As a business owner in Canada, it’s important to understand what exempt supplies are and how they affect your tax obligations. Exempt supplies refer to goods and services that are not subject to Goods and Services Tax (GST) or Harmonized Sales Tax (HST). In this blog post, we’ll cover everything you need to know about exempt supplies, including what they are, how they differ from zero-rated supplies, and how to handle them on your tax returns.
What are Exempt Supplies?
Exempt supplies are goods and services that are not subject to GST or HST. These supplies are not taxable, which means that you don’t need to charge your customers any tax on these items. However, since these supplies are not taxable, you cannot claim any input tax credits (ITCs) on the purchases you make to produce these supplies.
Examples of exempt supplies include:
- Most health care services provided by medical professionals, including doctors, dentists, and chiropractors.
- Child care services provided by daycares and private individuals.
- Educational services provided by schools and universities.
- Legal aid services provided by lawyers and paralegals.
- Financial services provided by banks, credit unions, and other financial institutions.
It’s important to note that some exempt supplies are subject to specific rules and conditions. For example, some health care services may be taxable if they are not provided by a qualified medical professional.
Exempt Supplies vs. Zero-Rated Supplies
While exempt supplies are not subject to GST or HST, zero-rated supplies are taxable, but at a rate of 0%. This means that you need to charge your customers GST or HST on these supplies, but you can claim ITCs on the purchases you make to produce these supplies.
Examples of zero-rated supplies include:
- Basic groceries, such as milk, bread, and vegetables.
- Prescription drugs and medical devices.
- Exported goods and services.
- Certain transportation services, such as public transit and long-haul trucking.
- Agricultural and fishing products.
How to Handle Exempt Supplies on Your Tax Returns
When it comes to filing your tax returns, it’s important to keep track of your exempt supplies and zero-rated supplies separately. You will need to report your exempt supplies on your GST/HST return, but you will not charge tax on these supplies.
To calculate the GST/HST you owe on your taxable supplies, you will need to subtract the ITCs you are eligible to claim on your purchases from the GST/HST you collected from your customers.
In conclusion, exempt supplies are goods and services that are not subject to GST or HST, while zero-rated supplies are taxable at a rate of 0%. As a business owner, it’s important to understand the difference between these two types of supplies and how to handle them on your tax returns. By doing so, you can ensure that you are meeting your tax obligations and minimizing your tax liability.