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Health Insurance Zero Rated Or Exempt

Health Insurance Zero Rated Or Exempt

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The basic rule for VAT is that everything is subject to VAT at the standard rate unless the legislation makes an exception for it. The list of zero-rated supplies is contained in Schedule 8 of the VAT Act 1994.

Zero-rating applies to most basic food stuffs, water and sewage services, books and newspapers, some building works, exports, transport services such as buses, trains and aircraft, new residential accommodation, some supplies to charities and children’s clothing. Even though there is no VAT on zero-rated supplies, the zero-rate is a rate of tax, and businesses that make only zero-rated supplies can register for VAT and recover the VAT on their costs and overheads.

What is Exempt?

Exempt supplies are outside the VAT regime and are not a rate of tax, as such if you only make exempt supplies you cannot register for VAT and you cannot recover any VAT on costs attributable to making the exempt supplies. If you make both taxable and exempt supplies you can register for VAT but you will not be able to recover all of the VAT on your costs.

What are Exempt Supplies?

Exempt supplies are listed in Schedule 9 of the VAT Act 1994 and include: most supplies of land and ‘second hand’ residential properties and residential property rental, insurance, education, health, betting, finance, postal services, professional subscriptions, sports competitions and some charity fund raising events and cultural activities.

The Trap!

A common trap that businesses fall into is where they normally make zero-rated taxable supplies, but change their mind, often due to economic circumstances, and end up making exempt supplies and do not consider the implication on VAT recovery.

Examples

For example, a building company that normally builds and sells residential property buys an old office block and converts it into flats. The intention is to sell them (zero-rated taxable supply) so he recovers all of the VAT.

Because of the slump in the housing market he decides to rent them out (exempt supply) so potentially he now has to pay back all the VAT he has claimed on the conversion costs.

Another example would be an accountant who decides to expand his business into providing financial advice and starts receiving sales commission from the financial products he recommends. This income is exempt from VAT and he suddenly finds that a percentage of his VAT on overheads is irrecoverable.

Practical Tip

Make sure you are aware of the difference between zero-rated and exempt supplies and the effects that it can have on your ability to recover the VAT on your costs. If you are going to make exempt supplies, you will need to factor in the extra costs of the irrecoverable VAT before you start, or else you could be in for a nasty and costly surprise.

If you make both exempt and taxable supplies you are what is called partly exempt, and every quarter you will need to do a calculation to see how much VAT you can recover.

By Andrew Needham

This article was first printed in Tax Insider in November 2010.

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Exemption and partial exemption for VAT

Find out what you need to do if you supply goods and services that are exempt from VAT and how these affect the amount of VAT you can reclaim on your purchases.

Some goods and services are exempt from VAT. If all of the goods and services you sell are exempt, your business is exempt and you won’t be able to register for VAT. This means you can’t reclaim any VAT on your business purchases or expenses.

If you are VAT-registered and incur VAT on any items that will be used to make exempt supplies, you are classed as partly exempt.

Exempt goods and services

  • insurance, finance and credit
  • education and training
  • fund raising events by charities
  • subscriptions to membership organisations
  • selling, leasing and letting of commercial land and buildings – this exemption can be waived

These items are exempt from VAT so are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes. And if you buy exempt items, there is no VAT to reclaim.

Exempt items are different from zero-rated supplies. In both cases VAT is not added to the selling price, but zero-rated goods or services are taxable for VAT – at 0%.

Exempt business

If you only sell or otherwise supply goods or services that are exempt from VAT then yours is an exempt business and:

  • you cannot register for VAT
  • you cannot recover any VAT you incur on your purchases or expenses

This is in contrast to where you sell or otherwise supply zero-rated goods or services. Here you can reclaim the VAT on any purchases that relate to those sales. If you sell mainly or only zero-rated items, you can apply for an exemption from VAT registration. If you are exempted from registration you will not be able to reclaim any VAT.

Partly exempt business

Your business is partly exempt if your business has incurred VAT on purchases that relate to exempt supplies. This is known as exempt input tax.

Generally, you won’t be able to reclaim exempt input tax. However, provided the amount of exempt input tax is below a certain amount, it can be recovered in full.

Non-business use in a partly exempt business

You can’t reclaim VAT you pay on goods and services that aren’t for business purposes. If your business is partly exempt and you buy goods or services that you use partly for business and partly for non-business purposes you must split the VAT accordingly. You then use your partial exemption method to work out how much of the business VAT you can reclaim.

Keeping records if your business is partly exempt

If you make both taxable and exempt supplies, you must keep a separate record of your exempt sales and details of how you’ve worked out how much VAT to reclaim.

Land and buildings

If you sell, lease or let commercial land or property, you can choose to waive the exemption and to charge VAT at the standard rate. This is known as ‘opting to tax land and buildings’. VAT incurred in making taxable supplies can be reclaimed.

Acquiring or creating a capital asset

If you acquire or create an expensive capital asset you may have to use the Capital Goods Scheme to adjust how much input tax you initially reclaimed in future years. The scheme applies when your capital spending, net of VAT is:

  • £250,000 or more on land or buildings, or on building or civil engineering works
  • £50,000 or more on a single computer or piece of computer equipment
  • £50,000 or more on an aircraft, ship, boat or other vessel

You’ll have to adjust the amount of VAT you reclaimed if your business has an asset, and the extent to which you use it to make taxable supplies (rather than exempt supplies) varies over the following 5 or 10 years (depending on the asset).

You can reclaim more if the proportion of your taxable supplies increases, but you’ll have to repay some if it decreases.

Sector insight | Insurance

With the economic, regulatory and organizational shifts currently taking place in insurance, industry players face unique challenges as they prepare for evolving insurance regulations and look to create opportunities. The most significant change short-term change is VAT which is likely to be introduced on 1 January 2018.

