chapter twenty-one goods and services tax (gst) © 2008, clarence byrd inc.2 transaction tax...

Chapter Twenty-OneChapter Twenty-One

Goods And Services TaxGoods And Services Tax

(GST)(GST)

© 2008, Clarence Byrd Inc.© 2008, Clarence Byrd Inc. 22

Transaction Tax ConceptsTransaction Tax Concepts

Manufacturer

Wholesaler

Retailer

Customer


Single Stage Transaction Tax – Single Stage Transaction Tax – Retail Sales TaxRetail Sales Tax

5% ($50,000) = $2,5005% ($50,000) = $2,500


Multi-Stage Transaction Tax - Multi-Stage Transaction Tax - VATVAT

Manufacturer = 5% ($10,000)Manufacturer = 5% ($10,000) $ 500$ 500 Wholesaler = 5% ($15,000)Wholesaler = 5% ($15,000) 750750 Retailer = 5% ($25,000)Retailer = 5% ($25,000) 1,250 1,250

$2,500$2,500


Multi-Stage Transaction Tax – Multi-Stage Transaction Tax – GSTGST

Manufacturer 5%($10,000) Manufacturer 5%($10,000) $ 500$ 500 WholesalerWholesaler

– 5%($25,000)5%($25,000) $1,250$1,250– 5%($10,000)5%($10,000) ( 500)( 500) 750750

RetailerRetailer– 5%($50,000)5%($50,000) $2,500 $2,500 – 5%($25,000)5%($25,000) ( 1,250)( 1,250) 1,2501,250

TotalTotal $2,500$2,500


Liability For GSTLiability For GST

ITA 165(1) - ..every recipient of a ITA 165(1) - ..every recipient of a taxable supply made in Canada shall taxable supply made in Canada shall pay to her majesty in right of Canada, pay to her majesty in right of Canada, tax in respect of the supply calculated tax in respect of the supply calculated at the rate of 5% on the value of the at the rate of 5% on the value of the consideration for the supply.consideration for the supply.


Liability For GSTLiability For GST

The liability is on the The liability is on the purchaser of the goods purchaser of the goods and services.and services.


The Concept Of SupplyThe Concept Of Supply

ETA 123 – “Supply” ETA 123 – “Supply” means the provision of means the provision of property or a service in property or a service in any manner, including any manner, including sale, transfer, barter, sale, transfer, barter, exchange license, exchange license, rental, lease, gift, or rental, lease, gift, or disposition.disposition.



Taxable SuppliesTaxable Supplies– Supplies made in the course of commercial Supplies made in the course of commercial

activityactivity

IncludesIncludes– Fully taxable at 5%Fully taxable at 5%– Zero-ratedZero-rated

taxable at 0%taxable at 0% vendor gets input tax creditsvendor gets input tax credits



Commercial ActivityCommercial Activity– In general: business carried on by a person, a In general: business carried on by a person, a

personal trust, or a partnership made up of personal trust, or a partnership made up of individualsindividuals

– ExclusionsExclusions no expectation of profitno expectation of profit exempt suppliesexempt supplies employment servicesemployment services


Supply CategoriesSupply Categories

Fully Taxable SuppliesFully Taxable Supplies

– Full Tax And ITCsFull Tax And ITCs

– ExamplesExamples TravelTravel ClothingClothing Restaurant MealsRestaurant Meals ElectriciansElectricians



Zero-Rated SuppliesZero-Rated Supplies– Tax At 0%, Full ITCsTax At 0%, Full ITCs– ExamplesExamples

Basic GroceriesBasic Groceries Prescription DrugsPrescription Drugs ExportsExports Foreign TravelForeign Travel



Exempt SuppliesExempt Supplies– No Tax, No ITCsNo Tax, No ITCs– ExamplesExamples

Health CareHealth Care Used Residential Used Residential

HousingHousing Financial ServicesFinancial Services


Applying the GST RatesApplying the GST Rates

Basic approachBasic approach– Rate is applied to consideration receivedRate is applied to consideration received– Includes all non-refundable federal taxesIncludes all non-refundable federal taxes– Excludes sales taxesExcludes sales taxes– Provincial sales taxesProvincial sales taxes

Quebec and PEI include GST in baseQuebec and PEI include GST in base Other Provinces (non-HST) do notOther Provinces (non-HST) do not


Applying the GST RatesApplying the GST Rates

On Trade-Ins – GST on Net AmountOn Trade-Ins – GST on Net Amount

Example: An individual acquires a new Buick at a cost of $38,000. He trades in his old Toyota and receives an allowance of $17,000, paying the net amount of $21,000

GST = [(5%)($21,000)] = $1,050


Collection And Remittance Of GSTCollection And Remittance Of GST

Liability is on Liability is on recipient of supply.recipient of supply.

