Chapter Twenty-OneChapter Twenty-One
Goods And Services TaxGoods And Services Tax
(GST)(GST)
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Transaction Tax ConceptsTransaction Tax Concepts
Manufacturer
Wholesaler
Retailer
Customer
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Single Stage Transaction Tax – Single Stage Transaction Tax – Retail Sales TaxRetail Sales Tax
5% ($50,000) = $2,5005% ($50,000) = $2,500
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Multi-Stage Transaction Tax - Multi-Stage Transaction Tax - VATVAT
Manufacturer = 5% ($10,000)Manufacturer = 5% ($10,000) $ 500$ 500 Wholesaler = 5% ($15,000)Wholesaler = 5% ($15,000) 750750 Retailer = 5% ($25,000)Retailer = 5% ($25,000) 1,250 1,250
$2,500$2,500
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Multi-Stage Transaction Tax – Multi-Stage Transaction Tax – GSTGST
Manufacturer 5%($10,000) Manufacturer 5%($10,000) $ 500$ 500 WholesalerWholesaler
– 5%($25,000)5%($25,000) $1,250$1,250– 5%($10,000)5%($10,000) ( 500)( 500) 750750
RetailerRetailer– 5%($50,000)5%($50,000) $2,500 $2,500 – 5%($25,000)5%($25,000) ( 1,250)( 1,250) 1,2501,250
TotalTotal $2,500$2,500
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Liability For GSTLiability For GST
ITA 165(1) - ..every recipient of a ITA 165(1) - ..every recipient of a taxable supply made in Canada shall taxable supply made in Canada shall pay to her majesty in right of Canada, pay to her majesty in right of Canada, tax in respect of the supply calculated tax in respect of the supply calculated at the rate of 5% on the value of the at the rate of 5% on the value of the consideration for the supply.consideration for the supply.
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Liability For GSTLiability For GST
The liability is on the The liability is on the purchaser of the goods purchaser of the goods and services.and services.
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The Concept Of SupplyThe Concept Of Supply
ETA 123 – “Supply” ETA 123 – “Supply” means the provision of means the provision of property or a service in property or a service in any manner, including any manner, including sale, transfer, barter, sale, transfer, barter, exchange license, exchange license, rental, lease, gift, or rental, lease, gift, or disposition.disposition.
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The Concept Of SupplyThe Concept Of Supply
Taxable SuppliesTaxable Supplies– Supplies made in the course of commercial Supplies made in the course of commercial
activityactivity
IncludesIncludes– Fully taxable at 5%Fully taxable at 5%– Zero-ratedZero-rated
taxable at 0%taxable at 0% vendor gets input tax creditsvendor gets input tax credits
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The Concept Of SupplyThe Concept Of Supply
Commercial ActivityCommercial Activity– In general: business carried on by a person, a In general: business carried on by a person, a
personal trust, or a partnership made up of personal trust, or a partnership made up of individualsindividuals
– ExclusionsExclusions no expectation of profitno expectation of profit exempt suppliesexempt supplies employment servicesemployment services
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Supply CategoriesSupply Categories
Fully Taxable SuppliesFully Taxable Supplies
– Full Tax And ITCsFull Tax And ITCs
– ExamplesExamples TravelTravel ClothingClothing Restaurant MealsRestaurant Meals ElectriciansElectricians
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Supply CategoriesSupply Categories
Zero-Rated SuppliesZero-Rated Supplies– Tax At 0%, Full ITCsTax At 0%, Full ITCs– ExamplesExamples
Basic GroceriesBasic Groceries Prescription DrugsPrescription Drugs ExportsExports Foreign TravelForeign Travel
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Supply CategoriesSupply Categories
Exempt SuppliesExempt Supplies– No Tax, No ITCsNo Tax, No ITCs– ExamplesExamples
Health CareHealth Care Used Residential Used Residential
HousingHousing Financial ServicesFinancial Services
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Applying the GST RatesApplying the GST Rates
Basic approachBasic approach– Rate is applied to consideration receivedRate is applied to consideration received– Includes all non-refundable federal taxesIncludes all non-refundable federal taxes– Excludes sales taxesExcludes sales taxes– Provincial sales taxesProvincial sales taxes
Quebec and PEI include GST in baseQuebec and PEI include GST in base Other Provinces (non-HST) do notOther Provinces (non-HST) do not
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Applying the GST RatesApplying the GST Rates
On Trade-Ins – GST on Net AmountOn Trade-Ins – GST on Net Amount
Example: An individual acquires a new Buick at a cost of $38,000. He trades in his old Toyota and receives an allowance of $17,000, paying the net amount of $21,000
GST = [(5%)($21,000)] = $1,050
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Collection And Remittance Of GSTCollection And Remittance Of GST
Liability is on Liability is on recipient of supply.recipient of supply.
Provider responsible Provider responsible for collection and for collection and remittanceremittance
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Requirement To RegisterRequirement To Register
A person is required to A person is required to register if the person is register if the person is providing taxable supplies in providing taxable supplies in Canada.Canada.
