Understanding Canada’s GST/HST Tax System– March 25, 2014 by Ray Polantz

Most foreign countries have a value-added tax (VAT) system in addition to their income tax system. VAT is an indirect consumption tax that is imposed on products and services at different stages of production. Businesses charge and collect VAT at each stage in the supply chain, with the tax ultimately being paid by the final consumer of the goods/services.

Canada’s version is the goods and services tax (GST) system. The GST applies to the sale of property and services in Canada. Certain Canadian provinces have a similar provincial sales tax that is combined with the GST to create a harmonized sales tax (HST) system in those provinces. Generally, the HST applies to the same base of property and services as the GST.

Almost everyone purchasing goods and services in Canada has to pay GST/HST. Registered businesses must charge and collect the tax on sales made in Canada, and remit these amounts to the Canadian Revenue Agency. They must also file returns on a regular basis in which they can claim credits (or dollar-for-dollar reductions) against their liability for GST/HST paid on purchases.

U.S. taxpayers doing business in Canada may be subject to the GST/HST regime as well. In addition to being charged GST/HST on Canadian purchases, U.S. businesses that have a “significant presence” in Canada will themselves be required to register for GST/HST and charge and collect the tax from their customers. This level of activity is higher than the “carrying on business” standard for income tax purposes. (Read “Doing Business in Canada: When Do you Owe Income Tax”)

Even if a U.S. taxpayer is not required to register for GST/HST, in certain situations it may be worthwhile to voluntarily register. Businesses who voluntarily register may have the opportunity to claim back the GST/HST taxes incurred and have these amounts refunded. But, as with any tax-related decision, consult with your advisors to ensure the amount of the potential refunds outweighs the total compliance costs.

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This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.