Chapter 4

Description of Goods and Services Tax/Harmonized Sales Tax Provisions

This chapter describes the various goods and services tax/harmonized sales tax (GST/HST) expenditure estimates and how they are derived. Since the GST/HST is levied at all points in the production and distribution chain, the value-added nature of the tax makes it equivalent to a retail sales tax levied on the sale of goods and services to the final consumer. Based on this equivalency, the GST/HST base can be estimated from a Sales Tax Model constructed using data obtained from Statistics Canada’s Input-Output Tables and the National Income and Expenditure Accounts.

The data from the Input-Output Tables are used to derive detailed expenditures by commodity for households, public sector bodies and exempt businesses such as financial service providers. The personal expenditure categories of the Input-Output Tables, along with the investment categories for residential construction, are used to derive commodity expenditures for households. The commodity expenditures of public sector bodies are derived from current public sector expenditure categories, in conjunction with relevant data obtained from the input matrix and appropriate investment categories contained in the Input-Output Tables. (Public sector bodies include the federal government, provincial governments, municipalities, universities, school boards, public colleges, public hospitals, charities and non-profit organizations.) The commodity expenditures of exempt businesses are derived from the input matrix of the Input-Output Tables in conjunction with data obtained from the appropriate investment categories.

The commodity data described above are used to identify the impact of the GST/HST provisions that either zero-rate[4] or exempt^[5] certain goods and services. In some cases, modifications had to be made to the data derived from the Input-Output Tables and the National Income and Expenditure Accounts to account for the structure of the GST/HST. Since final Input-Output Tables for a given year are available only three years after the fact, National Income and Expenditure Accounts data are used to project the impact of each GST/HST provision to the relevant historical year. Expenditure data contained in the Department of Finance’s Canadian Economic and Fiscal Model are used to project the impact of most of the GST/HST provisions over the forecast period.

The Sales Tax Model is not the sole source of the estimated tax expenditures associated with the GST/HST. In some cases, actual data from the Canada Revenue Agency (CRA) are used for the tax expenditure estimates. In other cases, estimates are derived from different sources. This chapter describes the various GST/HST expenditure estimates and how they are derived.

The public sector body rebates are measured on an activity basis rather than on an entity basis. On an entity basis, if a hospital, for example, claimed a charity rebate as well as a hospital rebate the entire amount would have been recorded as a hospital rebate. On an activity basis, the rebates are recorded based on the activity regardless of the institution that claimed them. This change does not affect the total cost of public sector body rebates but results in a small reallocation among the rebate categories.

The following pages itemize each GST/HST tax expenditure by subject. Along with its policy objective, a short description of the tax expenditure is provided.

Aboriginal Self-Government

Refunds for Aboriginal Self-Government

Under Comprehensive Claims and Self-Government Agreements, Aboriginal governments are provided with a 100-per-cent refund of the GST/HST for goods and services acquired for use in governmental activities.

The estimates for Aboriginal self-government refunds for historical years are based on data from the CRA. Projected values of the tax expenditure are simply the value estimated for the most recent historical reference year.

Business

Exemption for Domestic Financial Services

Financial services are defined to include services relating to financial intermediation, market intermediation and risk pooling. However, in many cases, the price of a financial service is implicit. For example, when banks provide lending and deposit-taking services, the banks’ fees for these services are the spread between interest rates received from borrowers and the interest paid to depositors. The exact price associated with each financial transaction is difficult to determine and, therefore, it is difficult to apply the GST/HST to the sale of the service. As a result, most financial services provided to residents of Canada are exempt under the GST/HST.

Members of a "closely related group" (if there is at least 90 per cent cross-ownership of voting shares between them), where one of the members is a "listed financial institution," may jointly elect to treat most supplies between them as tax-exempt financial services. The purpose of this election is to recognize that a closely related corporate group can be viewed as a single entity with respect to intragroup transactions.

No data are available.

Exemption for Ferry, Road and Bridge Tolls

Ferry, road and bridge tolls are GST/HST-exempt. International ferry services are treated as zero-rated like other international transportation services.

