What is the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST)?

In addition to the Federal tax and Provincial tax almost all of us pay in Canada there is also a value added tax or sales tax which must be paid to the federal government, on the sale of almost all goods and services which we purchase for individual use and for business purposes in Canada.

The Goods and Services tax (GST) was originally introduced in 1991 by the  Progressive Conservative (PC) Prime Minister Brian Mulroney and his finance minister Michael Wilson to replace the Manufacturers Sales Tax (MST).   The original rate of GST in 1991 was 7% and combined with the PST total sales taxes on goods was 15%.   Later in July 2006 the PC party reduced the GST to 6% and in 2005 the rate of GST was further reduced by 1% to 5% as of January 1, 2008.

As Torontonians we have seen the old Ontario provincial tax system (PST) of 8% sales tax on goods be merged with the Goods and Services Tax (GST) and the tax was expanded to include not only products but also services.    Previously when you had somebody do work in your home they charged you sales tax (GST) only on their labour at 5% and now when you have a home renovation performed the tax paid is 13% of the entire job, this adds considerably to cost of renovations.    This new harmonized sales tax (HST) came into effect in Ontario on July 1, 2010 which is currently 13%, it added 8% tax on personal and professional services such as legal and accounting fees, hairdressers, esthetician services, real estate agent commissions as well as to swimming & karate lessons and to athletic membership fees as the services previously did not have any provincial sales tax component.

There are certain items which are still exempt from the HST such as basic groceries which includes dairy, meats, vegetables and canned goods.    Also medical services, financial services and prescription drugs as well as residential rent are exempt.

Generally speaking all businesses which earn move then $30,000 in a single calendar quarter or in four consecutive quarters are required to register for GST/HST.    Also you have to register if you are a taxi or limousine operator whose fares are regulated, even if your revenues are less then $30,000.

If your sales are below $30,000 you can still elect to voluntarily register for GST/HST.   Once a business is registered, they can claim input tax credits for purchases and deduct these inputs from the tax they have collected and remit the net amount with their GST/HST tax return.   Or if they elect they can use something called the Quick Method of Accounting so long as their sales in four consecutive quarters is less than $400,000.

When you register for GST/HST using Form RC1 or online using the Business Registration On Line (BRO) so long as your total annual sales are below $1,500,000 you can elect to file Monthly or Quarterly or if no election is made you will be assigned as an Annual Filer.

You should discuss the registration with your Toronto Accountant and determine which method of accounting for the goods and services tax and harmonized sales tax is best for you.   As you can see the Goods and Services Tax and Harmonized Sales tax effects effects almost each and every Canadian on a daily basis and is part of the Canada Tax we contribute to.