An exception for “small An exception for “small suppliers”.suppliers”.
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Small Suppliers ExemptionSmall Suppliers Exemption
Small Suppliers Small Suppliers ThresholdThreshold– <$30,000 per year in <$30,000 per year in
taxable suppliestaxable supplies
May Voluntarily May Voluntarily RegisterRegister– may want input tax may want input tax
credits.credits.
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Small Suppliers ExemptionSmall Suppliers Exemption
Last 4 Calendar Quarters Last 4 Calendar Quarters TestTest– Over $30,000 on cumulative Over $30,000 on cumulative
basisbasis
Calendar QuarterCalendar Quarter– Over $30,000 in a single Over $30,000 in a single
quarterquarter
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Input Tax CreditsInput Tax Credits
Costs Other Than Capital CostsCosts Other Than Capital Costs– No MatchingNo Matching– Prorated For Taxable UsageProrated For Taxable Usage
≥ ≥ 90% = All90% = All ≤≤ 10% = None10% = None
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Input Tax CreditsInput Tax Credits
Capital CostsCapital Costs– No Matching Or AllocationNo Matching Or Allocation– Real Property: Real Property:
Pro Rate Based On Pro Rate Based On Commercial UsageCommercial Usage
– Other:Other: > 50% Commercial – 100%> 50% Commercial – 100% ≤ ≤ 50% Commercial - Nil50% Commercial - Nil
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Input Tax CreditsInput Tax Credits
Restrictions On Certain CostsRestrictions On Certain Costs– Club DuesClub Dues– 50% Meals And Entertainment50% Meals And Entertainment– Auto Costs > $30,000Auto Costs > $30,000– Reasonable In CircumstancesReasonable In Circumstances
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GST And AccountingGST And Accounting
No MatchingNo Matching No Allocation No Allocation
(Amortization, etc.)(Amortization, etc.) Some Deductions Some Deductions
Don’t Influence GST Don’t Influence GST (e.g., Wages, Interest)(e.g., Wages, Interest)
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Example Example
GAAP Income StatementGAAP Income StatementSalesSales $6,700,000 $6,700,000
Cost Of SalesCost Of Sales ( 4,200,000)( 4,200,000)
Amortization ExpenseAmortization Expense ( 1,400,000)( 1,400,000)
SalariesSalaries ( 500,000)( 500,000)
Other ExpensesOther Expenses ( 200,000)( 200,000)
TotalTotal $ 400,000 $ 400,000
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Example (Continued)Example (Continued)
Other Information:Other Information: Capital Expenditures Capital Expenditures
- $2,000,000 for a building (40% commercial)- $2,000,000 for a building (40% commercial)- $1,000,000 for equipment (70% commercial)- $1,000,000 for equipment (70% commercial)
Purchases of goods for resale were $4,500,000Purchases of goods for resale were $4,500,000 Other Expenses of $200,000, related to fully taxable Other Expenses of $200,000, related to fully taxable
suppliessupplies $5,000,000 of sales were fully taxable, the remainder $5,000,000 of sales were fully taxable, the remainder
were exemptwere exempt Ignore provincial sales taxesIgnore provincial sales taxes
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Solution To ExampleSolution To Example
Sales (5%)($5,000,000)Sales (5%)($5,000,000) $250,000 $250,000
Purchases (5%)($4,500,000)Purchases (5%)($4,500,000) ( 225,000)( 225,000)
Other Expenses (5%)($200,000)Other Expenses (5%)($200,000) ( 10,000)( 10,000)
Building Building
(5%)($2,000,000)(40%)(5%)($2,000,000)(40%) ( 40,000)( 40,000)
Equipment Equipment
(5%)($1,000,000)(100%)(5%)($1,000,000)(100%) ( 50,000)( 50,000)
GST Payable (Refund)GST Payable (Refund) ($ 75,000)($ 75,000)
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Relief For Small BusinessRelief For Small Business
Quick MethodQuick Method– <$200,000 Taxable Sales<$200,000 Taxable Sales– Collect Usual 5%Collect Usual 5%– Don’t Track ITCs, except Don’t Track ITCs, except
for capital expendituresfor capital expenditures– Apply Given % To GST Apply Given % To GST
Inclusive SalesInclusive Sales Service – 2.6%/3.6%Service – 2.6%/3.6% Retail – 0.8%/1.8%Retail – 0.8%/1.8%
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Example Example
Annual filing retail store has annual sales of $125,000, Annual filing retail store has annual sales of $125,000, resulting in GST included sales of $131,250. In addition, resulting in GST included sales of $131,250. In addition, there are $20,000 in capital expenditures.there are $20,000 in capital expenditures.