Highlights

KPMG in the Lower Gulf

KPMG in the Lower Gulf

Related content

VAT implications

Insurers must act now because VAT implementation will:

  • Increase costs
  • Complicate compliance
  • Introduce mixed VAT liabilities
  • Distort potential competition

VAT on insurance premiums

The VAT treatment of insurance premiums has not been confirmed as yet, but is likely to vary between taxable, zero rated and exempt. The UAE’s Ministry of Finance has confirmed in its ongoing VAT workshops that general insurance premiums will be taxable at five percent, while life insurance premiums are currently planned to be exempt – as is the case in many economies. If this is ultimately confirmed in the UAE, providing life cover will not incur a VAT charge. However, that means that the VAT on commissions paid to insurance brokers will not be recoverable – and so will be a cost that has to be absorbed by the organization. The VAT on other business input costs will equally be unrecoverable where related to the revision of exempt insurance policies.

Exemption and zero rated concerns

In Europe, all insurance products are exempt from VAT. If other GCC member states follow suit, a number of issues will arise. If a supply is exempt, recovery of VAT on business inputs will be denied, increasing business costs which in turn will put pressure on insurers to raise premiums. However, not all economies exempt all insurance products. In Australia, for example, general insurance is liable to VAT while life insurance is exempt and medical insurance is zero rated.
If, rather than being exempt, insurance products are zero-rated, some VAT recovery on inputs will be allowed. However, even being zero-rated could cause issues. To maximize VAT recovery, organizations will need to trace business input use and apportion overhead costs between those relates to taxable (either at standard VAT rate of five per cent or zero rated) and exempt activities, which is likely to increase compliance costs. Higher costs – no matter what the good or service – tends to impact demand.

Business implications

Taxes in the insurance sector can be rather complicated. Additional resources – including time and budget – will be required to administer not only the VAT process but also to determine the payout under a policy between a VAT-registered claimant and one that is not. Staff will need to be trained to ensure everyone understands – and is compliant with – the new regulations and is familiar with any necessary documentation. Specific invoicing may be needed, even if the services provided are VAT-exempt. Insurance-related companies, such as agents, brokers and claims handlers, will also need to understand how VAT could affect both margins and pricing. Where insurance is taxed at five percent, insurers will need to assess if this additional cost can be passed on to their customers or whether all – or some – of this has to be absorbed due to market pressures, impacting future profits.
These are just some of the many VAT hurdles that insurers will face. It is critical that insurers plan carefully to help mitigate the impact this will have on their organization and their customers.

How KPMG can help

We have an experienced VAT team, part of a global network of VAT experts, who have been advising clients on implementation strategies, helping them comply with VAT obligations and explaining their VAT liabilities. They focus on:

  • IT and VAT impact assessments
  • Implementation strategies
  • IT testing
  • In-house training for employees
  • VAT manuals
  • Registration advice
  • Guidance on VAT submissions – including reports and reviews

To ensure your organization is prepared for VAT, please contact Clare McColl and Rob Dalla Costa.

Charge the GST/HST

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When to charge GST/HST

Generally, if you have a GST/HST account, you must charge the GST/HST on your taxable supplies.

Even if you don’t have a GST/HST account yet, you might have to register for one. For more information, see Register for a GST/HST account.

Which GST/HST rate to charge

The current rates are:

  • 5% GST in Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and Yukon
  • 13% HST in Ontario
  • 15% HST in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island

See previous rates (from January 1, 2008 to September 30, 2016)

GST/HST rates from January 1, 2008 to Septermber 30, 2016

The rate you will charge depends on different factors:

Type of supply

It is important to know which supplies are taxable and at which rate. The following table shows the different types of supplies and how the GST/HST applies to them.

Most property and services supplied in or imported into Canada are subject to GST/HST. GST/HST applies to these supplies at the rate of the province.

Examples of taxable supplies (other than zero-rated)

  • sales of new housing (certain sales of new housing may be subject to a previous rate of GST/HST)
  • sales and rentals of commercial real property
  • sales and leases of automobiles
  • car repairs
  • soft drinks, candies, and potato chips
  • clothing and footwear
  • advertising (unless provided to a non-resident of Canada who is not registered for the GST/HST)
  • taxi and limousine transportation
  • legal and accounting services
  • franchises
  • hotel accommodation
  • barber and hairstylist services

There are certain situations where the GST/HST is applied differently, for example coupons, gift certificates, deposits, etc. For more information, see How to calculate the GST/HST.

  • You charge the GST/HST on the supplies that are made in Canada.
  • You may be eligible to claim ITCs to recover the GST/HST paid or payable on purchases made to provide them.

Some supplies are zero-rated under the GST/HST. GST/HST applies to these supplies at the rate of 0%.

Examples of supplies taxable at 0%

  • basic groceries such as milk, bread, and vegetables
  • agricultural products such as grain, raw wool, and dried tobacco leaves
  • most farm livestock
  • most fishery products such as fish for human consumption
  • prescription drugs and drug-dispensing services
  • certain medical devices such as hearing aids and artificial teeth
  • feminine hygiene products (as of July 1, 2015 )
  • exports (most goods and services for which you charge and collect the GST/HST in Canada, are zero-rated when exported)
  • many transportation services where the origin or destination is outside Canada
  • GST/HST of 0% is charged. You do not collect the GST/HST on these supplies.
  • You may be eligible to claim ITCs to recover the GST/HST paid or payable on property and services acquired to provide these supplies.

Some supplies are exempt from the GST/HST. GST/HST does not apply to these supplies.

