Chapter Twenty-One Goods And Services Tax (GST)

© 2008, Clarence Byrd Inc.2 Transaction Tax Concepts Manufacturer Wholesaler Retailer Customer

© 2008, Clarence Byrd Inc.3 Single Stage Transaction Tax – Retail Sales Tax  5% ($50,000) = $2,500

© 2008, Clarence Byrd Inc.4 Multi-Stage Transaction Tax - VAT  Manufacturer = 5% ($10,000)$ 500  Wholesaler = 5% ($15,000)750  Retailer = 5% ($25,000) 1,250 $2,500

© 2008, Clarence Byrd Inc.5 Multi-Stage Transaction Tax – GST  Manufacturer 5%($10,000) $ 500  Wholesaler –5%($25,000)$1,250 –5%($10,000)( 500) 750  Retailer –5%($50,000)$2,500 –5%($25,000)( 1,250) 1,250  Total$2,500

© 2008, Clarence Byrd Inc.6 Liability For GST ITA 165(1) -..every recipient of a taxable supply made in Canada shall pay to her majesty in right of Canada, tax in respect of the supply calculated at the rate of 5% on the value of the consideration for the supply.

© 2008, Clarence Byrd Inc.7 Liability For GST  The liability is on the purchaser of the goods and services.

© 2008, Clarence Byrd Inc.8 The Concept Of Supply  ETA 123 – “Supply” means the provision of property or a service in any manner, including sale, transfer, barter, exchange license, rental, lease, gift, or disposition.

© 2008, Clarence Byrd Inc.9 The Concept Of Supply  Taxable Supplies –Supplies made in the course of commercial activity  Includes –Fully taxable at 5% –Zero-rated  taxable at 0%  vendor gets input tax credits

© 2008, Clarence Byrd Inc.10 The Concept Of Supply  Commercial Activity –In general: business carried on by a person, a personal trust, or a partnership made up of individuals –Exclusions  no expectation of profit  exempt supplies  employment services

© 2008, Clarence Byrd Inc.11 Supply Categories  Fully Taxable Supplies –Full Tax And ITCs –Examples  Travel  Clothing  Restaurant Meals  Electricians

© 2008, Clarence Byrd Inc.12 Supply Categories  Zero-Rated Supplies –Tax At 0%, Full ITCs –Examples  Basic Groceries  Prescription Drugs  Exports  Foreign Travel

© 2008, Clarence Byrd Inc.13 Supply Categories  Exempt Supplies –No Tax, No ITCs –Examples  Health Care  Used Residential Housing  Financial Services

© 2008, Clarence Byrd Inc.14 Applying the GST Rates BBBBasic approach –R–R–R–Rate is applied to consideration received –I–I–I–Includes all non-refundable federal taxes –E–E–E–Excludes sales taxes –P–P–P–Provincial sales taxes QQQQuebec and PEI include GST in base OOOOther Provinces (non-HST) do not

© 2008, Clarence Byrd Inc.15 Applying the GST Rates  On Trade-Ins – GST on Net Amount Example: An individual acquires a new Buick at a cost of $38,000. He trades in his old Toyota and receives an allowance of $17,000, paying the net amount of $21,000 GST = [(5%)($21,000)] = $1,050

© 2008, Clarence Byrd Inc.16 Collection And Remittance Of GST  Liability is on recipient of supply.  Provider responsible for collection and remittance

© 2008, Clarence Byrd Inc.17 Requirement To Register  A person is required to register if the person is providing taxable supplies in Canada.  An exception for “small suppliers”.

© 2008, Clarence Byrd Inc.18 Small Suppliers Exemption  Small Suppliers Threshold –<$30,000 per year in taxable supplies  May Voluntarily Register –may want input tax credits.

© 2008, Clarence Byrd Inc.19 Small Suppliers Exemption  Last 4 Calendar Quarters Test –Over $30,000 on cumulative basis  Calendar Quarter –Over $30,000 in a single quarter

© 2008, Clarence Byrd Inc.20 Input Tax Credits  Costs Other Than Capital Costs –No Matching –Prorated For Taxable Usage  ≥ 90% = All  ≤ 10% = None

© 2008, Clarence Byrd Inc.21 Input Tax Credits  Capital Costs –No Matching Or Allocation –Real Property: Pro Rate Based On Commercial Usage –Other:  > 50% Commercial – 100%  ≤ 50% Commercial - Nil

© 2008, Clarence Byrd Inc.22 Input Tax Credits  Restrictions On Certain Costs –Club Dues –50% Meals And Entertainment –Auto Costs > $30,000 –Reasonable In Circumstances

© 2008, Clarence Byrd Inc.23 GST And Accounting  No Matching  No Allocation (Amortization, etc.)  Some Deductions Don’t Influence GST (e.g., Wages, Interest)