The estimate is derived using the Sales Tax Model.

Exemption and Rebate for Legal Aid Services

There are two ways in which the relief of GST/HST is provided in respect of legal aid services:

• Legal aid services delivered directly by the Crown or a Crown agency (as is the case in Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Quebec, Manitoba and Saskatchewan) are exempt.

• Legal aid services provided by private practitioners to a legal aid plan administrator are taxable. However, the person responsible for the legal aid plan is entitled to a rebate of 100 per cent of any tax paid on the supply.

For provinces where the service is explicitly exempt, provincial economic accounts data are used to calculate the value of the exemption. Specifically, it is assumed that the value of legal aid services relative to the total expenditures contained in the provincial economic account category "Personal Business" in the tax-exempt provinces would be the same as in those provinces where a rebate is provided. The CRA supplied the data related to the rebates provided to legal aid plans in the provinces of New Brunswick, Ontario, Alberta and British Columbia.

The projected expenditure estimate is based on the growth in consumption obtained from the Canadian Economic and Fiscal Model.

Non-Taxability of Certain Importations

Certain importations are tax-free under the GST/HST. These include:

• goods, other than books and periodicals, valued at not more than $20 and mailed to residents of Canada from other countries;

• duty-free personal importations such as goods valued at not more than $750 and imported by Canadians who have been outside the country for more than seven days; and

• goods imported by foreign diplomats.

No data are available.

Rebates for Foreign Visitors on Accommodations

Non-residents visiting Canada are entitled to a rebate for the GST/HST paid on most goods and short-term accommodation. Rebates are also provided for conference-related expenses for conferences attended by non-residents.

Specifically, the rebate covers the following where the tax paid is at least $20:

• goods for use primarily outside Canada, excluding excisable goods such as alcoholic beverages and tobacco products, provided the goods are exported within 60 days of purchase; and

• the tax paid on short-term lodging, but not including meals, where the period of stay is less than one month.

Goods for use outside Canada are essentially the same as other exported goods and should be considered as part of the benchmark. Thus, the cost of this provision is, as set out in Table 3, only the rebate associated with short-term accommodation.

The CRA has some administrative data related to rebates paid on short-term accommodation to foreign visitors. However, this data only partially captures the provision’s associated tax expenditure, since it is not possible to identify the value of rebates that are conferred to travel operators that are included in the business’s input tax credit. Hence, the estimate of the tax expenditure for short-term accommodation is based on CRA administrative data, supplemented with additional data on foreign visitors provided by Statistics Canada.

Small Suppliers’ Threshold

Small suppliers, that is, persons whose total taxable supplies in the preceding year are $30,000 or less ($50,000 or less in the case of public sector bodies), are not required to register and collect the GST/HST. Charities and public institutions (for example, a registered charity that is a university, a public college, a school authority, a hospital authority or a designated municipality) can also qualify as a small supplier if their gross annual revenue (as determined for income tax purposes) in either of their previous two fiscal years is $250,000 or less. Those who choose not to register do not have to charge and remit GST/HST, and they are not entitled to input tax credits.

The starting point in deriving the estimate is gross sales data for 1990 obtained from personal and corporate income tax information. From this data, it is estimated that the total sales from firms with annual sales of less than $30,000 account for approximately 0.5 per cent of all sales in the Canadian economy. This ratio can then be applied to the total gross GST/HST collections to approximate the revenues that would arise from eliminating the small business threshold.

The projected expenditure estimate is based on the growth in nominal gross domestic product (GDP) obtained from the Canadian Economic and Fiscal Model.

Zero-Rating of Agricultural and Fish Products and Purchases

Instead of taxing sales and providing input tax credits at early stages in the food production-distribution chain, GST/HST legislation zero-rates certain agricultural and fish products throughout the production chain. A prescribed list of zero-rated agricultural and fishing supplies includes farm livestock, poultry, bees, grains and seeds for planting or feed, hops, barley, flax seed, straw, sugar cane or beets. In addition, prescribed sales and purchases of major types of agricultural and fishing equipment are also zero-rated.