Examples of exempt supplies

  • a sale of housing that was last used by an individual as a place of residence
  • long-term rentals of residential accommodation (of one month or more) and residential condominium fees
  • most health, medical, and dental services performed by licensed physicians or dentists for medical reasons
  • child care services, where the primary purpose is to provide care and supervision to children 14 years of age or under for periods of less than 24 hours per day
  • most domestic ferry services
  • legal aid services
  • many educational services such as:
    • courses supplied by a vocational school leading to a certificate or a diploma that certifies the ability of individuals to practice or perform a trade or a vocation
    • tutoring services made to an individual in a course that follows a curriculum designated by a school authority
  • music lessons
  • most services provided by financial institutions such as lending money or operating deposit accounts
  • the issuance of insurance policies by an insurer and the arranging for the issuance of insurance policies by insurance agents
  • most property and services provided by charities and public institutions
  • certain property and services provided by governments, non-profit organizations, municipalities, and other public service bodies including municipal transit services and standard residential services such as water distribution
  • You do not charge the GST/HST.
  • You generally cannot claim ITCs to recover the GST/HST paid or payable on property and services acquired to provide these supplies.

If you are a public service body that provides exempt supplies, you may be eligible to claim a public service bodies’ rebate for the GST/HST paid or payable on expenses related to making exempt supplies whether or not you are registered for the GST/HST. For more information, see Guide RC4034, GST/HST Public Service Bodies’ Rebate.

Where the supply is made

In provinces where you have to charge the GST and the provincial sales tax (PST), calculate the GST on the price excluding the PST. If you are supplying goods or services to:

  • customers outside your province or territory, see GST/HST and place of supply rules
  • customers outside Canada, see GST/HST – Import and exports

Who the supply is made to

You charge the GST/HST on taxable supplies of property and services (other than zero-rated supplies) to almost everyone.

Even though certain organizations may be able to claim rebates, they always have to pay the applicable GST/HST on their purchases. For more information, see:

Certain persons may not always have to pay the GST/HST to a supplier. For more information, see:

  • GST/HST and indigenous peoples for Indians making purchases of goods and services on a reserve and Indian bands and band-empowered entities)
  • GST/HST and information for governments and diplomats for provincial governments (including their departments, ministries, Crown corporations, boards, commissions, and agencies) of Alberta, Manitoba, Northwest Territories, Saskatchewan and Yukon

How to calculate the GST/HST

To help you determine how to calculate the GST/HST in most cases, use the GST/HST calculator. You may have to calculate the GST/HST differently in certain situations. The following are special cases and how the GST/HST applies in those situations.

If you are acting as an agent (excluding auctioneers of goods) making taxable supplies of property and services on behalf of a person (who may be referred to as a vendor, owner or principal), different rules apply to determine who has to charge and account for the GST/HST on the sale. These rules depend, in part, on whether the vendor would have had to charge the GST/HST if the vendor had sold the goods or services directly to the purchaser.

To help you determine whether you are acting as an agent of another person, see GST/HST Info Sheet GI-012, Agents.

When the vendor has to charge GST/HST

If a vendor would have had to charge the GST/HST for taxable property and services sold directly to the purchaser, it is the vendor who must charge and account for the GST/HST on the taxable property and services sold through you as the agent.

If you are a registrant, charge and account for the GST/HST on your commission and on any other services provided to the vendor that relate to the sale of the property or services. Vendors who are registrants may be eligible to claim an ITC to recover the GST/HST paid or payable for your services.

Example – When the vendor has to charge the GST/HST

Daniel, a registrant vendor, gives a painting to an art gallery (agent) in Alberta to sell on his behalf. As Daniel’s agent, the art gallery sells the painting for $2,000 plus the GST.

GST to report and remit

Agent: The GST charged to the vendor is $22.50. The art gallery includes this amount in its net tax

Vendor: The GST charged to the purchaser is $100.00. Daniel includes this amount in his net tax.

Example – When the vendor has to charge the GST/HST

Daniel, a registrant vendor, gives a painting to an art gallery (agent) in Alberta to sell on his behalf. As Daniel’s agent, the art gallery sells the painting for $2,000 plus the GST.

GST to report and remit

Agent: The GST charged to vendor is $22.50. The art gallery includes this amount in its net tax

Vendor: The GST charged to purchaser is $100.00. Daniel includes this amount in his net tax.

Joint election

A joint election can be made between a vendor (who may also be referred to as an owner or principal) and an agent when a vendor is required to collect tax, but would prefer the agent to do so. The joint election can also be made between a vendor and a billing agent. A billing agent is a person acting as an agent only for charging and collecting the tax, but not for making the sale.

By making this joint election, the agent becomes responsible for collecting, reporting, and remitting (as required), the tax on the supply of taxable property or services made on behalf of the vendor. The joint election is made by completing and signing Form GST506, Election and Revocation of an Election Between Agent and Principal. Both the vendor and the agent must keep a copy of Form GST506 in their records.

Agents who make this election must charge the GST/HST on the commission and other services they provide to the vendor that relate to this supply. Agents must also include the tax on their supplies in their GST/HST return.

The rules pertaining to bad debt adjustments, the recovery of bad debts, and returned goods apply to agents and billing agents of a vendor who have made the election.

When the vendor does not have to charge GST/HST

If a vendor would not have had to charge the GST/HST for sales of goods (other than zero-rated or exempt sales of goods) to a purchaser, then, as a registrant agent, you have to charge and include the GST/HST on the sale of the goods in your net tax calculation. However, you do not charge the GST/HST on your commission or any other services provided to the vendor that relate to the sale of the goods.

Generally, agents have to charge and remit the GST/HST on goods sold for a registrant vendor that were not used in commercial activities. However, sometimes a registrant vendor may want to charge and remit the tax. In these situations, the vendor and agent may jointly elect in writing to make the sale of those goods taxable. When the goods are sold, the vendor charges the tax and includes it in its net tax.

The vendor also pays the GST/HST on the services provided by the agent and may be able to claim an ITC for this tax. However, the vendor cannot claim an ITC for other expenses related to the supply that were not charged to the vendor by the agent.

Example – When the vendor does not have to charge GST/HST

Marie, a non-registrant vendor, gives a used car to an agent in Ontario to sell for her. The agent, a registrant, sells the used car for $6,000 plus the HST. The agent charges Marie a commission of $600 plus an advertising fee of $25. The agent does not charge the HST on the commission and advertising.

HST to report and remit

Agent: The agent includes the $780 HST charged to the purchaser in his or her net tax.