© 2008, Clarence Byrd Inc.24 Example  GAAP Income Statement Sales$6,700,000 Cost Of Sales( 4,200,000) Amortization Expense( 1,400,000) Salaries( 500,000) Other Expenses( 200,000) Total $ 400,000

© 2008, Clarence Byrd Inc.25 Example (Continued)  Other Information:  Capital Expenditures - $2,000,000 for a building (40% commercial) - $1,000,000 for equipment (70% commercial)  Purchases of goods for resale were $4,500,000  Other Expenses of $200,000, related to fully taxable supplies  $5,000,000 of sales were fully taxable, the remainder were exempt  Ignore provincial sales taxes

© 2008, Clarence Byrd Inc.26 Solution To Example Sales (5%)($5,000,000)$250,000 Purchases (5%)($4,500,000)( 225,000) Other Expenses (5%)($200,000)( 10,000) Building (5%)($2,000,000)(40%)( 40,000) (5%)($2,000,000)(40%)( 40,000)Equipment (5%)($1,000,000)(100%)( 50,000) GST Payable (Refund)($ 75,000)

© 2008, Clarence Byrd Inc.27 Relief For Small Business  Quick Method –<$200,000 Taxable Sales –Collect Usual 5% –Don’t Track ITCs, except for capital expenditures –Apply Given % To GST Inclusive Sales  Service – 2.6%/3.6%  Retail – 0.8%/1.8%

© 2008, Clarence Byrd Inc.28 Example  Annual filing retail store has annual sales of $125,000, resulting in GST included sales of $131,250. In addition, there are $20,000 in capital expenditures. 0.8%$ 240 – 1.8%1,823 –Capital Expenditures (5%)($20,000)( 1,000) –GST Payable$1,063

© 2008, Clarence Byrd Inc.29 Relief For Small Business  Simplified ITC Accounting –GST On Sales – Regular Procedures –Input tax credits based on 5/105 multiplier applied to most purchases –Excluded from 5/105 calculation:  Capital expenditures for real property  Purchases of zero-rated supplies  Purchases from non-registrants  Cost not eligible for input tax credits (e.g., 50 percent of meals) –Can track capital expenditures on real property

© 2008, Clarence Byrd Inc.30 GST Procedures And Administration  Liability –Revenues when customer is invoiced –Input tax credits when invoice is issued

© 2008, Clarence Byrd Inc.31 GST Procedures And Administration  Taxation Year –Will have fiscal year –Usually the same as income tax fiscal year  If non-calendar income tax year;  Can use calendar year for GST

© 2008, Clarence Byrd Inc.32 GST Procedures And Administration  Filing –Taxable sales > $6,000,000  Monthly Filing  Returns one month after the end of the filing period –Taxable sales between $1,500,001 and $5,999,000  Quarterly filing  Returns one month after the end of the filing period –Taxable sales < $1,500,001  Annual filing  Three months after the end of the filing period

© 2008, Clarence Byrd Inc.33 GST Procedures And Administration  Payment and Interest –Payment is due when returns are filed –Non-deductible interest at prescribed rate plus 4 percent (2 percent on amounts owing to the taxpayer) –Late filing penalty of one-quarter of one percent per month, for a maximum of 12 months

© 2008, Clarence Byrd Inc.34 GST Procedures And Administration  Appeals –Informal procedures –Notice of objection  90 days after the date on the notice of objection –Tax Court Of Canada –Federal Court Of Appeals –Supreme Court Of Canada

© 2008, Clarence Byrd Inc.35 Employee/Partner GST Rebate EEEEmployees and partners are usually non- registrants EEEEmployees and partners have deductible expenses on which GST is paid TTTThe rebate allows them to recover this GST –M–M–M–Must be employee or partner of an employer or partnership that is a GST registrant –A–A–A–Also government employees –E–E–E–Expenses must be non-reimbursed

© 2008, Clarence Byrd Inc.36 Employee/Partner GST Rebate CCCCalculation –M–M–M–Multiply eligible expenses by 5/105 –R–R–R–Rebate is a refund of GST paid on costs that were deducted for income tax purposes –R–R–R–Rebate is added to income or deducted from UCC in the year it is received

© 2008, Clarence Byrd Inc.37 New Housing Rebate  GST is payable at 5 percent  Rebate available equal to 36 percent of GST paid  Maximum = $6,300 [(5%)($350,000)(36%)]  Phase out provision

© 2008, Clarence Byrd Inc.38 New Housing Rebate Reduction [A][($450,000 – B) ÷ $100,000] Where: A = The lesser of 36 percent of the GST paid and $6,300 [(5%)(36%)($350,000)] B = The greater of $350,000 and the cost of the home

© 2008, Clarence Byrd Inc.39 New Housing Rebate - Example Example On July 1, 2008, Gary and May Lartch acquire a new home at a cost of $385,000. GST paid was $19,250 [(5%)($385,000)] Rebate [$6,300][($450,000 - $385,000) ÷ $100,000 = $4,095

© 2008, Clarence Byrd Inc.40