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GST/HST 101: Division II & III Supplies
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Since the GST was first implemented in 1991, a continual source of misconception has been that the GST represents a single tax. In fact, there are potentially four different applications of the GST – i.e., reflected in Divisions II through IV.1 of the Excise Tax Act (“ETA”). When combined with the provincial HST component, further permutations can occur.
A major source of work (because of mistakes made by Canadian residents and non-residents alike) has been the application of Divisions II and III of the ETA, which are reviewed here, and which can quite counterintuitively result in the application of both a 5% GST and up-to a 15% GST/HST on one single supply of goods. Effectively, tax applying twice on a single transaction!
Background
The two main taxing Divisions that people trading into Canada generally encounter are Divisions II and III of the ETA. Division II simply applies to any “taxable supply made in Canada”. While simply put, there is a lot of baggage that goes into that phrase, and it is often difficult to understand what the rules are for determining whether a taxable supply is made “in Canada” or “outside Canada”, with different rules applying based on the character of the supply (i.e., whether the supply is a supply of goods, services or intangibles). Suffice to say, that if a person becomes GST registered, virtually all supplies of goods delivered or made available in Canada will be subject to GST/HST, with that GST registered person required to charge and collect same from its customers – even if a non-resident of Canada.
Under Division III, a separate application of the 5% GST is seen: the tax applies on every good imported to Canada, based on the value for duty of the goods imported.
Note: Nothing in the ETA indicates that if one of the Division II or III taxes applies, then the other does not. Hence the potential that both of these taxes may apply in respect of the same series of events!
Difficulties
Historically, the potential application of both the Division II and Division III taxes in a situation involving goods imported to Canada has been counterintuitive for most people.
This has often resulted in a myriad of issues, including failures to charge the Division II tax, over-looking input tax credit (“ITCs”) claims, failing to remit the proper “net tax” (i.e., pocketing the 5% GST paid at the border on the wrong-assumption that it defrays the Division II taxes), on-charging the 5% GST to customers, and drop-shipment issues.
Takeaways
Canada’s GST/HST is often a counterintuitive tax for both Canadian residents and US businesses. Persons unfamiliar with the application of indirect taxes like the GST/HST should get advice and undertake periodic compliance reviews. Often times compliance reviews will either reduce future exposures, or provide cash savings where unclaimed ITCs are identified.
Where CRA has assessed in these areas, professional advice will also usually be required in order to file the appropriate Notices of Objection, and appeal the matter to the Tax Court of Canada where indicated.