Vendor: Marie does not report any HST for this sale.

Example – When the vendor does not have to charge GST/HST

Marie, a non-registrant vendor, gives a used car to an agent in Ontario to sell for her. The agent, a registrant, sells the used car for $6,000 plus the HST. The agent charges Marie a commission of $600 plus an advertising fee of $25. The agent does not charge the HST on the commission and advertising.

HST to report and remit

Agent: The agent includes the $780 HST charged to purchaser in his or her net tax.

Vendor: Marie does not report any HST for this sale.

Zero-rated and exempt goods

When zero-rated or exempt goods are sold, neither the agent nor the vendor charges the purchaser the GST/HST. Whether the vendor is a registrant or not, the agent charges the GST/HST on its commissions and other services, such as advertising, provided in relation to the sale.

Example – Zero-rated and exempt goods

As an agent of a vendor, you make zero-rated sales of medical supplies in June 2016 , in Ontario, for $2,000. Your commission is 20% of the selling price and you charge an advertising fee of $100.

HST to report and remit

Agent: Agent includes HST of $65 charged to vendor in his or her net tax.

Vendor: HST charged to purchaser is $0.

Auctioneers

If you are a registrant auctioneer selling goods for a person (who may be referred to as a vendor, owner, or principal), you are considered to have made a taxable sale of goods. This means that it does not matter if the vendor is, or is not, a GST/HST registrant, because it is the auctioneer who must charge and remit the GST/HST on the sale of the vendor’s goods, unless you made a zero-rated sale of goods.

There is no GST/HST charged on your commission or other services provided to the vendor that relate to the sale of the goods, such as short-term storage and advertising.

Auctioneers’ election

A vendor (who may also be referred to as an owner or principal) and an auctioneer can make a joint election to have the vendor account for the GST/HST on the sale of auctioned goods if the following conditions are met:

  • both the vendor and auctioneer are GST/HST registrants
  • the supply of the goods would be taxable if made by the vendor
  • the goods are prescribed in the Property Supplied by Auction (GST/HST) Regulations for the purpose of the Excise Tax Act
  • at least 90% of the value of the goods sold at auction on a particular day on behalf of the vendor is for prescribed goods

Prescribed goods include:

  • motor vehicles designed for highway use
  • cut flowers, potted plants, and plant bulbs
  • horses
  • machinery and equipment designed for use in certain industries

Once the auctioneer makes a joint election with a vendor, the auctioneer collects the GST/HST on the sale of the goods and gives it to the vendor. The vendor accounts for the GST/HST. The auctioneer charges the vendor the GST/HST on their commission and on any services provided to the vendor, such as short-term storage and advertising and accounts for that GST/HST in their net tax calculation.

To make an election, complete Form GST502, Election and Revocation of Election Between Auctioneer and Principal. Both the vendor and the auctioneer must keep a signed copy of the election in their records.

Barter transactions

A barter transaction takes place when any two persons (suppliers) agree to an exchange of goods or services without the exchange of money. Suppliers calculate the value of the goods or services at the fair market value at the time of the transaction.

Since a barter transaction is two supplies (one from each party) with two suppliers and two recipients, a supply could be exempt, taxable, or zero-rated. For that reason, each supplier/recipient must deal with the transactions from their own point of view to find out whether they have to charge, collect, or pay GST/HST on the supply, and whether any input tax credit is available in connection with any GST/HST payable on the supply.

Example – Barter transactions

You exchange a gas barbecue for a lawnmower with your neighbour. No money is exchanged. You are not registered for the GST/HST and neither is your neighbour. There is no GST/HST implication on this transaction.

Barter-exchange networks

A barter-exchange network is a group of persons who have agreed in writing to accept credits (barter units) on account for the group members in exchange for property or services traded among members.

The accounts are maintained by an “administrator”. The administrator is responsible for administering, maintaining, or operating a system of members’ accounts to which barter units may be credited. When supplied by a GST/HST registrant, tax applies on the exchange value of the barter unit accepted as payment for the goods and services provided for the units.

The administrator of a barter-exchange network may apply to have the network designated for GST/HST purposes. Members of a designated barter-exchange network do not have to pay tax on barter units accepted in exchange for their supplies of goods or services. However, if registrants, they would continue to charge tax on their taxable supplies of goods and services provided for the barter units.

How to apply for network designation

The administrator of a barter exchange network must apply to the Canada Revenue Agency to have the network designated. Once designated, it relieves the members of the network from having to pay tax on barter units accepted in exchange for their supplies of goods or services.

A letter applying for designation is required, signed by the administrator (or an authorized individual), and containing all of the following information:

  • the name of the barter exchange network
  • the name, address, telephone number, trading name, and Business Number of the administrator of the barter exchange network
  • the effective date requested
  • a copy of the standard membership agreement of the barter exchange network describing the responsibilities of the members and the administrator
  • a statement from the applicant stating that it meets the definition of “administrator” of a barter exchange network
  • a statement from the applicant that certifies that the information given in the application and any document attached is true, correct, and complete, and signed by the administrator or an individual authorized to sign on behalf of the administrator.

Administrators outside the province of Quebec, send your letter to:

Director, Public Service Bodies and Governments
Excise and GST/HST Rulings Directorate
Policy and Legislation Branch
Canada Revenue Agency
14th Floor, Place de Ville, Tower A, 320 Queen Street
Ottawa Ontario K1A 0L5

Administrators in the province of Quebec, send your letter to:

Directeur, Direction des lois sur les taxes, le recouvrement et l’administration
Ministère du revenu du Québec
3800, rue de Marly
Québec (Québec) G1X 4A5

Coin-operated machines

Generally, any goods, services, or a right to use a machine that you sell through vending machines or coin-operated machines is subject to the GST/HST. This includes products such as milk and fruits that are usually zero-rated.

The price of these goods, services, or rights to use the machine includes the GST/HST. You are considered to have collected the GST/HST when you remove the money from the vending or coin-operated machine.