The main effect of this provision is on the cash-flow position of taxpayers. For example, in the normal operation of the GST/HST, farmers would pay the GST/HST on taxable purchases and would claim a corresponding input tax credit at the end of their tax period. However, in the case of prescribed zero-rated supplies, the farmer does not pay the GST/HST and so does not have to wait to claim an input tax credit. Consequently, the cash-flow position of the farmer is improved. At the same time, however, the suppliers lose the benefit of holding the GST/HST on these purchases until the end of their tax period. Since the aggregate tax liability of affected taxpayers remains unchanged, the revenue implications of this measure are small.

Zero-Rating of Certain Purchases Made by Exporters

The GST/HST legislation provides that certain supplies of goods and services delivered in Canada but subsequently exported are zero-rated. These include:

• goods imported by export distribution centres (effective January 1, 2001);
• the supply of goods to a recipient who intends to export them, provided they are not excisable goods (spirits, beer or tobacco) and the goods are not further processed or modified in Canada by the recipient;
• the supply of excisable goods to a recipient who, in turn, exports the goods in bond;
• supplies of natural gas made to a person who is exporting the gas by pipeline and not further processing or using the gas in Canada before its exportation other than as fuel or compressor gas to transport the gas; and
• goods sold to duty-free shops licensed as such under the Customs Act.

As with agricultural and fish products, this provision has only cash-flow implications since exporters would in any case be entitled to claim input tax credits for any tax that they paid on these purchases. In other words, the net effect of zero-rating these purchases is to relieve them of tax sooner than otherwise. Again, the impact of this measure on tax revenues is small.

Charities and Non-Profit Organizations

Exemption for Certain Supplies Made by Non-Profit Organizations

Most supplies made by charities are GST/HST-exempt. Supplies that are exempt when made by non-profit organizations include supplies made for no consideration; supplies of food and lodging made for the relief of poverty or distress; subsidized homemaker/home-care services; meals on wheels; recreational programs established for children, and disabled and disadvantaged individuals; memberships in organizations providing no significant benefit to individual members; and trade union and mandatory professional dues.

No data are available.

Rebates for Registered Charities and Non-Profit Organizations

Charities registered under the Income Tax Act are eligible for a rebate of 50 per cent of the GST/HST paid on purchases related to their supplies of exempt services. The organizations eligible for the non-profit organizations rebate are non-profit organizations that receive at least 40 per cent of their funding from governments, municipalities or Indian bands. Registered amateur athletic associations and non-profit organizations operating a facility or part thereof to provide nursing home intermediate care or residential care are also eligible for the rebate.

The estimate of GST/HST rebates for charities and non-profit organizations for historical years is based on data from the CRA. Since the expenditures of non-profit organizations are captured in Statistics Canada’s definition of personal expenditures, the projected estimate is based on the growth in consumer expenditures obtained from the Canadian Economic and Fiscal Model.

Education

Exemption for Education Services (Tuition)

The GST/HST provides an exemption for most educational services. The exemption includes tuition fees paid for courses provided primarily for elementary or secondary school students; courses leading to credits towards a diploma or degree awarded by a recognized school authority, university or college; and certain other types of training for a trade or vocation. In addition, the exemption covers meals supplied to elementary or secondary students as well as most meal plans at a university or college.

The estimate represents revenues that would be collected if tuition fees were taxed and input tax credits were allowed for taxable purchases.

The estimate is derived from the Sales Tax Model.

Rebates for Book Purchases Made by Qualifying Public Institutions

On October 23, 1996, the Minister of Finance announced that a 100-per-cent rebate would be provided on all book purchases made by public libraries, schools, universities, public colleges, municipalities, public hospitals, and qualifying charities and non-profit organizations.

The initial expenditure estimate for 1997 is the estimated annual cost of implementing this provision. The projected expenditure estimate is based on appropriate expenditure data obtained from the Canadian Economic and Fiscal Model.

