Week 1 to 3-HST (1) PDF

Byrd & Chen’s Canadian Tax Principles 2023–2024 Edition GST/HST Copyright © 2024 Pearson Canada Inc. 21 - 1 Goods and Services Tax (GST) - Introduction Introduced in Canada on January 1,1991 at 7% – Reduced to 6% in 2006 & to...

Byrd & Chen’s Canadian Tax Principles 2023–2024 Edition GST/HST Copyright © 2024 Pearson Canada Inc. 21 - 1 Goods and Services Tax (GST) - Introduction Introduced in Canada on January 1,1991 at 7% – Reduced to 6% in 2006 & to 5% in 2008 (current rate) Replaced Federal Sales Tax (FST) on manufactured goods Harmonised Sales Tax(HST) Intent of GST developers was to amalgamate GST with provincial sales tax (PST) to create a harmonized sales tax (HST) & eliminate dual administrative system – However, initially not accepted; some provinces took legal action claiming GST unconstitutional Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 2  Current Sales Tax Rates in Canada Participating/ Type of tax province Rates Tax Non-participating Administratio n Non- GST only Alberta and three 5%+0% Federal Participating territories(North west territories, Yukon, Nunavut) Non- GST and PST British Columbia 5%+7% Federal and Participating Manitoba 5%+7% Provincial Saskatchewan 5%+6% Participating HST(PST New Brunswick 15% Federal included) Newfoundland 15% Nova Scotia 15% Ontario 13% Prince Edward Island 15% Non- GST and QST Quebec 5%+9.97 Provincial Participating Note: In participating provinces and there will be HST (PST included) (TF3),Week 1-word Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 3 Transaction Tax Concepts – General Description GST & HST are transaction taxes (not income tax) Support for transaction taxes include – Simple to administer-Flat rate (TF1) – Incentive to work (Not progressive) – Consistent (Rate do not depend on family income ) – Keep tax revenues in Canada (TF 4) Potential disadvantage – Lower income individuals spend more on consumption; result is transaction taxes represent larger portion of individual’s income (regressive system) – Compensated by Refundable HST credit on filing income tax return Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 4 Transaction Tax Concepts - Example Cost to manufacture Manufacturer 1,000x $4=$4,000 (raw materials) Sold to wholesaler for Wholesaler $10,000 (1,000 x $10) Sold to retailer for Retailer $20,000 (800 x $25) Sold to customer for Customer $25,000 (500 x $50) Note: Example-see week 1-HST-excel for the example this example will be used in subsequent slides Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 5 Transaction Tax Concepts (1 of 3) Single stage transaction tax (commonly called a retail sales tax) – Applied at consumer level therefore tax is visible & incidence clear If in the example, the transactions took place in Manitoba, a 7% sales tax would be assessed: $1,750 [(7%) ($25,000)] Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 6 Transaction Tax Concepts (3 of 3) Multi-stage transaction tax – Apply tax, for example, at wholesale and retail level but not manufacturing level – Alternatively, apply tax at manufacturer and wholesale level but not retail level – Tax can applied be applied at each stage (turnover tax) Note: Quicker accrual of revenue for government compare with single stage (TF2) Results in “pyramiding” problem: – Tax would be assessed on previously assessed tax Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 7 Transaction Tax Concepts (3 of 3) Value Added Tax (VAT) – Types – Accounts-based method (Slide 9) ▪ Tax assessed on basis of value added at each level of production & development stage ▪ Based on accounting-based determination of income – Invoice-credit method (used in Canada)-Slide 10 ▪ Tax assessed on gross sales ▪ Vendor charges tax on full selling price; tax offset by input tax credit (ITC) for tax paid on costs to business – Note: methods demonstrated using example from previous slide Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 8 Accounts-Based VAT – Example Assume – 5% tax: Raw materials = [(5%)(1,000)($4)] $ 200 Manufacturer = [(5%)(1,000)($10 - $4)] 300 Wholesaler = [(5%)(800)($25 - $10)] 600 Retailer = [(5%)(500)($50 - $25)] 625 Total value added tax $1,725 Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 9 Invoice-Credit VAT (approach used in Canada for GST/HST) – Example (1 of 2) Raw material supplier [(5%)(1,000)($4)] – no ITC $200 Manufacturer – GST collected [(5%)(1,000)($10)] $ 500 – ITC on costs [(5%)((1,000)($4)(200) $300 Wholesaler – GST collected [(5%)(800)($25)] $1,000 – ITC on costs [(5%)((1,000)($10) ( 500) $500 Retailer – GST collected [(5%)(500)($50)] $1,250 – ITC on costs [(5%)((800)($25) ( 1,000) 250 Total net tax at all levels 1,250 Note GST collected from ultimate customer is equal to Total remiitted to CRA in all stages For double entry-see Week1-HST-Excel Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 10 Invoice-Credit VAT (approach used in Canada for GST/HST) – Example (2 of 