Example – Coin operated machines

You collect $100 from your coin-operated machine in Saskatchewan. Multiply that amount by 5/105 to determine the GST collected:

($100 × 5) ÷ 105 = $500 ÷ 105 = $4.76 of GST

However, the GST/HST is equal to zero on a supply of goods, services, or right to use a machine made through a coin-operated machine if it is designed to accept only a single coin of 25¢ or less as the total amount payable for the goods, services or right. For example, if you sell a lollipop in a vending machine for 25¢, and the vending machine only accepts one 25¢ coin, the GST/HST is equal to zero.

The above rule does not apply to machines that accept coins of more than 25¢ (such as $1 or $2 coins) or machines that accept more than one coin as the amount payable for the good, service, or right.

The right to use a coin-operated washing machine and clothes dryer located in a common area of a residential building is exempt from the GST/HST.

Commercial lease

Generally, commercial leases from a landlord who is registered for the GST/HST are taxable.

Property taxes paid by a tenant are to be treated as part of the payment to the landlord for the rental of the real property, even if the tenant pays the taxes directly to the municipality. Therefore, the amount of property taxes payable by a tenant is considered to be part of the rent and is subject to GST/HST in the same way as the amount of rent payable by the tenant. This will be the case whether or not the rental agreement states that the payment of property taxes by the tenant is to be considered as “rent” or “additional rent”

However, if a tenant is directly liable to the municipality for the payment of property taxes, this amount is not subject to GST/HST.

Consignment sales

A consignment sale is a transaction in which one party, the consignor, delivers goods to a second party, the consignee, who tries to sell the goods for the consignor.

If you, as a consignee, sell goods on consignment, the consignor still owns the goods until you sell them. This means that even though the consigned goods are in your possession, you do not include these items in your inventory.

Consignment arrangements consist of two types:

If you are not buying and reselling goods, then it is likely that you are acting as the consignor’s agent.

Where you are buying then reselling goods, we consider two transactions to take place at the time you sell the goods:

  • you buy the goods from the consignor
  • you sell the goods to your customer

If the consignor is a GST/HST registrant, you pay the GST/HST on the price the consignor charges you (assuming your purchase of the goods is taxable, other than zero-rated ) and collect the GST/HST from your customer on your selling price (assuming your sale of the goods is taxable, other than zero-rated ). If the consignor is not a registrant, you do not pay the GST/HST to the consignor, and you collect the GST/HST from your customer on your selling price.

Example – Consignment sales

You sell clothing on consignment to a customer in Saskatchewan for $100 plus the GST, which you include on your GST/HST return. You pay the consignor $60. You are considered to have bought the clothing from the consignor for $60 immediately before the sale. The consignor, if a GST/HST registrant, charges you the GST on the $60, which you can claim as an ITC on your return. If not a registrant, the consignor does not charge you the GST.

When you return any unsold items to the consignor, you do not have to pay the GST/HST on these items since the consignor never sold you the goods.

Do not collect the GST/HST when a customer gives you a deposit towards a taxable purchase. Collect the GST/HST on the deposit when you apply it to the purchase price.

If the customer does not make the purchase and loses the deposit, the forfeited deposit is subject to the GST/HST. If the customer is a GST/HST registrant, the customer may be eligible to claim an ITC for the GST/HST paid on the forfeited deposit.

Calculate the GST/HST on the forfeited deposit as follows:

  • the GST is equal to the forfeited amount multiplied by 5/105
  • the HST is equal to the forfeited amount multiplied by:
    • 13/113 where the rate of 13% applies
    • 14/114 where the rate of 14% applies
    • 15/115 where the rate of 15% applies

Example – Deposits

A customer gives you a deposit of $50 towards the purchase of an item that is taxable at 5% GST, but does not pay the balance owing and forfeits the deposit. We consider you to have collected the GST equal to 5/105 of the forfeited deposit. As a result, you have to include GST of $2.38 ($50 × 5/105) in your net tax calculation. If the customer is a GST/HST registrant, that person may be entitled to claim an ITC for the GST you collected on the forfeited deposit.

If you are in a participating province, the HST collected is equal to:

  • $5.75 ($50 × 13/113) where the HST rate of 13% applies
  • $6.14 ($50 × 14/114) where the HST rate of 14% applies
  • $6.52 ($50 × 15/115) where the HST rate of 15% applies

These rules do not apply to deposits for returnable containers. For more information, see Returnable beverage containers.

Conditional and instalment sales

A conditional sale takes place when you transfer possession of goods to a customer, but ownership passes only after the sale meets certain conditions, such as when the purchase price has been paid in full. In this type of sale, the customer agrees to make payments for the goods over a period of time. The customer takes possession of the goods, but you keep title or ownership of the goods until the customer has met the specified conditions.

In an instalment sale, the ownership passes immediately but the customer pays the purchase price in instalments. You transfer title or ownership and possession of the goods at the time the agreement is entered into, and the customer agrees to make payments over a period of time.

In both cases, you have to include the tax in your net tax calculation for the reporting period that includes the earlier of the following two rates:

  • the date you issued the invoice
  • the date you received payment

Any amount of tax that has not been paid or invoiced by the end of the month following the date you transferred possession or ownership of the goods (whichever is earlier) is considered due at that time and has to be included in your net tax calculation at that time.

Direct sellers

Businesses in the direct selling industry sell their products directly to consumers through sales representatives or to independent sales contractors who, in turn, sell the products to purchasers. Their business structure is usually based on one or both of the two following models:

  • direct sellers who sell their products to distributors and independent sales contractors who, in turn, sell them to purchasers
  • network sellers who sell their products directly to consumers through sales representatives who receive commissions for arranging the sales

Alternative Collection Method

Direct sellers may apply for approval to use the alternate collection method (ACM), another method for accounting for the GST/HST on their sales of exclusive products.