Rebates for Colleges

Public colleges operating on a not-for-profit basis that are funded by a government or municipality and whose primary purpose is to provide vocational, technical or general education are eligible for a rebate of 67 per cent of the GST/HST paid on purchases related to their supply of exempt services.

Rebates for Schools

Elementary and secondary schools operating on a not-for-profit basis are eligible for a rebate of 68 per cent of the GST/HST paid on purchases related to their supply of exempt services.

Rebates for Universities

Recognized degree-granting universities operating on a not-for-profit basis are eligible for a rebate of 67 per cent of the GST/HST paid on purchases related to their supply of exempt services.

The estimates for college, school and university rebates for historical years are based on data from the CRA. The projected expenditure estimates are derived from the Sales Tax Model, based on the growth in provincial and local government expenditures obtained from the Canadian Economic and Fiscal Model

Health Care

Exemption for Health Care Services

Health care services are exempt under the GST/HST. These services include the following categories:

• Institutional health care services provided in a health care facility. These include accommodation, meals provided with accommodation, and rentals of medical equipment to patients or residents of the facility. However, it excludes meals served in a cafeteria, parking charges, or haircuts for which a separate fee is charged.

• Services provided by physicians, dentists and certain health care practitioners whose profession is regulated by the governments of at least five provinces. This category includes nursing, dental, optometric, chiropractic, physiotherapy, occupational therapy, speech language pathology, chiropodic, podiatric, osteopathic, audiological and psychological services.

• Services covered by a provincial health insurance plan. The previous two provisions already cover most of these services.

Under the Constitution, the GST/HST would not apply in any event to purchases made by provincial governments and health insurance plans. Accordingly, the costs from this provision generally concern health services purchased by final consumers.

The estimates for this provision are derived from the Sales Tax Model.

Rebates for Hospitals

Public hospitals are eligible for a rebate of 83 per cent of the GST/HST paid on purchases related to their supply of exempt services.

The estimate of hospital rebates for historical years is based on data from the CRA. The projected expenditure estimates are derived from the Sales Tax Model, based on the growth in provincial and local government expenditures obtained from the Canadian Economic and Fiscal Model.

Zero-Rating of Medical Devices

A wide range of medical devices (generally those acquired directly by final consumers) is zero-rated under the GST/HST. This includes canes, crutches, wheelchairs, medical and surgical prostheses, ileostomy and colostomy devices, artificial breathing apparatus, hearing and speaking aids, prescription eyeglasses and contact lenses, various diabetic supplies, and selected devices for the blind and for the hearing or speech impaired. In some instances, a device qualifies for tax-free status only if prescribed by a recognized health care practitioner.

The estimate is obtained using the Sales Tax Model.

Zero-Rating of Prescription Drugs

Drugs that are controlled substances for which a prescription is required are zero-rated, as are other drugs that have been prescribed by a recognized health care practitioner. The associated dispensing fee is also zero-rated. However, those items labelled or supplied for veterinary use are not zero-rated as prescription drugs.

The estimate is derived using the Sales Tax Model.

Households

Exemption for Child Care and Personal Services

Certain child and personal care services are exempt under the GST/HST. The exemption covers the following:

• child care services provided for periods of less than 24 hours to children under 14 years of age; and

• certain personal care services including supplies of care and supervision to residents of an institution, as well as accommodation where it is provided for children or disabled or underprivileged persons.

The estimate is derived using the Sales Tax Model. The estimate reported here does not account for day care that might be paid by governments, or day care provided by a non-profit organization. Provincial expenditures in any event would not be subject to tax.

GST/HST Credit

When the GST was introduced, a refundable income tax credit was established to ensure that families with annual incomes below $30,000 would be better off under the new sales tax regime than under the former federal sales tax (FST). The amount of the GST/HST credit depends on family size and income. For the period from July 2004 to June 2005, the basic adult credit is $224 per year. Families with children aged 18 and under receive a basic child credit of $118 for each child per year. However, single parents can claim a full adult credit of $224 per year for one dependent child. In addition to their basic credit, single adults (including single parents) are eligible for an additional credit of up to $118 per year. The value of the credit is reduced for families with annual incomes over $29,123. As a result of the 2000 federal budget, both the credit amounts and the income threshold are adjusted annually for increases in the consumer price index.

