Chapter 6 - Description of the Goods and Services Tax Provisions

Since the goods and services tax (GST) 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 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. The personal expenditure categories of the input-output tables, along with the investment categories for residential construction and real estate commissions, are used to derive commodity expenditures for households. The commodity expenditures of public sector bodies are derived from certain personal expenditure categories, current government expenditure categories 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, hospitals, charities and non-profit organizations.) The commodity expenditures of exempt businesses are derived from the input matrix of the input-output tables.

The commodity data described above are used to identify the impact of the GST provisions that either zero-rate or exempt 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. Since final input-output tables for a given year are available only four years after the fact, National Income and Expenditure Accounts data are used to project the impact of each GST provision to the relevant historical year. Expenditure data contained in the Department of Finance's Canadian Economic and Fiscal Model (CEFM) are used to project the impact of most of the GST provisions over the forecast period.

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

Zero-Rated Goods and Services

Basic groceries

Basic groceries, which include the majority of foodstuffs for preparation and consumption at home, are zero-rated under the GST. 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 purchased by final consumers and public sector bodies which are currently not subject to tax. The majority of these purchases are contained in Statistics Canada's personal expenditure category "Food and Non-Alcoholic Beverages."

Prescription drugs

Drugs that are controlled substances for which a prescription is required are zero-rated. This provision also includes other drugs that have been prescribed by a recognized health care practitioner. The associated dispensing fee is also zero-rated. However, this provision excludes those items labelled or supplied for veterinary use.

The estimate is derived using the Sales Tax Model. However, an adjustment is made to reflect the fact that the input-output commodity "Pharmaceuticals" includes both prescription and non-prescription medicine. The ratio used to separate these two categories of medicine is based on information provided by Statistics Canada.

Medical devices

A wide range of medical devices are zero-rated under the GST. 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. The zero-rated medical devices are found in the input-output commodities "Personal Medical Goods," "Medical and Dental Equipment and Supplies," and "Ophthalmic Goods." An adjustment is made to reflect the fact that the input-output commodities "Personal Medical Goods" and "Ophthalmic Goods" include expenditures made by final consumers which are not zero-rated under the medical devices provision. The ratio used to separate the zero-rated from the non-zero-rated expenditures is based on information provided by Statistics Canada.

Agricultural and fish products and purchases

Instead of taxing sales and providing input tax credits at early stages in the food production-distribution chain, certain agricultural and fish products are zero-rated all through the chain. A prescribed list of such supplies includes farm livestock, poultry, bees, grains and seeds for planting or feed, hops, barley, flax seed, straw, sugar cane or beets, etc. In addition, prescribed sales and purchases of major types of agricultural and fishing equipment are 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, farmers would pay the GST 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 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 on these purchases until the end of their tax period. Since the aggregate tax liability of these taxpayers remains unchanged, the revenue implications of this measure are small.

Certain zero-rated purchases made by exporters

Certain supplies of goods and services delivered in Canada but subsequently exported are zero-rated. These include:

• 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. Again, the impact of this measure on tax revenues is small.

Non-taxable importations

Certain importations are tax-free under the GST. These importations 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 $500 and imported by Canadians who have been outside the country for more than seven days (the limit was $300 prior to June 13, 1995); and

• goods imported by foreign diplomats.

No data are available.

Zero-rated financial services

Financial services provided to non-residents are generally zero-rated. However, there are certain exceptions (e.g. financial services that relate to debt arising from deposits in Canada, real property situated in Canada, goods purchased for use primarily in Canada, services performed primarily in Canada).

The zero-rating provisions enable Canadian financial institutions that generate significant amounts of revenue through international activities to remain competitive in global markets.

Tax-Exempt Goods and Services

Residential and other personal-use real property

Certain real property transactions are exempt under the GST. These include sales of used residential property, sales of personal-use real property by an individual or a personal trust, and the sale of farmland to a family member who is acquiring the property for personal use.

Rentals of a residential complex (such as a house) or a residential unit (such as an apartment) for a period of at least a 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 based on the GST being applied to the input-output commodity "cash rent," and incorporates the loss of the GST currently paid on business inputs purchased by the landlord. In addition, the estimate captures the GST being applied to certain consumer expenditures on the commodity "other rent" which represents exempt purchases of parking privileges associated with rental accommodation.

Health care services

Health care services are exempt under the GST. 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 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 therapy, chiropodic, podiatric, osteopathic, audiological and psychological services; and

• services covered by a provincial health insurance plan. Most of these services are already covered by the previous two provisions.

