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If you’re a business owner frequently incurring expenses in Canada, you may be eligible for significant reclaim opportunities. How? Like most countries, Canada charges a consumption tax on most goods and services. This tax is referred to as either Goods and Services Tax (GST) or Harmonized Sales Tax (HST). Depending on where the expense took place in Canada, the GST or HST can range from 5-15% of the cost incurred.
However, businesses don’t have to settle for leaving their GST/HST portion on the table. In fact, businesses may be eligible to reclaim their GST/HST costs without necessarily needing to make sales in Canada or have a permanent establishment in the country. How? Cue foreign VAT reclaim solutions.
In this article, we’re diving into the Canadian consumption tax system and how overseas claimants can recover a portion of their expenses in Canada. Here’s what you need to know about GST and HST and how streamlined foreign recovery solutions can boost your bottom line while protecting your critical resources, time, and money.
Our foreign VAT reclaim specialists are well-versed in the art of dealing with local reclaim processes, tax authorities, and legislation to help you maximize GST recovery in Canada. But first, let’s set the groundwork.
In Canada, there are two primary consumption tax types levied on most goods and services; Goods and Services Tax (GST) and Harmonized Sales Tax (HST). Although both are sales taxes, there are some key differences between the two regarding tax rates and their application.
In brief, GST is a nationwide federal tax, whereas HST is a combination of federal GST and a provincial sales tax (PST). Depending on where the sale took place in Canada, the tax charged on goods may differ as some provinces have harmonized their PST and GST, which together make the HST rate. For example, the GST rate across Canada is 5%, however, when HST is implemented, the combined tax rate can go up to 15%, depending on the province. Ontario, for example, has an HST rate of 13%.
To help you navigate through the various taxes in Canada, here’s a quick breakdown:
| GST | Goods and Services Tax | A federal tax that is calculated on the total purchase price. This is a form of Value Added Tax. An Input Tax Credit can be claimed on GST paid. |
| PST | Provincial Sales Tax | A retail sales tax that is collected and remitted to the Ministry of Finance in a specific province. PST is a retail tax and differs from GST. No Input Tax Credit (ITC) can be claimed on PST. |
| HST | Harmonised Sales Tax | A combination of GST and PST. HST rates are currently in effect in New- foundland, Labrador, New Brunswick, Nova Scotia, Prince Edward Island, and Ontario. |
| QST | Québec Sales Tax | PST in Québec is called Québec Sales Tax (QST), or Taxe de Vente Au Québec (TVQ). It is important to note that, unlike other provincial sales taxes, QST is a value-added tax, and Input Tax Credits (ITC) can be claimed. |
How does GST/HST apply to your business? Here’s where things get pretty neat (albeit somewhat complicated). Businesses outside of Canada can be eligible to recover GST/HST that has been incorrectly charged. This means that if you’re a non-resident entity with business expenses in Canada, you could be charged and paying GST/HST, which you may be eligible to recover.
However, to recover the GST/HST incurred, various conditions must be met to qualify as a non-resident company and overseas business claimant. If eligible, companies can claim a rebate equal to the tax paid for qualifying goods exported outside of Canada or for services that are intended to be used outside of Canada. These rebates are subject to certain conditions, the most significant being that the company classifies as a non-resident entity.
What constitutes a non-resident? Here’s a look.
To qualify as a non-resident company in Canada, the entity mustn’t be involved, nor do they intend to make any taxable sales in Canada. In addition, to be qualified as a non-resident company, a business cannot have a permanent establishment (PE) in Canada.
A permanent establishment refers to a fixed place of business, including a place of management, branch, office, or workshop. In addition, it may constitute a PE in Canada if a business has an acting agent who supplies property or services on their behalf in Canada.
What’s important to note is that a non-resident status does not have to hinge on Canadian citizenship. If you’re a Canadian resident, but your permanent establishment is outside of Canada, Canada may consider you a non-resident for tax purposes only.
When it comes to claiming GST/HST, the process can quickly feel complex and daunting, especially without experts in your corner. However, businesses can quickly improve their reclaim potential with a good foundation and understanding of the claims process. The first important step is to remember that all claimants must file a physical paper-based application within the set period from when the expenses were paid. Speaking of expenses, what exactly can businesses reclaim in Canada?
Non-resident businesses can generally claim input tax credits (ITCs) to recover GST/HST paid or payable on the following business purchases and expenses:
Common recoverable expenses based on zero-rated services include:
With such a large scope within the GST/HST reclaim scope, leveraging the reclaim potential can bring significant financial benefits and competitive advantages to overseas claimants without establishing a permanent establishment in Canada or making any sales within the country. However, what if your business does make or intends to make sales connected to Canada?
Does the reclaim opportunity fall away? Not at all. However, the process may look a bit different. This is where Domestic recovery solutions come into play.
Businesses in Canada can either voluntarily register for claim-only GST or be subject to mandatory standard GST registration. Standard GST applies to businesses that do not qualify as non-resident companies due to either having a physical establishment in Canada or making sales to Canadian end-users connected to their taxable income. Businesses must register for GST/HST and comply with the Canadian Domestic VAT rules and regulations if this is the case. Fortunately, with VAT IT by your side, businesses can effortlessly administer their tax registrations and optimize their local Canadian GST/HST processes while maximizing their returns.
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