The estimate for historical years is based on data from the CRA. The projected expenditure estimate is obtained from the Department of Finance Canada’s fiscal forecast.

Zero-Rating of Basic Groceries

Basic groceries, which include the majority of foodstuffs for preparation and consumption at home, are zero-rated under the GST/HST. However, the tax is charged on certain goods such as soft drinks, candies and confections, and alcoholic beverages.

The cost of the tax expenditure can be estimated using the Sales Tax Model by identifying commodities that are currently not subject to tax and that are purchased by final consumers and public sector bodies.

Housing

Exemption for Sales of Used Residential Housing and Other Personal-Use Real Property

Generally, the GST/HST applies to residential real property when it is first sold or leased for residential purposes. Subsequent sales of used residential housing are tax exempt. In addition, most sales of other personal-use real property, such as vacant land, are tax exempt when sold by individuals. This exemption is consistent with the tax treatment of personal property and services not supplied in the course of commercial activities. The sale of farmland to a family member who is acquiring the property for personal use is also tax exempt.

No data are available.

Exemption for Residential Rent (Long-Term)

Rentals of a residential complex (such as a house) or a residential unit (such as an apartment) for a period of at least one month are tax-exempt. Short-term accommodation is also exempt where the charge for the accommodation is not more than $20 per day.

The estimate is derived using the Sales Tax Model.

Rebates for New Housing

Purchasers of newly constructed residential dwellings and substantially renovated houses are eligible for a rebate of the GST/HST paid if the purchaser is acquiring the dwelling as a primary place of residence. For houses sold at or below $350,000, the rebate is 36 per cent of the total GST/HST paid to a maximum of $8,750. The rebate is phased out for houses sold for between $350,000 and $450,000.

The estimate for historical years is obtained from Statistics Canada. The projected expenditure estimate is based on the growth in investment in new residential construction obtained from the Canadian Economic and Fiscal Model.

Rebates for New Residential Rental Property

Effective 2000, builders or purchasers of newly constructed or substantially renovated residential rental property are eligible for a rebate of the GST/HST paid if it can reasonably be expected that the first use of the individual residential units within the property will be for the purpose of renting it for periods of continuous occupancy of at least 12 months as a primary place of residence. The rebate also applies to the construction of new additions to residential rental property and to the leasing of land that is used for residential purposes.

For residential units sold at or below $350,000, the rebate is 36 per cent of the total GST/HST paid to a maximum of $8,750. The rebate is phased out for residential units sold for between $350,000 and $450,000.

The initial estimate is derived from two sources: data provided by the Canada Mortgage and Housing Corporation related to the number of units constructed for rental purposes, and data underlying the national accounts provided by Statistics Canada. Moreover, the estimate reflects an allowance for the expected lag between the commencement of construction of a residential rental unit and its completion. In order to determine the forecasted values, the initial estimate was projected using both national accounts and Canadian Economic and Fiscal Model data.

Municipalities

Exemption for Municipal Transit

A municipal transit service is defined as a public passenger transportation service provided by a transit authority whose services are at least 90 per cent within a particular municipality and its surrounding areas. These municipal transit services are exempt under the GST/HST.

The estimate is derived using the Sales Tax Model.

Exemption for Water and Basic Garbage Collection Services

Water and basic garbage collection services are exempt under the GST/HST. The estimates are derived from the Sales Tax Model.

Rebates for Municipalities

Municipalities, including entities determined or designated by the Minister of National Revenue to be a municipality, are entitled to a rebate for the GST/HST paid on their purchases used in the course of supplying exempt municipal services. As announced in the February 2, 2004, Speech from the Throne, the Government of Canada increased the rebate rate for municipalities from 57.14 per cent to 100 per cent effective February 1, 2004.