All exempt services that are covered by provincial health insurance plans are included in the benchmark because, under the Constitution, the GST does not apply to purchases made by provincial governments. Thus, the only cost from this provision involves health services purchased by final consumers. The estimates for this provision are derived from the Sales Tax Model.

Education services (tuition)

The GST 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 public college.

The estimate is derived from the revenues that would be collected if tuition fees were taxed and input tax credits were allowed for taxable purchases. The estimate takes into account the fact that universities and public colleges currently receive a rebate of 67 per cent of the tax that they pay on their purchases.

The estimate is derived from the Sales Tax Model based on the input-output commodity "Education Services" augmented by data contained in Statistics Canada's Education Quarterly Review.

Child care and personal services

Certain child and personal care services are exempt under the GST. 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 based on the input-output commodity "Personal Services, including Child Care" contained in the final demand category "Domestic and Child Care Services." 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. However, the impact of these exclusions on the overall estimate is unclear since provincial expenditures would not be subject to tax and the remaining expenditures would be eligible for partial rebates if taxed.

Legal aid services

Legal services provided under a provincially authorized legal aid program are exempt under the GST. This includes payments by the client in respect of the legal aid services and payments by a legal aid society to a private lawyer for legal services.

There are two ways in which the tax is relieved:

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

• 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.

Revenue Canada supplied the data related to the rebates provided to legal aid plans in the provinces of New Brunswick, Ontario, Alberta and British Columbia. To account for the other provinces where the service is explicitly exempt, provincial economic accounts data are used. 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 projected expenditure estimate is based on the growth in consumption obtained from the CEFM.

Ferry, road and bridge tolls

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

The estimate is derived using the Sales Tax Model based on the expenditures of final consumers on the commodity "Highway and Bridge Maintenance."

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.

The estimate is derived using the Sales Tax Model.

Exemption for small businesses

Businesses or individuals with annual revenues of $30,000 or less from taxable and zero-rated transactions may elect to be exempt under the GST. Such firms would not have to charge tax on their sales and would not be able to claim input tax credits on their business purchases.

The starting point in deriving the estimate is gross sales data for 1990 obtained from personal and corporate income tax information. From this data, one can estimate that the total sales from firms with annual sales of less than $30,000 accounts for approximately 0.5 per cent of all sales in the Canadian economy. This ratio can then be applied to the total gross GST 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 CEFM.

Quick method accounting

Small businesses registered under the GST are eligible to elect to account for GST 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 firms remit a prescribed percentage of the GST that they collect on their sales. The remaining GST collected is kept by the firm in lieu of the unaccounted input tax credits. The firm 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. The take-up rate of this provision for eligible small businesses is about 22 per cent. The estimate for subsequent historical years is derived by projecting the 1991 estimate based on information from Revenue Canada regarding the growth in total input tax credits claimed.

The projected expenditure estimate is based on the growth in nominal GDP obtained from the CEFM.

Water and basic garbage collection services

Water and basic garbage collection services are exempt under the GST. Charges levied for water and basic garbage collection services are captured in the commodity "Water, Waste Disposal and Other Utilities" contained in the input-output tables. The estimate is derived from the Sales Tax Model.

Domestic financial services

Financial services are defined as including 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 to the sale of the service. As a result, most financial services provided to residents of Canada are exempt under the GST.

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" could 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.

Certain supplies made by non-profit organizations

Supplies that are GST-exempt when made by non-profit organizations include recreational services provided primarily to children age 14 and under and individuals who are underprivileged or have a disability; supplies of food, beverages and lodging to relieve poverty or distress; and certain amateur performances.

No data are available.

Tax Rebates

Rebates for book purchases made by qualifying institutions

On October 23, 1996, the Minister of Finance announced that a 100-per-cent GST 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 CEFM.

Housing rebates

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

The estimate for historical years is obtained from Statistics Canada's National Income and Expenditure Accounts. The projected expenditure estimate is based on the growth in investment in new residential construction obtained from the CEFM.

Rebates for foreign visitors on accommodation

Non-residents visiting Canada are entitled to a rebate for the GST paid on most goods and short-term accommodation. 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.

However, 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 only the rebate associated with short-term accommodation.

Revenue Canada 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 and which are included in the business's input tax credit. The estimate of the tax expenditure for short-term accommodation is based upon Revenue Canada administrative data, supplemented with additional data on foreign visitors provided by Statistics Canada.

