Tax Question:

What is a Canadian federal goods and services tax (GST) account and do I need to register for one?

Facts:

GST is a federally levied value added consumption tax that is applied to the supply of most of the goods and services sold in Canada. Regardless if your company has a permanent establishment (to be covered in a future FAQ) or not, your company may still be required to register for a GST account.

Discussion:

GST is applied on the value added to the product or service at each stage of the supply chain. Registered corporations can claim GST paid on their purchases to deduct against the GST collected on their sales so they are only paying tax on the difference or value added amount. This prevents double charging of the tax at each step of the supply chain. In the end, the tax is borne by the end consumer. Generally the GST rate is 5% except for certain items that are either zero rated or exempt (basic groceries, agricultural products, prescription drugs, etc.).

When determining if your company has to register for GST, it needs to first determine if it is carrying on business. Carrying on business means that the business is frequently or regularly doing business, not just a one off sale. If a company is consistently doing business, then it needs to determine if it is carrying on business in Canada. Factors considered in carrying on business in Canada are:

• The place where agents or employees of the non-resident are located;
• The place of delivery, where the service is performed, or manufacture/production;
• The place where purchases are made or assets are acquired;
• The place from which transactions are solicited;
• The location of assets or an inventory of goods and location of a branch or office;
• The place where business contracts are made;
• The place of payment and location of a bank account; and
• The place where the non-resident’s name and business are listed in a directory.

If your company is considered to be carrying on business in Canada, then it will be required to register for GST. You can also register voluntarily. However, the cost versus benefit of registering should be looked at first before voluntarily registering as registering requires ongoing filings.

Recommendation

If you think your company may need to register for GST, please contact us.