According to the Organization for Economic Co-operation and Development (OECD), Canada received on average a lower proportion of revenues from taxes on goods and services than other OECD member countries. However, that does not mean that there are not still significant cashflow impacts of GST on Canadian businesses. In Canada, any taxpayers that earn over $30,000 in taxable sales must register with the Canada Revenue Agency (CRA) to collect the federal goods and services tax (GST) and harmonized sales tax (HST). While businesses can then later claim this amount back from the CRA in the form of Input Tax Credits (ITCs), this can take time and eat into the business cashflows. If you have questions or concerns about the cashflow impacts of GST or are curious if there are ways to minimize the applicability of GST/HST, it may be helpful to speak with a seasoned Canadian tax lawyer. Jeremy Scott Law provides indirect tax advice to clients and may be able to provide you with the guidance that you need. Reach out for a consultation today at (902) 403-7201.
In order to understand the cashflow impacts of GST, it is important to understand both GST and HST. Simply put, the GST applies to taxable goods and services supplied in Canada while the HST is effectively the GST applied at a higher tax rate in particular provinces. A person is required to register and collect GST/HST if they make taxable supplies in Canada and the value of those supplies exceeded CAD30,000 in the last year. This amount applies to any taxable supplies made both inside and outside of Canada and is applicable for taxable supplies of any associated entities. The requirement to register applies to individuals, corporations, trusts, and associations.
The reporting requirements of businesses vary according to their annual revenue in Canada. The reporting period for submitting GST/HST tax returns typically is as follows:
- Annually for businesses with total annual revenue of up to CAD1.5 million.
- Quarterly for businesses with revenue ranging between CAD1.5 million to CAD6 million.
- Monthly for businesses with revenue that totals over CAD6 million.
For many businesses, the GST/HST paid on the goods and services they acquire can be recovered by claiming an ITC on their tax return. This is possible because only the final consumer of the products or services is supposed to pay GST.
Although businesses are able to recover GST/HST, the cash flow impacts of GST can be difficult for businesses because it takes time for them to recover the amount. Fortunately, there are methods to minimize the applicability of GST/HST.
Ways To Minimize Applicability of GST/HST
There are several ways to minimize the negative cash flow impacts of GST on businesses. These include:
- Closely Related Election to Minimize Tax on Intercompany Transactions (Section 156 of the Excise Tax Act.)
- Election to Avoid Tax on the Sale of a Business (Section 167 of the Excise Tax Act.)
- Purchases of Taxable Real Property.
Closely Related Election
Section 156 of the ETA allows businesses that have intercompany transactions with Canadian Corporations or partnerships to avoid having to charge GST on otherwise taxable goods and services. So, for example, if company A and company B have a parent-subsidiary relationship and company A leases its building to company B, company A no longer has to include GST on the rent charge – saving the issue of company B having to wait for a refund in the form of ITC from the CRA. However, the legislation around who qualifies for Section 156 can be strict and confusing, which is why it is important to work with a seasoned tax lawyer to determine eligibility and correctly file the GST election. Jeremy Scott Law may be able to advise you and help you understand all of your financial and legal rights.
Purchase or Sale of an Entire Business
Generally, the seller is expected to collect GST/HST from the purchase during the sale of a business. Where however certain requirements are met, the purchase and vendor can make a joint election under section 167 that will result in no GST/HST. These requirements are:
- The purchase must be buying all or part of a business.
- The business must have been established or carried on by the vendor or established or carried by someone else and then acquired by the vendor.
- The purchaser must be acquiring ownership of whatever amount of the property is seen as necessary for the purchaser to carry on that business.
In addition to the above, if the vendor is registered for the GST/HST the purchaser must also be registered. Understanding when the requirements of Section 167 of the ETA are can be challenging. A tax lawyer may be able to clarify.
Taxable Real Property
Another way that the CRA legally allows businesses avoid having to pay GST or HST on a large transaction and then wait for the ITC — seriously disrupting cash flow — is by self-assessing the tax on the purchase of real property in place of paying the GST/HST to the supplier. Generally, a GST/HST registered purchaser acquiring real property is obligated to self-report the applicable tax. Often this self-reporting is done by including the GST/HST on the purchaser’s tax return, however this is not always the case. Completing the self-reporting and claiming any available input tax credits minimizes the cash-flow impact of GST/HST on the purchase of real property.
How an Experienced Canadian Tax Lawyer Can Help
The cash flow impacts of GST can be difficult to navigate for many Canadian taxpayers, which is why it can be helpful to work with a seasoned Canadian tax lawyer. The lawyer may be able to assist you in understanding how GST works and what steps you can take to minimize the applicability of GST as you conduct business. Consider reaching out to Jeremy Scott Law at (902) 403-7201 for guidance.
If you found this information valuable, I encourage you to check out my other blog posts.
Please note the content above and throughout this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any legal issues you may face. I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website and will not be held liable for anything contained in this document or any use you make of it. Finally, accessing the information on my website does not create a lawyer-client relationship.