The goods and services tax (GST) is a value-added tax charged on most supplies made in Canada of goods, services, real property, and intangible property. The GST is charged at a rate of 5% on the value of the consideration for a taxable supply. The harmonized sales tax (HST) is basically the GST charged at a higher rate. It applies to taxable supplies made in participating provinces. The participating provinces use the HST in lieu of implementing their own provincial sales tax schemes.
There are currently 5 participating provinces. In New Brunswick, Newfoundland and Labrador, and Ontario, the HST is charged at a rate of 13%. In Prince Edward Island, the HST is charged at a rate of 14%. In Nova Scotia, the HST is charged at a rate of 15%.
Certain supplies are zero-rated. Zero-rated supplies have a 0% rate of GST/HST charged on them. In other words, no GST/HST is payable on zero-rates supplies. Businesses that make zero-rated supplies can still claim input tax credits (explained below) even though they do not collect GST/HST on their zero-rated supplies. Zero-rated supplies generally include prescription drugs and biologicals, medical and assistive devices, basic groceries, agriculture and fishing products, exports, and transportation services.
There are also certain supplies that are exempt from GST/HST. No GST/HST is payable on these exempt supplies. Businesses that make exempt supplies are not able to claim input tax credits on purchases made in order to make exempt supplies. Exempt supplies generally include supplies of used residential property and residential rental housing, health care services, educational services, supplies by charities and public sector bodies, and financial services.
As mentioned above, the GST/HST is a value-added tax. Under a value-added tax, the tax is charged at every stage of production, but the goal is to only charge the final consumer. For example, a mechanic pays GST on his commercial rent and equipment. The mechanic also charges GST on the services he provides to the automobiles his customers use for their personal use. The mechanic is allowed to claim back the GST he paid on his commercial rent and equipment. The customers cannot claim back the GST paid on the services, and they bear the GST.
The mechanism through which a business claims back GST/HST paid on its inputs is called an input tax credit. In order to claim input tax credits, a business must be registered for GST/HST purposes, and the GST/HST claimed back must have been paid on expenses that relate to the business’s commercial activities (explained below). A business should be registered before it starts purchasing inputs in order to avoid problems claiming input tax credits. As mentioned above, a business cannot claim input tax credits for GST/HST paid in order to make an exempt supply.
Basically, a commercial activity is any business carried on by a person, and any adventure or concern in the nature of trade carried on by a person. The supply of real property and connected services can also be commercial activities. Making exempt supplies is not a commercial activity.
GST/HST registration is important because a non-resident who is registered and who makes taxable supplies in Canada must charge GST/HST and remit GST/HST net of input tax credits claimed. Also, a business cannot claim input tax credits unless registered.
A non-resident that makes taxable supplies in Canada in the course of commercial activity in Canada must register for the GST/HST, unless:
- the only commercial activity of the non-resident is the making of supplies of real property by way of sale otherwise than in the course of a business;
- the non-resident is a small supplier (explained below); or
- the non-resident does not carry on business in Canada (explained below).
Note, special rules affect the registration requirement for non-residents who supply certain admissions, solicit orders for printed publications and related audio recordings, and exhibit at or are a sponsor of a convention.
A small supplier is a small business with low revenue. In order for a person to be a small supplier, the total worldwide revenue from taxable supplies made by that person and all associated persons must be CDN $30,000 or less in the last four consecutive calendar quarters or in any single calendar quarter.
Carrying on Business in Canada
The Canada Revenue Agency (CRA) states in GST/HST Policy Statement P-051R2, "Carrying on business in Canada" that "[t]he mere fact that a non-resident person undertakes an activity that falls within the definition of a "business" does not mean that the business is being carried on in Canada". The CRA also states the following: "In general, a non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada. Generally, isolated transactions carried on in Canada as part of a business that is carried on by a non-resident person outside Canada may not result in the person being considered to be carrying on business in Canada, given that the [relevant] factors will usually not be met to a sufficient degree".
The common law applies in determining whether a business is being carried on in Canada for GST/HST purposes. Under the common law, the determination of whether a person is carrying on business in Canada is a question of fact and is based on a number of tests and factors.
Under the place where the contracts are made test, the place where sales, or contracts of sale, are effected is of substantial importance in determining whether a business is carried on in Canada. It is profit-making contracts that are important. Entering into contracts in Canada to buy goods or materials to be traded or used outside of Canada will not by itself be considered carrying on business in Canada.
The place where the contacts are made test may not be a decisive factor in determining where a business is carried on for GST/HST purposes. For example, a business will not necessarily be carried on in Canada if profit-making contracts are entered into in Canada but all other business activities (e.g., design, manufacturing, marketing, day-to-day running of the business) are carried on outside of Canada. In such circumstances, entering into profit-making contracts may be ancillary because all the other factors point to the business being carried on outside of Canada.