2) Observations: – Invoice-credit method results in less tax being paid – Enterprise receives Input Tax Credit (ITC )for all purchases regardless if sold or not ▪ ITC claimed from government on units purchased ▪ Taxes collected paid to government on units sold – Net result is government does not benefit until sale made to end consumer – Canadian approach is income tax neutral(Progressive) – See the previous slide Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 11 Liability for GST/HST Basic charging provision - Excise Tax Act (ETA) 165(1) “... every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 5% on the value of the consideration for the supply.” Note: definition of supply in following slides(Slide 13) Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 12 Liability for GST/HST: The Concept of Supply ETA 123(1) – “Supply means the provision of property or a service in any manner, including sale, transfer, barter, exchange, license, rental, lease, gift, or disposition.” Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 13 Supply Categories – Taxable Supplies (1 of 4) General Rules – ETA 123(1) “… supply made in the course of commercial activity”(See next slide) Includes supplies that are – Fully taxable at 5% – Zero-rated taxable ▪ taxable at 0% ▪ vendor gets input tax credits Note: Zero rated supplies also a taxable supplies Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 14 Supply Categories – Taxable Supplies (2 of 4) ETA 123(1): “Commercial Activity” of person means in general – business carried on by a person – an adventure or concern in the nature of trade – making of supply (excluding exempt supply) by person of real property (i.e., selling or leasing real property) Exclusions?? – Business or adventure/concern in the nature of trade carried on by individual has no reasonable expectation of profit – Exempt supplies (no tax – no input tax credits) – Employment services (not a business ) Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 15 Supply Categories – Fully Taxable Supplies Fully taxable supplies – Full tax (GST/HST) and full ITCs – Examples ▪ Transportation in Canada, ▪ Restaurant meals & beverages, ▪ Clothing & footwear, ▪ Admissions to concerts, athletics, and other events, ▪ Legal and accounting fees, ▪ Furniture, ▪ Haircuts, ▪ Cleaning services. ▪ Commercial rent Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 16 Supply Categories – Zero-Rated Supplies Taxable supplies that are zero-rated which means although taxable, the tax is 0% – Allows for ITC to provider of taxable supplies – Examples ▪ Basic groceries, ▪ Prescription drugs, medical devices (e.g. wheelchairs), ▪ Exports, ▪ Foreign travel (depends on origin/termination of travel) ▪ Termination point is out side- Zero rated, Domestic is fully taxable ▪ Most agricultural and fishing products. Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 17 Supply Categories – Exempt Supplies No GST/HST, no ITCs – Examples ▪ Basic health care & dental services ▪ Sales of used residential housing & long term residential rents (Airbnv-Taxable ) ▪ Financial services( Bank charges, insurance) ▪ Educational courses ( Tuition Fee) leading to certificates or diplomas ▪ Week 2-Excel-Type of supplies ▪ Week 2-Word-Question1,2 Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 18  Applying the GST/HST Rate – Place of Supply and Nature of supply Tangible goods – Province where the goods are delivered Intangible Goods (Copy rights, Francize) – Province where goods are used Real property – Province where the property is located Services – Province where the customer located rather than where service is provided.(Generally determined by Billing address of the customer) as per ETA Sch IX Part IV. Examples-Week 2-Excel -Place of supply Week 2-Word-Question 3,4 MCQ 6 Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 19 Applying the GST/HST Rates (2 of 2) Effect of trade-ins ▪ GST/HST on net amount after trade-in ▪ Example: Geoff Brown a resident of Alberta & acquires a new car at a cost of $38,000. He trades in his old car and receives an allowance of $17,000, paying the net amount of $21,000. ▪ GST = [(5%)($38,000-17,000=21,000)] = $1,050 Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 20 Applying the GST/HST Rates (1 of 2) Basic approach – Rate is applied to consideration received ▪ Monetary = sales price or service fee – Includes all non-refundable federal taxes, provincial taxes (excluding retail sales tax) custom duties & fees – Example, $100 item purchased in Manitoba by a Manitoba resident: GST is $5 [(5%)($100)] & PST is $7 [(7%)($100)] ▪ Non-monetary (e.g., barter transaction): based on estimate of FMV Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 21 Collection and Remittance of GST/HST GST/HST charges tax Collection & remittance to recipient of taxable of GST/HST supply responsibility of provider of taxable supply Note: special regulations for store promotions offering “no GST/HST” deal; fraction applied based on GST/HST rate Example :Excel-week 1-GST Holiday MCQ 7 Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 22 Registration (1 of 3) Meaning of a person for GST/HST: – Individual, – Partnership, – Corporation, – Estate of deceased individual, – Trust, or – Body that is society, union, club association, commission or other organization of any kind. Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 23 Registration (2 of 3) Who must register – A person is required to register if the person is providing taxable supplies in Canada in course of commercial activity – Exemptions: ▪ Small supplier (Next slides) Registration not required if, for example, – Business activity carried on by individual without reasonable expectation of profit (e.g., a hobby) – Provision of exempt supplies (e.g., child care, Basic health care, Financial services, residential rental properties) – Provision of employment services Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 24 Small Supplier Exemption (1 of 3) Small supplier threshold – Revenues (before expenses) from taxable supplies ) < $30,000 per year May voluntarily register if person wants ITC Certain taxable suppliers prohibited from exemption – Examples: taxi services, commercial ride-sharing (e.g., Uber) Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 25 Small Supplier Exemption (2 of 3) Last 4 calendar quarters test – Must register if over $30,000 on cumulative basis over last 4 consecutive calendar quarters ▪ Ceases to be a small supplier at end of 1st, month after the quarter in which $30,000 was reached ▪ Deemed registration date(Collection date) on first sale made after the additional month ▪ Actual registration required within 29 days from deemed registration date ▪ Week 2-Excel- Ex 1, 2 ▪ Week 2-Excel-Example 2-Calendar quarter test ▪ MCQ 8 Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 26 Small Supplier Exemption (3 of 3) Calendar quarter test – Must register if > $30,000 in a single quarter ▪ Deemed registrant (Collection date)as of first sale the $30,000 is reached ▪ Must formally register within 29 days ▪ Week 1-Excel- Exercise 3-calendar quarter test ▪ MCQ 9, TF6 Note: if we get different answers when using calendar quarter test (Regular method) and last 4 calendar quarter test, Regular method prevail Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 27 Input Tax Credits (ITC) (1 of 2) General rules – In course of supplying goods and services, registrant incurs GST/HST is not a cost and recorded as asset – To extent GST/HST was incurred in commercial activity, registrant can claim refund of that GST/HST (ITC) Week 2-Excel-Example 4 – If ITC exceeds GST/HST collected, registrant claims refund Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 28 Input Tax Credits Restrictions on claiming ITCs – Expenditure must be reasonable in relation to commercial activities Examples where no ITCs are available – Club dues – 50% meals and entertainment – Passenger vehicles cost (Limited to $30,000-cost, HST max 13% of 30,000=3900, rest amt to be considered as cost of the vehicles for depreciation) – Personal or living expenses – (Since limitation on Income tax side) MCQ 14,12Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 29 Accounting vs. Income Tax vs. GST/HST No matching: GST/HST collected when taxable supply provided & eligible for ITC when expenses/costs of commercial activity incurred EG: Capital expenditure Allocations for accounting & income tax (amortization, etc.) irrelevant for GST/HST Some deductions don’t influence GST/HST (e.g., wages, interest) MCQ 10, 13 Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 30  Input Tax Credits (ITC)-Capital assets &Expenses-Partly used in commercial activities Maximum ITC e.g. a h commerc Taxable Purchases Percentage used in ITC Commercial activities = x% Current X% < or = 10% Nil e; Expenditures/Real 10% or =50% 100% Claiming ITCs on current/ capital expenditures depends on the % of business usage Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 31 Example – Capital expenditure partly used in commercial activities Fully Taxable & Zero-Rated Supplies (1 of 3) GAAP Income Statement (Alberta business) Sales(FT-5M+ZR-1.7M) $ 6,700,000 Expenses: Cost of goods sold(Opening $4,200,000 balance=500,000+purchase=4,500,000- closing= 800,000) Amortization 1,400,000 Salaries and wages 500,000 Other 200,000 Total expenses (excluding GST & income tax) 6,300,000 Net income for accounting purposes $ 400,000 Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 32 Continuation of Example – Capital expenditure partly used in commercial activities (2 of 3) Other information: – Capital expenditures ▪ $2,000,000 for a building (40% commercial) ▪ $1,000,000 for equipment (70% commercial) – Purchases of goods for resale were $4,500,000 (fully taxable supplies) – Other expenses of $200,000, 80% related to fully taxable supplies & 20% to zero-rated supplies – $5,000,000 