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Legal Guide

The federal goods and services tax ("GST") is a value-added tax imposed on the final domestic consumption of most goods and services supplied in Canada. Specific rules with respect to the place of supply exist to determine whether a supply is deemed to be made in Canada.

The GST came into effect on January 1, 1991. The original rate of 7 percent was twice decreased by one percentage point, on July 1, 2006, and January 1, 2008. The federal government has not announced any plan to further decrease or increase the current GST rate of 5 percent. GST is not imposed on all supplies: the rate for “zero-rated” supplies (e.g. exported goods and services, prescription drugs, medical devices and basic groceries) is zero percent and the “exempt” supplies (e.g. health care services, educational services and most financial services) are not subject to the GST at all.

Entities and individuals that are involved in making taxable supplies in Canada in the course of a commercial activity are required to register for and charge, collect and remit GST on such supplies. As the GST is intended to be a consumption tax, which is ultimately borne by the final consumer, each registrant that makes taxable supplies (including zero-rated supplies) is generally entitled to recover any GST paid on its inputs by means of the input tax credit ("ITC") mechanism. Generally speaking, only the final consumer is not eligible for an ITC and it is this person who ultimately bears the full cost of the GST. Entities and individuals involved in making exempt supplies are not entitled to claim ITCs with respect to those supplies.

Non-residents are required to register and charge GST if they are making supplies in the course of a business carried on in Canada. For GST purposes, a non-resident with a permanent establishment in Canada is deemed to be a resident of Canada with respect to its activities carried on through the establishment.

Quebec sales tax

On July 1, 1992, Quebec was the first Canadian province to introduce a value-added tax. The Quebec sales tax (“QST”) is, to a great extent, harmonized with the GST. The QST, like the GST, is a consumer-level tax not borne by businesses, aside from the administrative costs. Most of the concepts existing under the GST legislation have been adopted by the government of Quebec with respect to the QST. Nonetheless, the QST remains a distinct tax and is not to be confused with the harmonized sales tax discussed below.

Moreover, by virtue of an agreement with the federal government, the government of Quebec administers the GST and the harmonized sales tax in the province of Quebec in addition to administering the QST. The QST rate is currently 9.975% on both goods and services supplied in Quebec.

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