Provider responsible Provider responsible for collection and for collection and remittanceremittance


Requirement To RegisterRequirement To Register

A person is required to A person is required to register if the person is register if the person is providing taxable supplies in providing taxable supplies in Canada.Canada.

An exception for “small An exception for “small suppliers”.suppliers”.


Small Suppliers ExemptionSmall Suppliers Exemption

Small Suppliers Small Suppliers ThresholdThreshold– <$30,000 per year in <$30,000 per year in

taxable suppliestaxable supplies

May Voluntarily May Voluntarily RegisterRegister– may want input tax may want input tax

credits.credits.


Small Suppliers ExemptionSmall Suppliers Exemption

Last 4 Calendar Quarters Last 4 Calendar Quarters TestTest– Over $30,000 on cumulative Over $30,000 on cumulative

basisbasis

Calendar QuarterCalendar Quarter– Over $30,000 in a single Over $30,000 in a single

quarterquarter


Input Tax CreditsInput Tax Credits

Costs Other Than Capital CostsCosts Other Than Capital Costs– No MatchingNo Matching– Prorated For Taxable UsageProrated For Taxable Usage

≥ ≥ 90% = All90% = All ≤≤ 10% = None10% = None



Capital CostsCapital Costs– No Matching Or AllocationNo Matching Or Allocation– Real Property: Real Property:

Pro Rate Based On Pro Rate Based On Commercial UsageCommercial Usage

– Other:Other: > 50% Commercial – 100%> 50% Commercial – 100% ≤ ≤ 50% Commercial - Nil50% Commercial - Nil



Restrictions On Certain CostsRestrictions On Certain Costs– Club DuesClub Dues– 50% Meals And Entertainment50% Meals And Entertainment– Auto Costs > $30,000Auto Costs > $30,000– Reasonable In CircumstancesReasonable In Circumstances


GST And AccountingGST And Accounting

No MatchingNo Matching No Allocation No Allocation

(Amortization, etc.)(Amortization, etc.) Some Deductions Some Deductions

Don’t Influence GST Don’t Influence GST (e.g., Wages, Interest)(e.g., Wages, Interest)


Example Example

GAAP Income StatementGAAP Income StatementSalesSales $6,700,000 $6,700,000

Cost Of SalesCost Of Sales ( 4,200,000)( 4,200,000)

Amortization ExpenseAmortization Expense ( 1,400,000)( 1,400,000)

SalariesSalaries ( 500,000)( 500,000)

Other ExpensesOther Expenses ( 200,000)( 200,000)

TotalTotal $ 400,000 $ 400,000


Example (Continued)Example (Continued)

Other Information:Other Information: Capital Expenditures Capital Expenditures

- $2,000,000 for a building (40% commercial)- $2,000,000 for a building (40% commercial)- $1,000,000 for equipment (70% commercial)- $1,000,000 for equipment (70% commercial)

Purchases of goods for resale were $4,500,000Purchases of goods for resale were $4,500,000 Other Expenses of $200,000, related to fully taxable Other Expenses of $200,000, related to fully taxable

suppliessupplies $5,000,000 of sales were fully taxable, the remainder $5,000,000 of sales were fully taxable, the remainder

were exemptwere exempt Ignore provincial sales taxesIgnore provincial sales taxes


Solution To ExampleSolution To Example

Sales (5%)($5,000,000)Sales (5%)($5,000,000) $250,000 $250,000

Purchases (5%)($4,500,000)Purchases (5%)($4,500,000) ( 225,000)( 225,000)

Other Expenses (5%)($200,000)Other Expenses (5%)($200,000) ( 10,000)( 10,000)

Building Building

(5%)($2,000,000)(40%)(5%)($2,000,000)(40%) ( 40,000)( 40,000)

Equipment Equipment

(5%)($1,000,000)(100%)(5%)($1,000,000)(100%) ( 50,000)( 50,000)

GST Payable (Refund)GST Payable (Refund) ($ 75,000)($ 75,000)


Relief For Small BusinessRelief For Small Business

Quick MethodQuick Method– <$200,000 Taxable Sales<$200,000 Taxable Sales– Collect Usual 5%Collect Usual 5%– Don’t Track ITCs, except Don’t Track ITCs, except

for capital expendituresfor capital expenditures– Apply Given % To GST Apply Given % To GST

Inclusive SalesInclusive Sales Service – 2.6%/3.6%Service – 2.6%/3.6% Retail – 0.8%/1.8%Retail – 0.8%/1.8%


Example Example

Annual filing retail store has annual sales of $125,000, Annual filing retail store has annual sales of $125,000, resulting in GST included sales of $131,250. In addition, resulting in GST included sales of $131,250. In addition, there are $20,000 in capital expenditures.there are $20,000 in capital expenditures.

