The Goods and Services Tax (GST) is a value-added tax that applies to most goods and services sold in Canada. The current Canada GST rate is 5%, but it is set to increase to 9% on January 1, 2024, as part of a two-stage hike announced in the 2022 federal budget. This change will have significant implications for Canadian businesses and consumers, as well as the government’s revenue and spending.
In this article, we will explain what the GST is, why it is increasing, how it will affect you as a business owner or a customer, and what you need to do to prepare for the upcoming change.
What is the GST and how does it work?
The GST was introduced in Canada on January 1, 1991, by the government of Prime Minister Brian Mulroney, replacing a previously hidden 13.5% manufacturers sales tax (MST). The GST is administered by the Canada Revenue Agency (CRA) and applies to the supply of most goods and services in Canada, except certain items that are either exempt or zero-rated.
Exempt items are those that are not subject to GST, such as groceries, residential rent, medical services, and financial services. Zero-rated items are those that are subject to GST at a rate of 0%, such as basic groceries, prescription drugs, and exported goods. Businesses that make exempt supplies cannot claim input tax credits (ITCs) for the GST they pay on their purchases, while businesses that make zero-rated supplies can claim ITCs for the GST they pay on their purchases.
Businesses that have an annual turnover of more than $30,000 are required to register for GST and collect and remit the tax on their taxable supplies. Businesses that have an annual turnover of less than $30,000 can choose to register voluntarily. Businesses that are registered for GST can claim ITCs for the GST they pay on their purchases that are used in their commercial activities, subject to certain documentation requirements. This avoids the cascading effect of the tax, where the same good or service is taxed multiple times as it passes from business to business.
Some provinces have harmonized their provincial sales tax (PST) with the GST to form a harmonized sales tax (HST), which is a single tax that combines both the federal and provincial portions. The HST rates vary from 11% to 15%, depending on the province. The CRA collects and administers the HST on behalf of the participating provinces, which are Nova Scotia, New Brunswick, Newfoundland and Labrador, Ontario, and Prince Edward Island. Quebec has a similar arrangement, where the GST and the Quebec sales tax (QST) are collected and administered together by the provincial government ¹⁹. Alberta and the territories of Yukon, Northwest Territories, and Nunavut have only the GST and no provincial or territorial sales taxes.
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Why is the GST increasing?
The GST rate increase is part of the government’s plan to raise more revenue to fund its spending priorities, especially in the areas of health care, seniors, and climate change. The government expects the GST rate hike to generate an additional $204 billion in revenue over 10 years ⁵.
The government also argues that the GST rate increase is fair and progressive, as it will affect higher-income households more than lower-income households, who will receive enhanced benefits and rebates to offset the impact of the tax. The government has announced a $9.6 billion Assurance Package, which will provide cash transfers and tax credits to low- and middle-income families, seniors, and persons with disabilities ⁵. The government has also pledged to absorb the GST for publicly subsidized education and health care ⁵.
The GST rate increase is part of a two-stage process that was announced in the 2022 federal budget. The first stage was implemented on January 1, 2023, when the GST rate rose from 7% to 8%. The second stage will take effect on January 1, 2024, when the GST rate will rise from 8% to 9%. The government has stated that it will not increase the GST rate beyond 9% ⁵.
How will the Canada GST increase affect you as a business owner or a customer?
The GST rate increase will have different impacts on different types of businesses and customers, depending on the nature and location of their transactions.
For businesses that make taxable supplies, the GST rate increase will mean that they will have to charge and collect more GST from their customers and remit the extra amount to the CRA. They will also have to update their accounting systems, invoices, and price displays to reflect the new GST rate. However, they will also be able to claim more ITCs for the GST they pay on their purchases, which will reduce their net GST liability.
For businesses that make exempt or zero-rated supplies, the GST rate increase will not affect their GST collection and remittance, as they will continue to charge and collect GST at 0% or not at all. However, they will have to pay more GST on their purchases, which they will not be able to recover through ITCs. This will increase their cost of doing business and may affect their profitability and competitiveness.
