The Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) are value-added taxes that apply to most goods and services supplied in or imported into Canada. However, not all supplies are subject to the same tax rate. Some supplies are taxable at the standard rate of 5% or 13%, depending on the province or territory, while some are zero-rated or exempt from GST/HST.
What is the difference between zero-rated and exempt supplies, and why does it matter for businesses and consumers?
Zero-Rated Supplies
Zero-rated supplies are taxable supplies subject to GST/HST at the rate of 0%. This means that no GST/HST is charged or collected on these supplies, but the suppliers can still claim input tax credits (ITCs) to recover the GST/HST paid or payable on their business inputs. ITCs are the GST/HST amounts that a business can deduct from the GST/HST it has to remit to the Canada Revenue Agency (CRA).
Some examples of zero-rated supplies are:
- Basic groceries, such as milk, bread, and vegetables
- Agricultural products, such as grain, raw wool, and dried tobacco leaves
- Most farm livestock
- Most fishery products, such as fish for human consumption
- Prescription drugs and drug-dispensing services
- Certain medical devices, such as hearing aids and artificial teeth
- Feminine hygiene products, such as sanitary napkins, tampons, and menstrual cups
- Exports, such as most goods and services for which GST/HST is charged and collected in Canada, but are zero-rated when exported
- Many transportation services, where the origin or destination is outside of Canada
Zero-rated supplies are beneficial for both businesses and consumers, as they reduce the tax burden and the cost of goods and services. For example, a farmer who sells zero-rated agricultural products does not have to charge GST/HST to the customers but can claim ITCs for the GST/HST paid on the seeds, fertilizers, equipment, and other inputs used in farming activities. Similarly, a consumer who buys zero-rated groceries does not have to pay GST/HST on them, which lowers the food expenses.
Exempt Supplies
Exempt supplies are supplies that are not subject to GST/HST. This means that no GST/HST is charged or collected on these supplies, but the suppliers cannot claim ITCs to recover the GST/HST paid or payable on their business inputs. Exempt supplies are different from zero-rated supplies, as they do not allow the suppliers to claim any GST/HST credits.
Some examples of exempt supplies are:
A sale of housing that was last used by an individual as a place of residence
Long-term rentals of residential accommodation (of one month or more) and residential condominium fees
Most health, medical, and dental services performed by licensed physicians or dentists for medical reasons
Child care services, where the primary purpose is to provide care and supervision to children 14 years of age or under for periods of less than 24 hours per day
Bridge, road, and ferry tolls
Legal aid services
Many educational services, such as courses supplied by a vocational school leading to a certificate or a diploma that certifies the ability of individuals to practice or perform a trade or a vocation, or tutoring services provided to an individual in a course approved for credit by a school authority or the service follows a curriculum designated by a school authority
Music lessons
Most financial institution services, such as arrangements for a loan or mortgage, or arranging for and issuing insurance policies by insurance companies, agents, and brokers
Most goods and services provided by charities
Certain goods and services provided by non-profit organizations, governments, and other public service bodies, such as municipal transit services and standard residential services such as water distribution
Exempt supplies are intended to relieve the tax burden and the cost of the goods and services that are considered essential or socially desirable, such as housing, health care, education, and public services.
However, exempt supplies also create a tax disadvantage for the suppliers, as they cannot recover the GST/HST paid on their business inputs.
For example, a landlord who rents out an exempt residential property does not have to charge GST/HST to the tenants, but cannot claim ITCs for the GST/HST paid on the property maintenance, utilities, insurance, and other expenses.
Similarly, a consumer who buys an exempt legal service does not have to pay GST/HST on it, but the lawyer cannot claim ITCs for the GST/HST paid on the office rent, supplies, equipment, and other inputs.
Zero-rated and exempt supplies are two types of supplies that are not subject to the standard GST/HST rate in Canada. Zero-rated supplies are taxable at the rate of 0%, while exempt supplies are not taxable at all. The main difference between them is that zero-rated supplies allow the suppliers to claim ITCs to recover the GST/HST paid on their business inputs, while exempt supplies do not. Zero-rated and exempt supplies affect the tax burden and the cost of goods and services for both businesses and consumers, depending on the type and nature of the supply.
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