– $30,000 @ 0.8%$30,000 @ 0.8% $ 240$ 240

– $101,250 @ 1.8%$101,250 @ 1.8% 1,8231,823

– Capital Expenditures (5%)($20,000)Capital Expenditures (5%)($20,000) ( 1,000)( 1,000)– GST PayableGST Payable $1,063$1,063


Relief For Small BusinessRelief For Small Business

Simplified ITC AccountingSimplified ITC Accounting– GST On Sales – Regular ProceduresGST On Sales – Regular Procedures– Input tax credits based on 5/105 multiplier Input tax credits based on 5/105 multiplier

applied to most purchasesapplied to most purchases– Excluded from 5/105 calculation:Excluded from 5/105 calculation:

Capital expenditures for real propertyCapital expenditures for real property Purchases of zero-rated suppliesPurchases of zero-rated supplies Purchases from non-registrantsPurchases from non-registrants Cost not eligible for input tax credits (e.g., 50 Cost not eligible for input tax credits (e.g., 50

percent of meals)percent of meals)

– Can track capital expenditures on real Can track capital expenditures on real propertyproperty


GST Procedures And AdministrationGST Procedures And Administration

LiabilityLiability– Revenues when customer is invoicedRevenues when customer is invoiced– Input tax credits when invoice is issuedInput tax credits when invoice is issued



Taxation YearTaxation Year– Will have fiscal yearWill have fiscal year– Usually the same as Usually the same as

income tax fiscal yearincome tax fiscal year If non-calendar income tax If non-calendar income tax

year;year; Can use calendar year for Can use calendar year for

GSTGST



FilingFiling– Taxable sales Taxable sales > $6,000,000> $6,000,000

Monthly FilingMonthly Filing Returns one month after the end of Returns one month after the end of

the filing periodthe filing period– Taxable sales between Taxable sales between

$1,500,001 and $5,999,000$1,500,001 and $5,999,000 Quarterly filingQuarterly filing Returns one month after the end of Returns one month after the end of

the filing periodthe filing period– Taxable sales < $1,500,001Taxable sales < $1,500,001

Annual filingAnnual filing Three months after the end of the Three months after the end of the

filing periodfiling period



Payment and InterestPayment and Interest– Payment is due when returns are filedPayment is due when returns are filed– Non-deductible interest at prescribed rate plus 4 Non-deductible interest at prescribed rate plus 4

percent (2 percent on amounts owing to the percent (2 percent on amounts owing to the taxpayer)taxpayer)

– Late filing penalty of one-quarter of one percent Late filing penalty of one-quarter of one percent per month, for a maximum of 12 monthsper month, for a maximum of 12 months



AppealsAppeals– Informal proceduresInformal procedures– Notice of objectionNotice of objection

90 days after the date on the 90 days after the date on the notice of objectionnotice of objection

– Tax Court Of CanadaTax Court Of Canada– Federal Court Of AppealsFederal Court Of Appeals– Supreme Court Of CanadaSupreme Court Of Canada


Employee/Partner GST RebateEmployee/Partner GST Rebate

Employees and partners are usually non-Employees and partners are usually non-registrantsregistrants

Employees and partners have deductible Employees and partners have deductible expenses on which GST is paidexpenses on which GST is paid

The rebate allows them to recover this GSTThe rebate allows them to recover this GST– Must be employee or partner of an employer or Must be employee or partner of an employer or

partnership that is a GST registrantpartnership that is a GST registrant– Also government employeesAlso government employees– Expenses must be non-reimbursedExpenses must be non-reimbursed


Employee/Partner GST RebateEmployee/Partner GST Rebate

CalculationCalculation

– Multiply eligible expenses by 5/105 Multiply eligible expenses by 5/105

– Rebate is a refund of GST paid on Rebate is a refund of GST paid on costs that were deducted for costs that were deducted for income tax purposesincome tax purposes

– Rebate is added to income or Rebate is added to income or deducted from UCC in the year it deducted from UCC in the year it is received is received


New Housing RebateNew Housing Rebate

GST is payable at 5 percentGST is payable at 5 percent

Rebate available equal to 36 Rebate available equal to 36 percent of GST paidpercent of GST paid

Maximum = $6,300 [(5%)Maximum = $6,300 [(5%)($350,000)(36%)]($350,000)(36%)]

Phase out provisionPhase out provision


New Housing Rebate ReductionNew Housing Rebate Reduction

[A][($450,000 – B) ÷ $100,000]

Where:

A = The lesser of 36 percent of theGST paid and $6,300[(5%)(36%)($350,000)]

B = The greater of $350,000 and thecost of the home


New Housing Rebate - ExampleNew Housing Rebate - ExampleExample

On July 1, 2008, Gary and May Lartch acquire a new home at a cost of $385,000. GST paid was $19,250 [(5%)($385,000)]

Rebate

[$6,300][($450,000 - $385,000) ÷ $100,000 =

$4,095

chapter twenty-one goods and services tax (gst) © 2008, clarence byrd inc.2 transaction tax...

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taxable suppliesfull

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