of sales were fully taxable, the remainder were zero-rated – No PST in Alberta & each of the 3 Territories Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 33  Example – Solution ( 3 of 3) es Gst collected-Sales (5%)($5,000,000) $250,000 ITC g Bal Purchases (5%)($4,500,000) ( 225,000) purchase counted Other expenses (5%)($200,000)(80%) ( 8,000) alculated Building (5%)($2,000,000)(40%)(See slide 31) ( 40,000) Property 00% ITC Equipment (5%)($1,000,000)(100%) ( 50,000) GST payable (refund) ($ 73,000) 40,000 - Example 1-Fully commercial- Taxable and Zero rated- Week 2-Excel -HW Example 2-Fully commercial- Taxable and Exempt supplies- Week 2-Excel- HW Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 34 ) Relief for Small Businesses – Quick Method Election (form GST74) available to eligible businesses ▪ Taxable sales of $400,000 or less - incl. all associated business ▪ Examples of type of eligible business include groceries, convenient stores, hardware stores, gas service stations, antique dealers and clothing stores Collect GST/HST at normal rate but ▪ not required to keep detailed records of current expenditures eligible for ITC ▪ Capital expenditures need to be tracked for ITC Apply remittance rate (see next slide) to GST/HST inclusive taxable sales – 1% credit on 1st $30,000 taxable & zero-rated sales – MCQ 15 Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 35 2023 Quick Method Remittance Rates (Excluding Quebec) Businesses that Purchase Goods Service GST/HST Rate for Resale Providers GST at 5% (B.C., Alberta, Manitoba, Saskatchewan, and the three territories) 1.8% 3.6% HST at 13% (Ontario) 4.4% 8.8% HST at 15% (Newfoundland/ 10.0% Labrador, Nova Scotia, New Brunswick, and PEI) 5.0%. Excel work sheet Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 36 Quick Method – Example 1 Facts: – Alberta retail business (GST registrant) provides fully taxable services – Annual taxable revenues including GST of $131,250 – Capital expenditures of $20,000 Solution: Basic tax [(1.8%)($131,250) $ 2,363 Credit [(1%)($30,000)] (300) Capital expenditures - ITC (5%)($20,000) (1,000) GST payable $ 1,063 Qucick method –Example 2-Week 3-Excel Example 3-Week 3-Excel(Quick mtd compare with regular method) Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 37 ITCs and Income Tax ITCs claimed for current expenditures for registrants Reduces expense deduction Note: For non-registrants , GST/HST Rebate for ITC could be claimed for business expenses on personal tax return and included in income in the next year ITC claimed on Capital expenditures reduce capital cost of capital property in following taxation year (results in reduced CCA claims) Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 38 GST/HST Compliance and Administration (1 of 4) Timing of liability – Registrant remits GST/HST in reporting period customer invoiced ▪ May not be same period payment received – ITCs claimed when invoice is issued by supplier even if supplier paid later Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 39 GST/HST Compliance and Administration (2 of 4) Taxation year – Fiscal year (usually the same as income tax fiscal period) – If non-calendar income tax year ▪ For GST/HST, can use either calendar year or same year used for income tax Filing due date – Filing frequencies determined by total annual taxable supplies made by registrant & associated persons (see next slide) Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 40  GST/HST Compliance and Administration (3 of 4) vious Option 0 or qua Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 41 GST/HST Compliance and Administration (4 of 4) Filing due dates for GST/HST returns – Taxable sales > $6,000,000 ▪ Monthly filing ▪ Due 1 month after end of reporting period – Taxable sales between $1,500,001 and $6,000,000 ▪ Quarterly filing ▪ Due 1 month after end of reporting period – Taxable sales < $1,500,001 ▪ Annual filing ▪ Due 3 months after the year end (extension to June 15th in some cases) Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 42 Specific Applications (1 of 2) Imports: generally subject to GST/HST Exports: generally zero-rated Charities: revenues are exempt from GST/HST ▪ If revenues from commercial activities, are fully taxable subject to increase in small supplier threshold to $50,000 Government bodies: all government departments receive full rebate of GST/HST paid on purchases Crown corporations: are not GST/HST exempt Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 43 Specific Applications (2 of 2) Municipalities, Universities, Schools, and Hospitals (MUSH) – Revenues are fully taxable (except where exemptions) Financial Institutions: revenues from providing financial services are designated as exempt Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 44 Review questions Week 5-Excel-sample questions Week 5-Practice questions-Place/Nature of supply Copyright © 2022 Pearson Canada Inc. All rights reserved. 21 - 45