As a Canadian business owner, you might have heard the term “Value Added Tax” or VAT before, but do you know what it really means? In this blog post, we’ll explain everything you need to know about VAT and how it can impact your business.

What is Value Added Tax (VAT)?

Value Added Tax (VAT) is a consumption tax that is added to the price of goods and services. It is a tax that is paid by the end consumer, but it is collected and remitted to the government by businesses. VAT is calculated as a percentage of the sale price of the goods or services, and the rate of VAT can vary depending on the type of product or service being sold, and the country or region where the sale takes place.

In Canada, VAT is known as the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST), which is a combination of federal and provincial sales taxes. The current rate of GST/HST in Ontario is 13%.

How does VAT work?

VAT is applied at every stage of the supply chain, from the manufacturer to the wholesaler to the retailer, until it reaches the end consumer. Businesses are required to collect VAT on behalf of the government and remit it on a regular basis, usually quarterly or annually.

For example, let’s say you own a retail store and you purchase a product from a manufacturer for $100. The manufacturer adds 10% VAT, making the total cost $110. You then sell the product in your store for $150, adding another 10% VAT, making the total cost for the end consumer $165. You would then remit the $15 VAT collected to the government on behalf of the end consumer.

Advantages of VAT

One of the advantages of VAT is that it ensures a steady revenue stream for governments, as it is collected at every stage of the supply chain. This means that the burden of taxation is spread out among all businesses involved in the supply chain, rather than just the end consumer.

VAT can also reduce the price of exports, as businesses can claim back the VAT they paid on goods and services used to produce their export products. This makes their products more competitive in the global market.

Disadvantages of VAT

One disadvantage of VAT is that it can be a burden for small businesses, as they are required to register for VAT and collect and remit it on behalf of the government. This can create administrative and financial challenges for small businesses.

Another disadvantage of VAT is that it can increase the cost of goods and services for the end consumer, as they are required to pay the tax on top of the sale price.

Conclusion

VAT is an important tax that is collected by businesses and remitted to the government. As a business owner, it is important to understand how VAT works and how it can impact your business. While there are advantages and disadvantages to VAT, it is a necessary tax that ensures a steady revenue stream for governments and helps to fund public services and infrastructure.