Under the ACM, direct sellers charge and account for the GST/HST on the suggested retail price of the exclusive products as if they had made the sales directly to purchasers. For more information, including how to apply for approval to use the ACM, see GST/HST Info Sheet GI-125, Direct Selling Industry – The Alternate Collection Method for Approved Direct Sellers and Approved Distributors.

With the ACM, most independent sales contractors do not have to register for the GST/HST because they do not include revenues from their sales of exclusive products in their calculation to determine if they are small suppliers. For more information, see GST/HST Info Sheet GI-126, Direct Selling Industry – The Alternate Collection Method for Independent Sales Contractors.

Network sellers method

Network sellers who meet certain conditions may apply for approval to use the network sellers method.

As a result, the commissions and bonuses paid to sales representatives for arranging for the sale of the network seller’s select products would not be subject to the GST/HST and would not be used for determining whether sales representatives are small suppliers.

Early-payment discounts and late-payment surcharges

Early-payment discounts

If you offer an early-payment discount on credit sales, charge the GST/HST on the full invoice amount even if your customer takes the discount.

When you invoice an amount that is already net of the early payment discount, charge the GST/HST on the invoiced amount.

Example – Early-payment discounts

You operate a business in Manitoba. You issue an invoice that shows the price of goods as $100, plus the GST. The credit terms of the invoice give the customer a 2% discount if the customer pays within 10 days. Your customer pays within 10 days. You calculate the amount owed as follows:

Late-payment surcharges

Do not charge GST/HST on late-payment surcharges. GST/HST is payable only on the original invoiced amount.

Example – Late-payment surcharges

You operate a business in Manitoba. You issue an invoice that shows the price of goods as $100, plus the GST.

Your customer pays after the due date. If you charge $5 for late payment of goods invoiced at $100, the GST does not apply to the late charge. You calculate the amount owed as follows:

Freight transportation service

A supply of a freight transportation service made in Canada can be taxable at the usual rate for a province, or it can be zero-rated (taxable at 0%).

Gift certificates

A gift certificate (including gift cards and online gift certificates) is generally a voucher, receipt, or ticket that:

  • has a stated monetary value or is for a particular supply of property or a service
  • is issued or sold for consideration
  • is accepted as payment or partial payment of the consideration for a supply of property or service
  • has only to be presented as a means of payment without any other obligation imposed on the holder
  • has no intrinsic value

Do not collect the GST/HST on the sale of a gift certificate. When a customer gives you a gift certificate towards a purchase, calculate the GST/HST on the price of the item and deduct the amount of the gift certificate as if it were cash. For more information about gift certificates, see GST/HST Policy Statement P-202, Gift Certificates.

Example – Gift certificates

You sell a taxable item in Alberta for $100, and the purchaser gives you a $20 gift certificate toward the purchase.

Insurance claims

Generally, when an insurance company pays out benefits to compensate a claimant under the terms of an insurance policy, it is providing an exempt financial service. The following is an explanation of two kinds of insurance claims:

  • life and health insurance claims
  • property and casualty insurance claims

Example – Insurance claims

You are a GST/HST registrant in Manitoba who uses a car exclusively in the course of your commercial activities. You are involved in an accident with that car. You arrange to have the repairs done at the dealership for $5,000 plus $250 GST. Under the car insurance policy, there is a $500 deductible. You make a cheque payable to the dealership and claim $250 in tax payable as an ITC. You forward a copy of the invoice to your insurer and ask for compensation less the tax portion. The insurer pays you the following:

Life and health insurance claims

Under life and health insurance contracts, the settlement of a claim is usually limited to the payment of financial benefits. These payments are financial services and are generally GST/HST-exempt.

Property and casualty insurance claims

Under property and casualty insurance contracts, the insurer agrees to settle a claim for loss or damage to property by:

  • making a cash settlement with the insured
  • paying the cost of repairs to the damaged property
  • paying the cost of replacing the damaged property

Cash settlements – A cash settlement is a financial service and is generally GST/HST exempt.

Repairs and replacements – Other than a cash settlement, an insurer can settle a loss related to damaged property by:

  • repairing or replacing the damaged property
  • compensating the insured for the cost of repairing or replacing the damaged property

If the insurer repairs or replaces the damaged property – The insurer purchases repair services or replacement property directly. The insurer would pay the GST/HST and would not be entitled to claim an ITC because the insurer would not be acquiring the property or service for consumption, use, or supply in the course of a commercial activity.

If insurer compensates the insured for the cost of repairing or replacing the damaged property – You, as the insured, acquire the repair services or replacement property directly and are therefore the recipient of the services or property. If you are a registrant, you may be eligible to claim an ITC. If you are a public service body, you may be eligible to claim a rebate. In this situation, the insurer can use the net-of-GST/HST method for settling the property and casualty insurance claim.

The net-of-GST/HST method results in an insurer making a payment for an insurance claim only to the extent of the actual loss suffered by the insured in accordance with the terms of the insurance policy. The amount paid to you by an insurer will be reduced by the amount that you are eligible to claim as an ITC or rebate related to the tax portion of the repair or replacement expense.

Manufacturers’ rebates

Some manufacturers include a rebate application with the goods or services they sell. After buying the item from the retailer, the customer completes the application and mails it directly to the manufacturer. Since the payment of the rebate is a separate arrangement between the manufacturer and the customer, the retailer has to remit the GST/HST collected on the full selling price of the taxable goods or services without deducting the value of the manufacturer’s rebate.

The GST/HST rules for manufacturers’ rebates apply when:

  • the supply of goods or services to the customer is made either directly by the manufacturer or by another person such as a retailer
  • the customer is made aware in writing that the rebate includes the GST/HST

Example – Manufacturer’s rebates

A customer buys a package of batteries in your hardware store in Saskatchewan for $10 plus the GST. Inside the package is an application for a $2 rebate to complete and mail to the manufacturer. You collect and remit tax on $10, the full price of the batteries. The customer completes the rebate application and mails it to the manufacturer. Once the manufacturer receives the application it will send the customer a cheque for $2.

