Every time you sell taxable goods or services in Canada, a 5%, 13% or 15% sales tax gets added to the bill. This additional cost for a product or service helps the government in generating revenue that is used in funding public services, such as public schools and police stations or to improve infrastructure.
While many Canadians around the country are advocating lowering the percentage of sales tax given the current inflation rates, sales tax helps evenly distribute the tax burden amongst the population.
In this article, we’ll explore the impacts of Canadian sales tax and take a closer look at Canadian sales tax by province to determine what it means for businesses. Pull out your calculators because we’re about to calculate our way through sales taxes!
Understanding the Basics: What Is the Canadian Sales Tax?
Before we dive deeper into sales tax calculations, it’s important to go over what sales taxes are and why the Canadian government set them in place.
A sales tax is a type of tax that gets enforced by the government on the final sale of goods or services. During the final point of sale, the retailer or service provider collects the retail sales tax and passes it on to the government. A sales tax is a portion of the purchase price. Provincial sales taxes vary as follows:
- 5% in Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan and Yukon
- 13% in Ontario
- 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island
The Different Types of Sales Taxes in Canada
There are three types of Canadian sales taxes; GST, PST, and HST.
GST or the Goods and Services Tax
Levied by the federal government and collected by the Canada Revenue Agency (CRA), the GST is a 5% value-added sales tax that's added to all goods and services in Canada, including intangible personal property.
The GST is arguably one of the most common types of sales taxes because it;s a Federal tax that gets added to almost all goods and services with a few exceptions. In Alberta, Nunavut, Yukon, and Northwest Territories, consumers only pay GST, while other provinces combine GST with the other two types of sales taxes.
PST or the Provincial Sales Tax
The PST is a type of sales tax levied in addition to the GST. However, there are only a few provinces in Canada that have PST set in place. Those provinces include British Columbia, Manitoba, Quebec, and Saskatchewan.
Unlike GST, the percentage of PST differs based on the needs and budgets of each province or territory. In 2023, the PST rate for British Columbia and Manitoba is 7%, while the Quebec sales tax rate is 9.975% and Saskatchewan has a 6% rate.
HST or the Harmonised Sales Tax
Lastly, HST or Harmonised Sales Tax is a combination of the federal GST and provincial PST. The HST rate ranges between 13% to 15% and makes collecting sales tax easier. One collective sales tax gets added to goods and services instead of consumers paying two separate types of taxes.
A Crash Course on Tax History
In 1920, the Canadian federal government introduced the manufacturers' sales tax which was set in place to help pay for the Great War. This multistage sales tax was applied whenever someone was at a cash register.
The temporary manufacturers' sales tax had hidden federal taxes and was unfair. In the following years, a series of tax reforms were introduced as a solution for the manufacturers' sales tax. And in 1991, the Goods and Services Tax (GST) was introduced in Canada.
In comparison to the Manufacturers’ tax, the new goods and services tax was easier to administer, as it placed an equal tax burden on everyone involved in manufacturing and purchasing of goods or services.
Benefits and Drawbacks of Sales Taxes
Whether you hire a skilled worker or purchase goods in Canada, you must pay the sales tax. And depending on the province or territory you purchase from, you are charged with 5%, 13% or 15% sales tax.
With the revenue earned from sales taxes, the government can fund programs, develop infrastructure, and provide better social services to its residents. Even if you enroll your child in private schools, you’ll still be paying taxes that contribute towards public schools. Your contribution to the tax pool contributes to the betterment of the society you work and live in, despite the public resources you choose to use.
For employers, sales taxes are a medium for promoting fair business competition within an industry and building trust amongst clientele. All businesses need to charge the same tax rate. This encourages employers to stray away from unfair pricing of goods and services.
In addition to fair market practices, sales taxes aid in building trust and credibility. Visible sales taxes on invoices and receipts are an indication to consumers that the business operates while following Canadian tax guidelines.
While sales taxes are a great way to improve society, they have a few drawbacks that are worth not overlooking. Whether you’re an employer or a customer, the complexity of taxes may raise questions about how sales taxes can influence you.
Since most businesses and employers are end users, they are at the forefront of collecting GST from customers. This means businesses and employers are responsible for accurately calculating, collecting, and remitting the appropriate sales tax to the tax authorities.
Failure to accurately calculate, collect, or remit sales taxes can result in penalties, interest, and reputational damage. With each province having their unique tax rates, registration requirements and reporting obligations, an employer needs to invest time and resources in staying updated on current taxation regulations.
Registering for GST/HST
When charging Canadian sales tax, the first question to ask yourself is whether or not you qualify to register for GST or HST. There are two principle requirements:
- Providing taxable supplies in Canada
- Being a large-scale supplier The first requirement is for a business to provide taxable supplies in Canada. The second requirement requires businesses to be large-scale suppliers.