If the place where the contracts are made test is not determinative, courts also apply the place where profits arise test, which involves weighing multiple factors to determine the place where business operations take place from which profits arise. The CRA will assess the following factors to determine whether a business is carried on in Canada:
- the place where agents or employees of the non-resident are located;
- the place of delivery;
- the place of payment;
- the place where purchases are made or assets are acquired;
- the place from which transactions are solicited;
- the location of assets or an inventory of goods;
- the place where the business contracts are made;
- the location of a bank account;
- the place where the non-resident’s name and business are listed in a directory;
- the location of a branch or office;
- the place where the service is performed; and
- the place of manufacture or production.
The above factors are weighed and balanced against each other, and the importance of any one factor depends on the facts of a specific case. The fact specific nature of the inquiry and the lack of precise rules can make it difficult to determine whether a non-resident is carrying on business in Canada when the facts are not clear-cut.
Note, the test for carrying on business in Canada is also important for determining whether a non-resident makes a supply in Canada. A supply of personal property or a service made in Canada by a non-resident is deemed to be made outside of Canada unless:
- the supply is made in the course of a business carried on in Canada;
- the person is a GST/HST registrant at the time the supply is made; or
- the supply is the supply of an admission in respect of an amusement, a seminar, an activity or an event where the non-resident person did not acquire the admission from another person.
A non-resident that does not have to register for GST/HST purposes can still voluntarily register in certain circumstances. Voluntary registration may enable a non-resident to claim input tax credits. A non-resident can voluntarily register if the non-resident:
- is engaged in a commercial activity in Canada;
- in the ordinary course of carrying on business outside of Canada, regularly solicits orders for the supply by the non-resident of goods for export to, or delivery in, Canada;
- in the ordinary course of carrying on business outside Canada, has entered into an agreement for the supply by the non-resident of services to be performed in Canada; or
- in the ordinary course of carrying on business outside Canada, has entered into an agreement for the supply by the non-resident of intangible personal property (e.g., a trade-mark, copyright, or patent) to be used in Canada or that relates to real property situated in Canada, goods ordinarily situated in Canada, or services to be performed in Canada.
A non-resident that is required to register or voluntarily registers must maintain a security deposit with the CRA. However, a non-resident is not required to maintain a security deposit if it has a fixed place of business in Canada through which it makes supplies. A fixed place of business includes a place of management, a branch, an office, a factory, or a workshop. It also includes a mine, an oil or gas well, a quarry, timberland, or any other place of extraction of natural resources.
The amount of the security deposit is determined by CRA policy. The CRA states in GST/HST Memorandum 2.6, "Security Requirements for Non-Residents" that generally the minimum amount of security is CDN $5,000 and the maximum is CDN $1 million. The security deposit initially is 50% of the estimated net tax (GST/HST collected minus input tax credits claimed) of the non-resident for the 12 month period following registration, whether the estimated net tax is a positive or negative amount. After the initial 12 month period, the security deposit amount will be 50% of the non-resident’s actual net tax during the previous 12 month period, whether the estimated net tax is a positive or negative amount. This means that a security deposit is required even where the input tax credits that can be claimed exceed the GST/HST that must be collected.
The CRA does not require a non-resident to make a security deposit if the non-resident’s taxable supplies in Canada do not exceed CDN $100,000 annually, and the non-resident’s annual net tax is between CDN $3,000 remittable and CDN $3,000 refundable.
There are special rules for non-residents with a permanent establishment in Canada. Many of these rules have serious tax consequences.
A non-resident has a permanent establishment in Canada if it has a fixed place of business in Canada through which it makes supplies. A fixed place of business includes a place of management, a branch, an office, a factory, or a workshop. It also includes a mine, an oil or gas well, a quarry, timberland, or any other place of extraction of natural resources. A non-resident also has a permanent establishment in Canada if there is a fixed place of business in Canada of another person (other than a broker, general commission agent or other independent agent acting in the ordinary course of business) who is acting in Canada on behalf of the non-resident and through whom the non-resident makes supplies in the ordinary course of business.
A non-resident with a permanent establishment in Canada is deemed to be resident in Canada in respect of, but only in respect of, the non-resident’s activities carried on through the permanent establishment. The consequences of that deeming rule are as follows:
- The non-resident is required to register for GST/HST purposes if it makes taxable supplies through the permanent establishment, unless the non-resident is a small supplier;
- The non-resident’s supplies made in Canada through the permanent establishment will not be subject to the special non-resident place of supply rule which would otherwise deem the supplies to be made outside of Canada;
- GST/HST may be payable on supplies acquired by the non-resident through the permanent establishment as the supplies may not be considered zero-rated exports;
- The non-resident may have to self-assess GST/HST on property and services imported for consumption, use or supply through the permanent establishment; and
- The non-resident may be required to pay GST/HST on transfers of personal property and rendering of services between its Canadian permanent establishment and its permanent establishments in other countries.
Non-residents who have dealings in Canada should consider whether they are required to register for the GST/HST and whether it would be beneficial to voluntarily register for the GST/HST where not required to do so. Non-residents also need to consider whether they must comply with provincial sales tax, which applies in provinces that do not participate in the HST.