Rebates for municipalities

Recognized municipalities are entitled to a rebate of 57.14 per cent of the GST paid on their purchases used in the course of supplying exempt municipal services.

The estimate for historical years is based on data from Revenue Canada. Since the value of the tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax expenditure for the relevant years is simply the value estimated for 1997.

Rebates for hospitals

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

The estimate for historical years is based on data from Revenue Canada. Since the value of the tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax expenditure for the relevant years is simply the value estimated for 1997.

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 paid on purchases related to their supply of exempt services.

The estimate for historical years is based on data from Revenue Canada. Since the value of the tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax expenditure for the relevant years is simply the value estimated for 1997.

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 paid on purchases related to their supply of exempt services.

The estimate for historical years is based on data from Revenue Canada. Since the value of the tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax expenditure for the relevant years is simply the value estimated for 1997.

Rebates for colleges

Public colleges which 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 paid on purchases related to their supply of exempt services.

The estimate for historical years is based on data from Revenue Canada. Since the value of the tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax expenditure for the relevant years is simply the value estimated for 1997.

Rebates for charities

Charities registered under the Income Tax Act are eligible for a rebate of 50 per cent of the GST paid on purchases related to their supply of exempt services.

The estimate for historical years is based on data from Revenue Canada. Since the expenditures of charities are captured in Statistics Canada's definition of personal expenditures, the projected estimate is based on the growth in consumer expenditures obtained from the CEFM.

Rebates for non-profit organizations

The organizations eligible for this rebate are government-funded non-profit organizations. They include registered amateur athletic associations and organizations operating a facility or part thereof to provide nursing home intermediate care or residential care that receive at least 40 per cent of their funding from governments, municipalities or Indian bands. These organizations are eligible for a rebate of 50 per cent of the GST paid on purchases related to their supply of exempt services.

The estimate for historical years is based on data from Revenue Canada. 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 CEFM.

Tax Credits

Special credit for certified institutions

A special credit was provided in the period from January 1, 1991 to the end of 1995 to certified institutions that employed mentally or physically disabled individuals in the manufacturing of goods. These institutions were treated in the same manner as other businesses under the GST. However, they received a special credit calculated on the basis of 100 per cent of the GST collected from sales of manufactured goods in 1991, 75 per cent in 1992, 50 per cent in 1993 and 25 per cent in both 1994 and 1995.

No data are available.

The GST credit

When the GST was introduced, a GST credit was established to ensure that families with annual incomes below $30,000 would be better off under the new sales tax regime. The amount of the GST credit depends upon family size and income. Currently, the basic adult credit is $199. Families with children 18 years and younger receive a basic child credit of $105 for each child. However, single parents can claim a full adult credit of $199 for one dependent child. In addition to their basic credit, single adults (including single parents) are eligible for an additional credit of up to $105. The value of the credit is reduced for families with incomes of over $25,921. Both the credit amounts and the income threshold are adjusted annually to increases in the consumer price index in excess of 3 per cent.

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

Memorandum Items

Meals and entertainment expenses

In the normal operation of the GST, registrants are allowed to claim full input tax credits for the tax paid on their purchases. 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 paid as an input tax credit. (Prior to February 1994, the input tax credit for business meals and expenses was 80 per cent.) There is no input tax credit allowed for the GST 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 cost of the meals and entertainment tax expenditures contained in the personal and corporate income tax expenditure tables. These figures are first grossed up to arrive at the total meals and entertainment expenses in the entire economy using the marginal federal income tax rates by sector. Then, 15 per cent is removed to account for expenses incurred in GST-exempt activities since they are ineligible for any input tax credits. The cost of this provision is equal to the above net expenses multiplied by 7 per cent.

Rebates to employees and partners

A rebate is available to certain employees of a GST registrant for the GST 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 7/107ths of the capital cost allowance on an automobile, aircraft or musical instrument that is used in his or her employment and on which GST is payable. Also, the GST rebate is available to an individual who is a member of a GST-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 Revenue Canada. The projected expenditure estimate is based on the growth in nominal GDP obtained from the CEFM.

Sales of personal-use real property

The sale of personal-use real property by an individual or trust (all of the beneficiaries of which are individuals) is exempt under the GST. Examples include the sale of used owner-occupied homes and country properties kept for personal use. However, the exemption does not include real property that is sold in the course of business.

No data are available.

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