SOME GST AND HST QUIRKS YOU MIGHT NEED TO KNOW
The Goods and Services Tax (GST) and Harmonized Sales Tax (HST) form a very complex system, with myriad special rules and exceptions. Many details have changed since the GST first came into force in 1991.
Here are a baker’s dozen of unusual GST and HST rules from the Excise Tax Act (ETA) — some less well-known than others — that might affect your business. Note that while the GST and HST are administered by the CRA across Canada, they are administered in Quebec by Revenu Québec (RQ).
- Medical and other health clinics. When revenues are shared between a doctor (or other health care provider) and a clinic, it is often unclear whether the clinic is paying the doctor for health care services (exempt), or the doctor is paying the clinic for the use of the clinic’s facilities (taxable). This determination depends on both the contractual arrangements and the facts. (See CRA Policy P-238.) These arrangements need to be carefully reviewed by a GST/HST expert to ensure that the right taxes are being remitted by the right parties. Otherwise, there can be a nasty (and expensive) surprise when the CRA or RQ audits either business!
- Cosmetic-related health care services. Cosmetic surgery (e.g. facelift, teeth whitening, laser spots removal) is taxable unless it is needed for medical or reconstructive purposes. This rule actually applies to all health care services “in respect of” a cosmetic service. Thus, for example, a nursing service or dental hygienist service relating to a cosmetic treatment may be taxable, even though such services are normally exempt.
- Charges between related companies can often be free of GST by filing a special election (ETA section 156, Form RC4616) with the CRA or RQ, but only if the effect is merely to eliminate cash flow. This election cannot save tax. If one of the companies is making exempt supplies such as residential rents or health care services (so that it cannot claim full input tax credits), the companies cannot make the election. Also, if the election was made before 2015 on old Form GST25, it is now invalid and the companies are at risk of being assessed for not collecting and remitting GST/HST. Also, if two companies are both owned by the same individual, rather than under common corporate control, the election cannot be made and GST/HST must be charged between them.
- Not all health care services are exempt. Those that are not regulated by at least 5 provinces, or covered by public health insurance in at least 2 provinces, are generally not on the “exempt” list. For example, the services of massage therapists, kinesiologists and homeopaths are taxable, even if they are regulated by the province! (There is an exception for a “small supplier”, with no more than $30,000 per year of annual taxable supplies, who chooses not to register for GST/HST.)
- Services are generally taxed based on the customer’s address. Thus, in general, if a consultant in Ontario bills an Alberta client, only 5% GST applies, but if a consultant in Alberta bills an Ontario client, the Ontario 13% HST rate applies. However, there are many exceptions to this rule. One exception is for “personal” services (e.g., haircuts), which are taxed based on where they are performed … but this rule excludes a “professional” service (e.g. a lawyer or accountant), which normally follows the general rule! This rule may have surprising effects. For example, a hotel with a spa that provides massage therapy should likely be charging GST or HST based on the customer’s home province, if massage therapy is a “professional” service.
- A vendor selling real property that has GST or HST buried in the price (where the vendor wasn’t able to claim an input tax credit on purchasing the property, for any reason) can often recover that GST or HST, by way of a special input tax credit or rebate. These obscure rules, in ETA sections 193 and 257, are often overlooked by lawyers and accountants advising vendors.
- If your business collects a “deposit” from a customer, no GST or HST applies until you apply it as “consideration” for the purchase. However, based on a Tax Court case (Tendances et Concepts Inc., 2011), what you think is a “deposit” might actually be a “payment on account”, in which case the GST or HST applies as soon as you have collected it. As well, once you have invoiced an amount, the entire GST or HST on that amount is normally “payable” and must be remitted for that reporting period. These rules are tricky, and if you get them wrong, when the CRA or RQ audits your business, it will assess you for not having remitted GST or HST in the right reporting period.
- If you are selling commercial real property to a GST-registered purchaser, the purchaser normally accounts for the GST or HST and usually claims an offsetting input tax credit, so that the purchaser doesn’t actually pay any amount in tax. However, the sale is still “taxable” for GST/HST purposes. As a result, if your purchase and sale agreement says that any GST or HST is “included” in the sale price, you will only get 100/105ths, 100/113ths or 100/115ths of the sale price (depending on the province) when the deal closes. Be careful about how the agreement is worded!
- The sale of vacant land is often exempt when sold by an individual, but there are many exceptions. For example, if you have previously severed the land into more than two parts, it will be taxable. If you have been renting out the land, it may be taxable. A sale by a corporation is almost always taxable. If a farm has a farmhouse on it, the farmhouse portion (plus one-half hectare of land) is usually exempt. Again there are lots of special rules and exceptions, and you should get professional advice to make sure you’re getting it right.
As you can see, the GST and HST are very complex. The legislation and regulations run to thousands of pages. The above only scratches the surface of the complexity.
