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 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!
- Medical and other health clinics. 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.
(A different election on Form GST27 (ETA section 150) is available to eliminate tax in certain cases, but only if one of the companies is a “financial institution” as that term is defined.)
- 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 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 of various reasons) 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 you acquire a service or intangible property (e.g. a consulting service or downloaded software) from outside Canada, and you are not charged GST/HST, you generally have a legal obligation to self-assess and pay the GST or HST to the Canada Revenue Agency, unless the purchase is for a business that can claim full input tax credits anyway. This is called an “imported taxable supply”. The CRA does not in practice assess consumers for this, though legally it could. But if you acquire an imported taxable supply for your business, and you are not able to claim input tax credits (e.g. because your sales are exempt), the CRA or RQ may find this on auditing your business and assess you.
- If a GST-registered agent sells goods for a principal who is not required to collect tax, the agent is considered to have bought and sold the property from the principal, and must collect GST or HST on the full price charged to the customer. For example, suppose you have a used boat (which you used for your own pleasure) that you want to sell. You leave it with a boat dealer, who sells it for you and takes a commission. The dealer must collect and remit GST or HST on the full sale price (not just the commission), even though you would not have to do so if you sold the boat yourself.
- 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 the deposit. 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.
- 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 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.
- If your business sues another person for breach of contract, and the original contract bore GST or HST, any amount you receive as damages or in a settlement will normally be considered to be GST- or HST-included, so that you must remit tax out of the total and the defendant may be able to claim an input tax credit. Make sure to “gross up” for the GST or HST in any claim or settlement in such cases. But you may have already recognized and remitted GST/HST when you first billed the client. To the extent you have to write off some of the amount originally owing, you can likely use the “bad debt” or “credit note” rules in the legislation (ETA sections 231 and 232) to recover from the CRA or RQ the GST/HST that you weren’t able to collect.
- An employed musician who is also GST-registered can often claim input tax credits for tax paid on buying musical instruments used in employment, under a special rule in ETA subsection 199(5).