There is a lot of confusion associated with how taxes are applied to freight transportation services in Canada. Notably, GST/HST does not apply to any shipments that cross the border (international shipments), but it does apply to domestic shipments within Canada.
Revenue Canada imposes a place of supply test to determine what types of GST/HST to apply to a typical transaction. In simpler terms, the tax rate used will be determined by where the freight delivers. For example, if you live in Albert and you ship to Ontario by mail, Canada Post will either charge you 5 percent GST or 13 percent HST depending on the service you use. (5 percent GST on the regular parcel or 13 percent HST on XpressPost or Priority)
Even though you might be entitled to Input Tax Credits (ITCs) on the exact amount of tax you have paid, it has nothing to do with the amount you need to charge/remit your client in Ontario. When shipping taxable goods (some of your products may be non-taxable) to Ontario, 13 percent HST applies to the products and the shipping and handling charge.
Types of Duties and Taxes for Items Imported into Canada
There are 3 kinds of duties and taxes for items being imported into Canada. Goods and Services Tax (GST) is a 5 percent federal tax that applies to items being sold to Canadian customers for domestic consumption. A handful of Canadian provinces have opted to harmonize their provincial sales tax with the general sales tax and the total rate is known as Harmonized Tax (HST).
Provinces that do not participate in the HST collection process impose their own taxes at the local level. The tax rate varies by province and can range from 5 percent to 9.75 percent. Just like it was stated above, freight transportation services that move goods from Canada to another country and vice versa are rated as GST/HST zero-rated services. And if your Canadian business needs to charge GST/HST, it is necessary you understand the difference between GST/HST zero-rated and GST/HST exempt goods and services.
Indeed there is no much difference between GST/HST zero-rated and exempt goods and services from the point of view of the customer; in neither case does he or she get charged GST/HST. Howbeit, from the point of view of the business owner, there is a difference in how the two classes of goods and services are treated when filing a GST/HST return.
GST/HST Zero-rated Goods and Services
Normally, when you fill out your GST/HST return, you can claim Input Tax Credits (ITCs) to get back the GST/HST you paid or owe on your business purchases and/or expenses. But for zero-rated goods and services, you don’t charge or collect GST/HST, but you can still claim ITCs for them on your GST/HST return. Some examples include;
- Medical devices – artificial teeth or limbs, hearing aids, walkers, wheelchairs, canes, guide dogs, eyeglasses or contact lenses, asthmatic devices, modifications to motor vehicles to accommodate disabilities, orthotics, etc. Also included are insulin pumps, syringes, and pens, and urinary catheters.
- Freight transportation services involve the movement of goods from Canada to another country and vice versa.
- Feminine hygiene products such as tampons, sanitary napkins, etc.
- Basic groceries – This category includes meat, fish, poultry, cereals, dairy products, eggs, vegetables (fresh, frozen, canned), coffee, tea, etc. (but does not include items not necessary for dietary needs, such as snack foods, liquor, sodas, candy, etc.)
- Most fishery products if used for human consumption (fish products used for bait are not included).
- Farm livestock sold for human consumption – (GST/HST is collectible on livestock sales that are not used for human consumption, such as horses, dogs, cats, and fur-bearing animals such as mink). Some animals can be either. Rabbits and goats, for example, can either be raised for consumption, in which case they are zero-rated or as pets, in which case they are not.
- Farm equipment such as tractors, seeders, planters, and processing equipment.
- Prescription Drugs and dispensing fees are zero-rated. Most over the counter medications such as aspirin, vitamins and minerals, cold remedies, bandages, etc. are not zero-rated and GST/HST must be charged. (Generally, if the item does not require a prescription and is intended to treat a minor ailment it is not zero-rated.) If the item is an over-the-counter product that does not require a prescription, it is not zero-rated – GST/HST is charged even if a prescription has been issued for the item.
GST/HST Exempt Goods and Services
Meanwhile, for exempt goods and services, you also do not charge or collect GST/HST and you cannot claim Input Tax Credits. Some examples include;
- Educational services that lead to a certificate or diploma or are required to practice (or upgrade the certification for) a trade or vocation. This includes tutoring services for courses that follow a designated school curriculum.
- Most goods and services provided by charities.
- Financial services such as fees for bank accounts, lending, etc.
- Legal aid services.
- Day-care services for children 14 or younger if the service is not provided 24 hours per day.
- Food and beverages sold in an educational institution such as a school or university cafeteria.
- Used residential housing (GST/HST is only charged on new or “substantially renovated” residential housing. Substantial renovations are defined as the removal or replacement of most of the building except for the roof, walls, foundation, and floors – see the CRA’s B-092 Substantial Renovations and the GST/HST New Housing Rebate).
- Residential rental accommodation if equal to or greater than one month duration.
- Music lessons
- Medical and dental services – includes doctors, dentists, dental hygienists, orthodontists, optometrists, chiropractors, physiotherapists, audiologists, psychologists, podiatrists, dieticians, social workers (but not massage therapists). Note that some medical procedures are considered to be non healthcare-related and as such are subject to GST/HST. Examples include preparing medical-legal reports or disability certificates, expert witness fees, cosmetic surgery to enhance an individual’s appearance (unless it is for reconstructive purposes such as from accident or disease), etc.
- Issuing insurance policies (by insurance companies, agents, and brokers).
There is often confusion as to how taxes are applied to freight transportation services in Canada. A supply, including a supply of a freight transportation service, that is made in Canada is subject to the GST at the rate of 5 percent or subject to the HST at the applicable harmonized rate unless it is zero-rated (taxable at 0 percent) or exempt.
Meanwhile, international freight transportation services are zero-rated. To add to the confusion, some goods and services which are exempt from the federal GST are not exempt at the provincial level in provinces that charge a provincial sales tax and are therefore subject to PST/RST/QST.