– $30,000 @ 0.8%$30,000 @ 0.8% $ 240$ 240
– $101,250 @ 1.8%$101,250 @ 1.8% 1,8231,823
– Capital Expenditures (5%)($20,000)Capital Expenditures (5%)($20,000) ( 1,000)( 1,000)– GST PayableGST Payable $1,063$1,063
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Relief For Small BusinessRelief For Small Business
Simplified ITC AccountingSimplified ITC Accounting– GST On Sales – Regular ProceduresGST On Sales – Regular Procedures– Input tax credits based on 5/105 multiplier Input tax credits based on 5/105 multiplier
applied to most purchasesapplied to most purchases– Excluded from 5/105 calculation:Excluded from 5/105 calculation:
Capital expenditures for real propertyCapital expenditures for real property Purchases of zero-rated suppliesPurchases of zero-rated supplies Purchases from non-registrantsPurchases from non-registrants Cost not eligible for input tax credits (e.g., 50 Cost not eligible for input tax credits (e.g., 50
percent of meals)percent of meals)
– Can track capital expenditures on real Can track capital expenditures on real propertyproperty
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GST Procedures And AdministrationGST Procedures And Administration
LiabilityLiability– Revenues when customer is invoicedRevenues when customer is invoiced– Input tax credits when invoice is issuedInput tax credits when invoice is issued
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GST Procedures And AdministrationGST Procedures And Administration
Taxation YearTaxation Year– Will have fiscal yearWill have fiscal year– Usually the same as Usually the same as
income tax fiscal yearincome tax fiscal year If non-calendar income tax If non-calendar income tax
year;year; Can use calendar year for Can use calendar year for
GSTGST
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GST Procedures And AdministrationGST Procedures And Administration
FilingFiling– Taxable sales Taxable sales > $6,000,000> $6,000,000
Monthly FilingMonthly Filing Returns one month after the end of Returns one month after the end of
the filing periodthe filing period– Taxable sales between Taxable sales between
$1,500,001 and $5,999,000$1,500,001 and $5,999,000 Quarterly filingQuarterly filing Returns one month after the end of Returns one month after the end of
the filing periodthe filing period– Taxable sales < $1,500,001Taxable sales < $1,500,001
Annual filingAnnual filing Three months after the end of the Three months after the end of the
filing periodfiling period
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GST Procedures And AdministrationGST Procedures And Administration
Payment and InterestPayment and Interest– Payment is due when returns are filedPayment is due when returns are filed– Non-deductible interest at prescribed rate plus 4 Non-deductible interest at prescribed rate plus 4
percent (2 percent on amounts owing to the percent (2 percent on amounts owing to the taxpayer)taxpayer)
– Late filing penalty of one-quarter of one percent Late filing penalty of one-quarter of one percent per month, for a maximum of 12 monthsper month, for a maximum of 12 months
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GST Procedures And AdministrationGST Procedures And Administration
AppealsAppeals– Informal proceduresInformal procedures– Notice of objectionNotice of objection
90 days after the date on the 90 days after the date on the notice of objectionnotice of objection
– Tax Court Of CanadaTax Court Of Canada– Federal Court Of AppealsFederal Court Of Appeals– Supreme Court Of CanadaSupreme Court Of Canada
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Employee/Partner GST RebateEmployee/Partner GST Rebate
Employees and partners are usually non-Employees and partners are usually non-registrantsregistrants
Employees and partners have deductible Employees and partners have deductible expenses on which GST is paidexpenses on which GST is paid
The rebate allows them to recover this GSTThe rebate allows them to recover this GST– Must be employee or partner of an employer or Must be employee or partner of an employer or
partnership that is a GST registrantpartnership that is a GST registrant– Also government employeesAlso government employees– Expenses must be non-reimbursedExpenses must be non-reimbursed
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Employee/Partner GST RebateEmployee/Partner GST Rebate
CalculationCalculation
– Multiply eligible expenses by 5/105 Multiply eligible expenses by 5/105
– Rebate is a refund of GST paid on Rebate is a refund of GST paid on costs that were deducted for costs that were deducted for income tax purposesincome tax purposes
– Rebate is added to income or Rebate is added to income or deducted from UCC in the year it deducted from UCC in the year it is received is received
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New Housing RebateNew Housing Rebate
GST is payable at 5 percentGST is payable at 5 percent
Rebate available equal to 36 Rebate available equal to 36 percent of GST paidpercent of GST paid
Maximum = $6,300 [(5%)Maximum = $6,300 [(5%)($350,000)(36%)]($350,000)(36%)]
Phase out provisionPhase out provision
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New Housing Rebate ReductionNew Housing Rebate Reduction
[A][($450,000 – B) ÷ $100,000]
Where:
A = The lesser of 36 percent of theGST paid and $6,300[(5%)(36%)($350,000)]
B = The greater of $350,000 and thecost of the home
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New Housing Rebate - ExampleNew Housing Rebate - ExampleExample
On July 1, 2008, Gary and May Lartch acquire a new home at a cost of $385,000. GST paid was $19,250 [(5%)($385,000)]
Rebate
[$6,300][($450,000 - $385,000) ÷ $100,000 =
$4,095
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