For many businesses, the collection of HST is part of regular business operations. When the HST rules were released on 1 July 2010, this affected consumers as more HST had to be paid in buying certain goods, but benefited small and big businesses as they were now able to collect back all the tax paid out on purchases made.
The government has three HST classifications: 13% taxable, zero rated or exempt. Why is this important?
Most businesses have to charge 13% HST on all product sales and/or services. Once the collection happens this amount is netted against HST paid by the business on their own purchases (most commonly referred to as Income Tax Credits or ITCs) and the net amount is remitted to the government.
While the above is true, why is it important to distinguish between a zero rated supply and exempt sales? The simple answer to this question is zero rated supplies allow businesses to claim back the ITCs while an exempt supplier does not.
Below you will find two examples to distinguish the difference:
Zero rated
Examples of zero rate supplies are usually found with businesses who generate revenue from exporting. Such businesses do not charge HST when exporting products overseas but are able to collect back the HST paid in doing business and buying goods and services in Canada.
Exempt sales
A dentist provides services that are exempt from the tax system completely i.e. cannot charge patients and cannot submit an HST return to recover the ITCs paid. In other words the additional tax (unclaimed ITCs) is a cost of doing business.
To summarize, determining your type of product and service and the correct tax to charge can make a big difference on your cash flow.
If you need help determining how your products should be taxed, contact us today. We’re expert Ottawa Tax Accountants, and would be happy to schedule a free consultation.