Some manufacturers give rebates to their customers through the retailer when the customer buys the goods. Even if the retailer applies the rebate toward the retail price of the goods, the retailer collects the GST/HST on the full retail price before deducting the rebate amount.

Example – Manufacturers give rebate to their customers through the retailer

An automobile dealership in Alberta sells an automobile to a customer for $20,000 plus $1,000 GST. The dealer informs the customer that the manufacturer is providing a $1,050 tax included rebate. The customer uses the rebate to reduce the payment for the automobile.

Example – Manufacturers give rebate to their customers through the retailer

An automobile dealership in Alberta sells an automobile to a customer for $20,000 plus $1,000 GST. The dealer informs the customer that the manufacturer is providing a $1,050 tax included rebate. The customer uses the rebate to reduce the payment for the automobile.

When the manufacturer pays a rebate, it has the option of providing, along with the rebate, written indication that the rebate includes GST/HST. If the customer receiving the rebate is a registrant who is entitled to claim an ITC or a GST/HST rebate on the purchase, and the manufacturer provides written indication that GST/HST is included in the rebate, the customer will have to remit an amount of GST/HST. This amount is generally calculated by multiplying the rebate amount by one of the following tax fractions, as applicable:

  • the GST is equal to 5/105
  • the HST is equal to:
    • 13/113 where the rate of 13% applies
    • 14/114 where the rate of 14% applies
    • 15/115 where the rate of 15% applies

If the manufacturer pays a rebate to a customer and provides written indication that the rebate includes GST/HST, the manufacturer can claim an ITC in the reporting period in which it paid the rebate. The ITC is determined by multiplying the rebate amount by one of the above fractions, as applicable.

If the manufacturer chooses not to provide written indication that the rebate includes GST/HST, the manufacturer will not claim an ITC and the customer will not be required to remit any amounts of GST/HST.

Non-reimbursable coupons

These are coupons that you, as the vendor, issue and accept, and for which no one reimburses you. They entitle the customer to a reduction in the price for a fixed dollar amount or a fixed percentage amount. As the issuer, you have the option to include the GST/HST in the value of the coupons, when the coupons are used to purchase taxable goods or services (other than zero-rated goods or services).

If you choose to include the GST/HST in the value of the coupons, you treat them the same way as reimbursable coupons. This means that you charge and remit the GST/HST on the full price of the good or service and you can claim an ITC calculated on the tax fraction of the coupon value. Your coupon should state that the GST/HST is included in the value.

If you choose not to include the GST/HST in the value of your coupons, deduct the coupon value from the selling price before calculating the GST/HST.

Example – Non-reimbursable coupons

A client buys an item in your store in Manitoba. He gives you a non-reimbursable coupon that does not include the GST.

In this case, when you file your GST/HST return, report the GST/HST you charged on your sale after you deducted the coupon from the purchase price ($1 GST in the above example). You cannot claim any ITCs for coupons you issue that do not include the GST/HST.

Other coupons

Other coupons (whether reimbursable or not) that are not for one specific monetary discount may:

  • offer a different percentage off the price of an item (such as 10% off the purchase of 5 or fewer boxes and 20% off the purchase of 6 or more)
  • offer an item for no charge if another item is purchased (such as two-for-one coupons)
  • contain more than one monetary discount such as 25¢ off a 750 ml soft drink, or 50¢ off a 1.5 litre soft drink

These coupons reduce the selling price of an item before GST/HST is added. Therefore, deduct the value of the coupons from the selling price before calculating GST/HST.

Real estate agents (services)

Generally, services from a real estate agent who is registered for the GST/HST related to the selling or renting of real property will be taxable even when the real property in question is exempt from GST/HST.

The real estate agent who is registered for the GST/HST has to charge and remit GST/HST on his/her commission and other services (other than financial services) provided to their clients. In turn, the clients may be able to claim an input tax credit to recover the GST/HST they paid for the agent’s services if the real property is used in commercial activities.

Reimbursable coupons

Reimbursable coupons are usually called manufacturers’ coupons. They entitle the customer to a reduction of a fixed dollar amount on the purchase price. Vendors can expect to be reimbursed an amount by the manufacturer or another third party for accepting these coupons from customers. The value of the coupons includes the GST/HST when used to purchase taxable supplies (other than zero-rated supplies).

When you, as a vendor, accept a reimbursable coupon from a customer, you treat the coupon the same as cash. If the purchase is subject to tax, you charge the GST/HST on the full price of the item and then deduct the value of the coupon. We consider you to have collected a portion of the GST/HST equal to the tax fraction of the value of the coupon.

The tax fraction for the GST is 5/105, and the tax fraction for the HST is:

  • 13/113 where the rate of 13% applies
  • 14/114 where the rate of 14% applies
  • 15/115 where the rate of 15% applies

For example, a coupon for $1 off the selling price includes:

  • 5¢ for the GST ($1 × 5/105)
  • 12¢ for the HST ($1 × 13/113) where the rate of 13% applies
  • 12¢ for the HST ($1 × 14/114) where the rate of 14% applies
  • 13¢ for the HST ($1 × 15/115) where the rate of 15% applies

The manufacturer reimburses you for the coupon value of $1, which includes the GST/HST.

Example – Reimbursable coupons

You operate a pharmacy in Alberta. A customer buys shampoo for $10 and has a reimbursable coupon for $1. You charge and remit 50¢ GST and get $1 reimbursed by the manufacturer, which includes 5¢ GST.

If the customer is a GST/HST registrant and uses coupons to make purchases for their commercial activities, they can claim an ITC equal to the total GST/HST paid on the purchases less the tax fraction of the coupon value. They can claim an ITC of 45¢:

Returnable beverage containers

Refundable deposits

There is no GST/HST on deposits for returnable beverage containers that are refundable to consumers.

When a bottler or manufacturer sells beverages in sealed returnable containers to you, the GST/HST is not charged on the refundable deposit. When you sell the beverages in the sealed containers to your customer, you do not charge the GST/HST on the refundable deposit.

