Tax & Trade Blog
Masks are no Longer Zero Rated: Their Tax Status is "Back to Normal"!
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Bill C-69, which received Royal Assent on June 20, 2024, contains various amendments to implement the federal government’s 2024 Budget. In this blog, we discuss a small but important amendment: supplies of certain face masks, respirators and face shields are no longer classified as zero-rated supplies!
Background – Zero-Rated Supplies
Section 165 of the Excise Tax Act (the “ETA”) generally imposes the GST/HST on recipients of taxable supplies made in Canada. Zero-rated supplies are a subset of taxable supplies which are taxed at the rate of 0%. Common examples of zero-rated supplies include basic groceries, prescription medications, and some medical devices.
Zero-rated supplies are distinct from exempt supplies, which are not taxable (and are carved out of the definition of “taxable supply”).
Suppliers of zero-rated supplies do not charge GST/HST on their supplies and are generally entitled to claim input tax credits (“ITCs”) in respect of GST/HST paid on their expenses. Suppliers of exempt supplies also do not charge GST/HST on their supplies but are generally not entitled to claim ITCs in respect of GST/HST paid on expenses related to the making of those exempt supplies.
COVID Response – Zero-Rating Masks
As part of Canada’s response to combat the spread of COVID-19 in 2021 Parliament passed Bill C-30, which added sections 2 – 5 to Part II.1 of Schedule VI of the ETA to zero-rate supplies of face masks, respirators and face shields made after December 6, 2020. This effectively lowered the cost of face masks and face shields as recipients (including consumers) no longer had to pay the GST/HST on same, but suppliers could still claim ITCs.
Budget 2024 – Masks are Taxable Again
Bill C-69 has reversed this earlier zero-rating effective for supplies made “after April 2024” by removing sections 2 – 5 of Part II.1 of Schedule VI. Accordingly, those masks and face shields which were zero-rated supplies are subject to GST/HST once more.
Implications
Setting aside public health concerns, this change will make face masks more expensive for consumers as they will now have to pay the GST/HST on the price of the masks.
For businesses, this amendment will require them to start charging GST/HST on their sales and remitting same to the CRA. One would hope that with most businesses using computerized point of sale systems the taxable status of the relevant SKUs can be easily adjusted.
Takeaways
Minor amendments such as this one occur all the time with little publicity. That lack of publicity, however, means that it is possible these changes remain unnoticed – even by those in the industry!
For those businesses who may not yet be charging GST/HST on supplies of masks and face shields, you should consider contacting Legal Counsel who can help advise you on the potential of filing a Voluntary Disclosure. As we wrote about in a previous blog a Voluntary Disclosure may provide a “shield” against potential penalties in some situations.