. Examples include basic groceries, most agricultural products, prescription drugs, and most exports.

Conversely, exempt supplies are not subject to GST/HST, and businesses making these supplies cannot claim ITCs for related expenses. Common examples include most healthcare services, educational services, and long-term residential rentals.

Businesses calculate their “net tax” as the difference between GST/HST collected on sales and ITCs claimed on purchases during a reporting period. If collected tax exceeds ITCs, the business remits the difference to the CRA. If ITCs exceed collected tax, the business is eligible for a refund.

Key Considerations for Specific Transactions

Real property transactions, such as the sale of new homes or commercial properties, are subject to GST/HST. However, the sale of used residential property is exempt. Long-term residential rentals are also exempt, though commercial property rentals are taxable.

Digital services supplied by non-resident vendors to Canadian consumers have GST/HST implications. Since July 1, 2021, non-resident businesses supplying digital products and services to consumers in Canada are required to register, charge, and collect GST/HST if their total taxable supplies exceed CAD $30,000 over a 12-month period. This applies to services like streaming, mobile apps, and e-books, with the tax based on the consumer’s location.

Imports of goods into Canada are subject to the 5% GST or the federal portion of the HST, calculated on the value of the goods including duties and excise taxes. This tax is collected at importation. A GST/HST registered business importing goods for commercial activities can claim an ITC for the tax paid. Exports of goods and many services from Canada are zero-rated, meaning no GST/HST is charged, but businesses can still claim ITCs on related inputs.

Inter-provincial supply rules determine the GST or HST rate for goods or services supplied across provincial borders. For goods, the rate is determined by the province of delivery. For services and intangible personal property, rules rely on the recipient’s location. If a service is performed primarily in a participating HST province, that province’s HST rate applies.

Compliance, Reporting, and Record Keeping

Businesses registered for GST/HST must adhere to compliance, reporting, and record-keeping requirements. The CRA assigns reporting periods (monthly, quarterly, or annually) based on a business’s annual revenue. Businesses with annual revenues of CAD $1,500,000 or less report annually. Those with revenues between CAD $1,500,000 and CAD $6,000,000 report quarterly. Businesses exceeding CAD $6,000,000 file monthly. Returns for monthly and quarterly filers are due one month after the reporting period, while annual filers have three months.

Preparing and submitting GST/HST returns involves accurately reporting sales, ITCs claimed, and the resulting net tax. Returns can be filed electronically through the CRA’s NETFILE service or My Business Account portal, or by mail or in person at a financial institution. All GST/HST registrants are now required to file electronically for reporting periods beginning on or after January 1, 2024.

Payment methods for remitting net tax due to the CRA include online payments through financial institutions or the CRA’s My Business Account. Payments can also be made by mail or in person at a financial institution or Canada Post outlet. Remit the correct amount by the due date to avoid penalties and interest charges.

Maintaining accurate and complete records is required for GST/HST registrants. Businesses must keep records of all financial transactions, including sales invoices, purchase receipts, and documentation supporting ITC claims. These records must be retained for six years from the end of the calendar year to which they relate. The CRA conducts audits to ensure compliance and verify correct collection, reporting, and remittance of GST/HST.