When you accept used and empty containers from customers, no part of the refund to the consumer is a refund of tax and, therefore, you would not claim an ITC for that refund. When you return used containers to a depot or a bottler, there is no GST/HST charged on the refund you receive.

Example – Refundable deposits

You are a retailer in a non-participating province. You sell a beverage in a returnable container to a consumer in a non-participating province and charge a fully refundable deposit.

Non-refundable deposits

In some provinces, only part of the deposit is refundable to the consumer. Non-refundable amounts such as environmental levies and recycling fees are separately charged in addition to the refundable deposit. In these cases, you only exclude the GST/HST from the amount of the deposit refundable to the consumer.

The non-refundable amounts are subject to the GST/HST at the same rate as the beverage.

Example – Non-refundable deposits

You are a retailer in a non-participating province. You sell a beverage in a returnable container to a consumer and charge a deposit. Half of the deposit is refundable.

You have to collect and remit the GST/HST on non-refundable deposits you charge when you sell beverages. Also, you may be eligible to claim ITCs for the GST/HST you are charged on non-refundable deposits you pay when you purchase beverages, unless you are located in a participating province.

HST and returnable beverage containers

Special rules apply in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island where the deposits include tax, and only part of the deposit on beverage containers is refundable. A bottler or manufacturer sells the beverages to you and charges the deposit. The bottler or manufacturer sends us the HST included in the deposit. You do not claim an ITC for the HST included in the deposit. When you sell the beverages and containers to your customer, you remit the HST on the sale of the beverage and the HST included in the non-refundable part of the deposit.

Some registrants, such as take-out establishments that provide eating areas on their premises, may charge tax on the refundable deposit. If you are such a registrant, and you do not charge tax on the refundable deposit, you have to pay an amount equal to the tax on the refundable deposit when you collect the empty containers from your premises and redeem them for the refunds.

Example – HST included in the part of the deposit of beverage containers

You are a retailer in New Brunswick. You sell a beverage in a returnable container to a consumer and charge a deposit, half of which is refundable.

Returnable containers

The GST/HST generally applies to empty returnable containers. However, we consider usual packaging or containers (other than returnable beverage containers) to be part of the goods they cover or contain and tax them on the same basis as the goods they hold. For example, containers filled with medical oxygen are zero-rated .

When a customer returns a container that held goods, you can treat the transaction in one of two ways, depending on the terms of the original agreement as either:

  • a sale by the customer to you (the original supplier)
  • a refund you pay to the customer

If the return of the container is treated as a sale, the customer, if a registrant, charges you the GST/HST on the return of the container. You may be eligible to claim an ITC for the GST/HST payable on the purchase of the container.

If the return is treated as a refund, you may have to issue a credit note to the customer or, alternatively, the customer may have to give you a debit note. In that case, see Returned goods.

Returnable goods

If you give customers a refund or credit for all or part of an amount they paid or were charged for goods they return, you can adjust, refund, or credit the customer the GST/HST you first charged or collected on these goods. If you do this, issue a credit note to the customer, or have the customer issue a debit note to you. Be sure the following information is included on the credit or debit note:

  • a statement or other indication that the document is a credit or debit note
  • your business or trading name, or the name of your intermediary, and your business number (BN), or the BN of the intermediary
  • the customer’s name or trading name, or the name of the customer’s authorized agent or representative
  • the date on which the note is issued
  • one of the following:
    • the amount of the adjustment, refund, or credit for tax
    • a statement that the total amount for which the note is issued includes the adjustment, refund or credit of tax, the tax rate (GST or HST) that applies to each taxable supply for which tax is reduced, and either the total amount and tax reduced for all the supplies to which the same tax rate applies or the total amount and tax reduced for each supply

You can deduct the amount of the GST/HST adjusted, refunded, or credited in determining your net tax for the reporting period in which you issued the credit note or received the debit note, as long as that amount was previously included in your net tax. In turn, if your customer claimed an ITC, the customer has to add that amount back when calculating its net tax. If your customer claimed a rebate, the customer has to repay that amount.

You have four years from the end of the reporting period during which you reduced the purchase price to make the adjustment, refund, or credit.

If you refund only a certain percentage of the purchase price (for example, 85%) and keep the balance as a restocking charge, you refund only 85% of the GST/HST you first collected. You would issue a credit note, or the customer would issue a debit note, for the amount of the GST/HST you refunded.

If you and the customer are GST/HST registrants, you can choose not to refund or credit the customer the GST/HST that was previously paid. You may wish to forgo the GST/HST refund if you have already sent us the tax and the customer has already claimed an ITC. In this case, you refund the amount without including the GST/HST that the customer first paid. You and your customer do not have to make any adjustments on your GST/HST returns.

Sale-leaseback arrangements

When you purchase goods from a person who does not have to collect tax on the sale and you immediately lease the goods back to that person, the amount of the GST/HST on the lease is determined by deducting the amount paid or credited for the sale from the lease payments. The total credit is usually spread evenly over the number of lease payments.

Determine the credit for each lease payment at the beginning of the lease by dividing the sale price of the goods by the number of lease payments. If the terms of the lease change, recalculate this amount. The maximum you can deduct from any one lease payment is the amount needed to bring that payment to zero.

When there is a renewal, variation, or early termination in a lease that changes the number of lease payments, or when the lease is assigned to a new lessor but the lessee and the goods remain the same, you recalculate the amount that you can credit against each lease payment. When a lessee exercises an option to purchase the goods, you can deduct any unused credit from that purchase price up to the amount of the purchase price.

Example – Sale-leaseback arrangements

Larry sells a piece of heavy duty equipment to a leasing company in Alberta for $100,000, who leases it back to Larry. The terms of the lease were for 100 monthly lease payments of $1,200. Larry is not registered for the GST/HST. The leasing company calculates the GST on the monthly lease payment as follows:

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