September 5, 2024 · Tax Planning and Preparation

Are You Charging the Correct GST/HST Rate? Navigating the Complexities

An image of a tax accountant in Oakville pointing to the GST/HST on a client's invoice

Every small business owner in Canada should be aware of the Goods and Service Tax (GST) and Harmonized Sales Tax (HST) applicable to their business. GST is the 5% value-added tax levied by the Canadian government, and HST (in the range of 13-15%) includes GST and the provincial sales tax. The GST/HST rate is based on the Place of Supply and Type of Supply. It is where the complexity begins.

Complexities and Exceptions in GST/HST

The GST has several exceptions and special rules that can complicate a business transaction. In a business, it is essential to define the parties to the transaction, the amount of the goods or services, and what is included and excluded in the price.

In this article, we will look at some lesser-known rules and exceptions that might affect your business.

Type of Supply

  • Healthcare services are generally exempt from GST to make necessary medical treatments affordable. For instance, cosmetic surgery, such as facelifts or teeth whitening (taxable), is exempt from GST if performed for medical reasons. However, there are exceptions to healthcare services. If you provide nursing services for cosmetic treatment, it may be taxable.
  • Another scenario of a type of supply is a lawsuit filed for breach of contract. Your business receives a damage claim for the violation. If the original contract states that GST/HST will be charged for the goods/services, the damage claim amount will be considered to include GST/HST. You have to remit the GST to the CRA, and the other party can claim an input tax credit.

Place of Supply

  • The business should charge the GST rate applicable to the place of supply. Services are generally taxed based on the customer’s address. If a lawyer from Ontario (13% HST) provided professional service to a client in Alberta (5% GST), he/she would bill the client at 5% GST. However, there is an exception in the case of personal services like haircuts, where the tax is based on the place of service. If an Alberta (5%) resident is taking a haircut from a New Brunswick (15%) barber in Ontario (13%), the Ontario rate of 13% will apply.

It is essential to differentiate between personal and professional services. For instance, a spa that provides massage therapy as a professional service will charge GST based on the customer’s location. However, if a freelancer offers massage therapy as a personal service, he/she will charge GST at the place of service.  

  • Here is another scenario of a place of supply. You receive a taxable service from outside Canada, and the provider doesn’t charge you GST/HST. It is your legal obligation to report the service, pay GST/HST to the CRA, and claim ITC. If you do not report and pay GST on such imported taxable supply because you can’t claim ITC, you could face a penalty when the CRA finds out about this transaction in the audit.

Importance of Words in Contractual Agreement

The GST rate applies to the type of service provided. In some arrangements, this may not be very clear. In this case, one refers to the contract to define the service.

  • For instance, a doctor shares revenue with a clinic. In this transaction, the contract has to specify whether the clinic is paying the doctor for providing healthcare services (exempt under GST) or for using the clinic’s space (taxable under GST).
  • Let’s take another scenario of contract wording. You sell a commercial property for $1 million to a GST holder who can claim input tax credit on the GST paid on the property purchase. If the purchase and sale agreement states that the $1 million price is “inclusive” of GST/HST, you will only get $952,381 after deducting 5% GST or $884,956 after deducting 13% HST.

Real Estate Property

Real estate property transactions are complex, and so are their GST calculations.

  • Suppose you sold real estate property worth $1 million, including GST/HST, but were unable to claim ITC for any reason. There is a particular input tax credit or rebate that allows you to claim the credit.
  • If you sell vacant land as an individual, it is exempt from GST. However, there are many exceptions. If you have previously severed the land into more than two parts or have rented it out, the sale is taxable.

Determining the Amount on Which You Should Charge GST/HST

Sometimes, one business transaction might involve two or more sub-parts. In this scenario, it gets a little tricky to determine the amount on which you should charge GST.

  • You are a GST-registered boat dealer who sells boats of X company in return for a commission. In such a scenario, the onus to collect the GST falls on you. For tax purposes, it is deemed that you purchased boats from the principal (X company) and sold them. Hence, you have to charge GST/HST on the sale price of the ship and not on the commission you earn.
  • In another scenario, you collect a deposit from the customer. If the deposit is just a consideration for the purchase, no GST applies to it. However, if the deposit is part of the total payment, GST will apply to the total amount (including the deposit) when you raise the invoice.

These are just a few exceptions and scenarios to give you an idea about the complexities of reporting GST.

Contact Glenn Graydon Wright LLP in Oakville to Help You File Your GST/HST Returns

A skilled tax consultant is well-versed in complex GST rules and can help you navigate them and charge the correct GST rate. At Glenn Graydon Wright LLP, our tax experts can help you with the right contract wordings and define business transactions to run your business tax efficiently. To learn more about how Glenn Graydon Wright LLP can provide you with the best tax consulting expertise, contact us today at 905-845-6633 or connect with us online to schedule an initial consultation.