The estimate of municipal rebates for historical years is based on data from the CRA. The projected expenditure estimates are derived from the Sales Tax Model, based on the growth in provincial and local government expenditures obtained from the Canadian Economic and Fiscal Model.

Memorandum Items

Recognition of Expenses Incurred to Earn Income

Rebates to Employees and Partners

A rebate is available to certain employees of a GST/HST registrant for the GST/HST paid on those expenses that are deductible in computing the employee’s income from employment for income tax purposes. For example, an employee is allowed to claim a rebate equal to 7/107^ths (or 7/115^ths in a participating HST province) of the capital cost allowance on an automobile, aircraft or musical instrument that is used in his or her employment and on which GST/HST is payable. Also, the GST/HST rebate is available to an individual who is a member of a GST/HST-registered partnership in respect of expenses incurred outside the partnership that are deducted in computing the member’s income from the partnership for the purposes of the Income Tax Act.

The estimate for historical years is based on data from the CRA. The projected expenditure estimate is based on the growth in nominal GDP obtained from the Canadian Economic and Fiscal Model.

Other

Exemption for Quick Method Accounting

Small businesses registered under the GST/HST are eligible to elect to account for GST/HST using quick method accounting. Under the scheme, businesses do not have to keep track of the tax paid on most of their inputs. Instead, these businesses remit a prescribed percentage of the GST/HST that they collect on their sales. In lieu of the unaccounted input tax credits, the business keeps the remaining GST/HST collected. The business is eligible to claim an input tax credit for the tax paid on capital goods.

The estimate is derived from micro-statistical data for 1991 supplied by Statistics Canada, which suggests that the take-up rate of this provision for eligible small businesses is 22 per cent. The estimate for subsequent historical years is derived by projecting the 1991 estimate based on information on the growth in total input tax credits claimed, which is obtained from the CRA.

The projected expenditure estimate is based on the growth in nominal GDP obtained from the Canadian Economic and Fiscal Model.

Partial Input Tax Credits for Meals and Entertainment Expenses

In the normal operation of the GST/HST, registrants are allowed to claim full input tax credits for the tax paid on their inputs used in making taxable supplies. However, in the case of the tax paid on meals, beverages and entertainment expenses, the registrant is allowed to recover only 50 per cent of the GST/HST paid as an input tax credit. There is no input tax credit allowed for the GST/HST paid on membership fees or dues in any club whose main purpose is to provide dining, recreational or sporting facilities.

The estimate is based on the meals and entertainment tax expenditures contained in the personal and corporate income tax expenditure tables. Then, 15 per cent is removed to account for expenses incurred in GST/HST-exempt activities since they are ineligible for any input tax credits.

¹  The 15-per-cent HST applies in Nova Scotia, New Brunswick, and Newfoundland and Labrador since April 1, 1997. For the purposes of this publication, the HST represents only the federal component in the participating provinces (i.e. 7 per cent). [Return]

²  It should be noted that this analysis deals only with the goods and services tax and harmonized sales tax and not with other commodity taxes (e.g. excise taxes). The exclusion of these other commodity taxes recognizes the inherent conceptual difficulties of defining an appropriate benchmark system in the context of a tax that is applied to a specific commodity. The 15-per-cent HST applies in Nova Scotia, New Brunswick, and Newfoundland and Labrador since April 1, 1997. For the purposes of this publication, the HST represents only the federal component in the participating provinces (i.e. 7 per cent). [Return]

³  Most services provided by hospitals are exempt from the GST/HST. This means that no tax is charged on these services but input tax credits cannot be claimed to recover the tax paid on inputs. However, hospitals are able to claim a rebate of 83 per cent of the GST/HST paid on the inputs they use to provide exempt services. [Return]

⁴  When a commodity is zero-rated the purchaser pays no tax, and the vendors of these products are entitled to claim input tax credits to recover the GST/HST paid on inputs to the zero-rated products. [Return]

⁵  Final consumers and businesses pay no tax on exempt goods and services; however, vendors are not entitled to claim input tax credits to recover the GST/HST paid on inputs to these products. [Return]

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