For customers who buy taxable goods and services, the GST rate increase will mean that they will have to pay more GST on their purchases, which will reduce their purchasing power and disposable income. However, some customers may be eligible for enhanced benefits and rebates from the government, such as the GST/HST credit, the Canada Child Benefit, and the Assurance Package, which will help them cope with the higher GST.
For customers who buy exempt or zero-rated goods and services, the GST rate increase will not affect the GST they pay on their purchases, as they will continue to pay GST at 0% or not at all. However, they may face higher prices for these goods and services, as the suppliers may pass on the higher GST they pay on their inputs to the customers.
The GST rate increase will also vary depending on the province or territory where the transaction takes place. For provinces and territories that have only the GST, the GST rate will increase from 8% to 9%. For provinces that have the HST, the HST rate will increase by 1 percentage point, depending on the provincial portion. For example, in Ontario, the HST rate will increase from 13% to 14%, while in Nova Scotia, the HST rate will increase from 15% to 16%. For Quebec, the GST rate will increase from 8% to 9%, while the QST rate will remain unchanged at 9.975%.
What do you need to do to prepare for the Canada GST rate increase?
As a business owner or a customer, you need to take some steps to prepare for the GST rate increase and comply with the new rules. Here are some tips and resources to help you:
- Review your transactions and determine how the GST rate increase will affect your GST collection, remittance, and payment. You may need to adjust your budget, cash flow, and pricing strategy accordingly.
- Update your accounting systems, invoices, and price displays to reflect the new GST rate. You may need to consult your software provider, tax advisor, or the CRA for assistance. The CRA has issued a guide on how to prepare for the GST rate change, which you can find here ⁴.
- File your GST returns electronically and on time. The CRA requires all GST registrants, except charities and selected financial institutions, to file their returns electronically for GST reporting periods that begin in 2024 ⁵. You can file your GST returns online using the CRA’s Online services for business or through your tax software. You can also pay your GST online using the CRA’s My Payment service or through your financial institution. Filing and paying electronically will help you avoid penalties and interest for late filing and payment.
- Claim your benefits and rebates from the government, if you are eligible. You may qualify for the GST/HST credit, the Canada Child Benefit, the Assurance Package, or other programs that will help you offset the impact of the GST rate increase. You can apply for these benefits and rebates online using the CRA’s Online services for individuals or through your tax software. You can also check the status of your benefits and rebates online using the CRA’s My Account service or the MyBenefits CRA mobile app.
- Stay informed and updated on the GST rate change and other tax matters. You can visit the CRA’s website ¹⁴ for more information and guidance on the GST rate change and other GST topics. You can also subscribe to the CRA’s electronic mailing list ¹⁴ to receive the latest news and updates on GST and other tax issues. You can also contact the CRA by phone at 1-800-959-5525 or by mail at Canada Revenue Agency, Ottawa ON K1A 0L5, if you have any questions or concerns about the GST rate change or your GST obligations.
The GST rate increase is a major change that will affect the Canadian economy, businesses, and consumers. By following these tips and resources, you can prepare for the GST rate change and comply with the new rules. You can also benefit from the government’s programs and services that will help you cope with the higher GST. Thank you for choosing HustleHub.
Source: (1) Businesses: Here are the top changes this year that will affect …. https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2023/businesses-here-are-top-changes-this-year-will-affect-business-taxes-2024.html. (2) IRAS | Overview of GST Rate Change. https://www.iras.gov.sg/taxes/goods-services-tax-%28gst%29/gst-rate-change/gst-rate-change-for-business/overview-of-gst-rate-change. (3) GST/HST Registration – Canada.ca. https://www.canada.ca/en/revenue-agency/news/cra-multimedia-library/businesses-video-gallery/transcript-gst-hst-registration.html.