How to Identify if You Are a Large-Scale Supplier
When a supplier exceeds the CA $30,000 threshold in a single calendar quarter, they are no longer considered a small supplier and must register to charge GST or HST the day they exceed CA $30,000.
If a supplier exceeds the $30,000 threshold over the previous four consecutive calendar quarters or less, they are no longer considered a small supplier. They must register for GST or HST no later than the beginning of the month when they were no longer a small supplier.
All other suppliers who do not exceed the CA $30,000 threshold are considered small suppliers and are legally not required to register for charging GST or HST in Canada.
Sales Tax Registration Process for Businesses
Unlike many other government documentation processes, registering for charging sales tax is quick and easy. But before you register for charging GST or HST, you need to ensure that you have a business number.
This number will be a form of identification at every step of the registration process and other sales tax-related inquiries. If your business is already incorporated, then you will already have a business number and a corporate income tax account.
Non-resident companies that wish to register must follow the guidelines provided in guide RC4027. Otherwise, you can register voluntarily with the Canada Revenue Agency.
Gather documentation
Before you start your registration process, gather the necessary business information. First determine if your business is a sole proprietorship, partnership, or corporation? Next, ensure you have your business details, such as your address, contact information and legal business name. Once all this is handy, you can advance to the next step in the registration process.
Obtain a business number
Using BRO (business registration online), you can apply for a business number (if applicable) and register for the GST/HST program. Your business number will allow you to register for other Canada Revenue Agency programs, such as payroll deduction. BRO is one of the fastest and easiest ways to register.
Note that if your business is in Quebec, you will need to register using Revenue Quebec.
Start Charging Sales Taxes
By registering to charge sales taxes in Canada, you become responsible for charging, collecting, and remitting GST/HST to all taxable supplies of goods and services for your business. As a business, you will also be responsible for filing GST/HST returns regularly.
Once registered, you can claim input tax credits (ITC), and this will allow you to recover the GST/HST paid on your purchases and operating expenses.
Contracts Charging Sales Taxes
Whether you are a contractor or a small business, both establishments are legally required by law to charge sales tax. Sales taxes are added to both labor and the cost of materials and that’s why many contractors charge sales tax on the cost of the entire project.
How to Calculate Sales Taxes
Now that you have registered for charging GST/HST, it’s time you pull out your Canadian sales tax calculator and start identifying how much you should be charging.
The Canadian government has a GST/HST calculator that you can use to aid in calculating how much to charge. You can also perform your own calculations using the formula below..
To calculate the sales tax amount, identify the total value of taxable sales, excluding all exempt goods and services. Following this, multiply the total value of a good or service by the sales tax rate of the province or territory.
For example, the sales tax rate for Ontario is 13%, and if the total value of your goods is $100, then you must charge $100 (total value of goods) x 0.13 (Ontario’s sales tax rate) = $13. Therefore your sales tax amount is $13.
Common Mistakes to Avoid when Charging Sales Tax
Charging sales tax is an integral yet confusing part of Canada's taxation system. Here are some common mistakes to avoid to make this process a bit more smooth and prevent potential complications with the Canada Revenue Agency.
- Charging your customer sales taxes based on your location: Your business should be charging taxes based on your customer's point of purchase.
- Charging sales taxes on zero-rated goods and services: Most groceries, prescription drugs, and healthcare services are exempted from sales tax. A business must identify zero-rated goods and services and exempt the appropriate sales tax from them.
- Failing to register for GST or HST: If required, you must register for the corresponding sales tax account to avoid penalties and interest.
- Lacking organization: It’s crucial to maintain proper records of all sales transactions. Having the correct documentation available during a tax audit is the key to accurate reporting and remittance of sales tax.
- Missing regulatory changes and updates: Sales tax regulations are subject to change, and it is up to the business to stay updated and ensure compliance with new sales tax regulations.
Charging Canadian Sales Taxes Made Easier With Borderless
Charging Canadian sales taxes is an essential part of Canada’s taxation system. While it can be challenging to understand, it allows for the development of a country's infrastructure and the betterment of public services provided in communities.
Businesses small and large play a crucial role in ensuring consumers get charged at an accurate rate, alongside being liable for distributing sales taxes to the Canada Revenue Agency.
Meanwhile, consumers and end users are responsible for paying the appropriate sales tax rate on all taxable goods and services.
With various forms, guidelines and aids provided by the CRA and the Canadian government, you can avoid common mistakes and learn the importance of sales taxes.
As an employer and business owner, your responsibilities may seem endless. Borderless has your back. We can assist you in tackling contracts, payroll, insurance, and much more. Contact us today to see how we can help you navigate the complex labor and taxation laws in Canada.
Disclaimer
Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
