***The following information is presented "as is" - Canadian Design Manager users should check with the Canadian government or a certified tax professional or accountant in Canada.****
In Canada, sales taxes exist at the federal level and at the provincial level. Goods and Services Tax (GST) is a federal tax levied in the non-participating provinces and territories across Canada. In the participating provinces, which include Newfoundland, Nova Scotia, and New Brunswick, a federal and provincial 'blended tax' called Harmonized Sales Tax (HST) is used. The recovery of tax is made through a rebate and/or an Input Tax Credit (ITC), depending on whether the purchases are intended for commercial or non-profit activities. Some goods and services are exempt from GST and HST.
Sales tax at the provincial level varies by province. The tax rates within each province apply to the value of goods or services before GST is applied (this is known as the 'side-by-side' application). The only exceptions are Quebec and Prince Edward Island, where the sales tax applies to the value of goods or services after GST is applied (this is known as the 'compounding' application). See also here
Goods and Services Tax
Goods and Services Tax (GST) is tax levied on many consumer products and professional services. Some goods and services are exempt from GST (for example, health and educational services). Depending on whether a purchase is considered commercial or not determines if the recovery of the tax can be made through a rebate, an Input Tax Credit (ITC), or both.
With Goods and Services Tax, the purchaser may be eligible for an ITC, a rebate on taxes payable, or both. To claim the ITC or rebate, the purchaser must have on record the supplier's GST registration number. If purchases are used exclusively in commercial activities, the purchaser is eligible for a full ITC.
Non-profit organizations can also apply for rebates (at prescribed rates) for purchases not qualifying for ITC. In addition, an organization can claim an ITC on the purchased goods and services that qualify as commercial activities and a rebate on the non-commercial portion.
Harmonized Sales Tax
Effective April 1, 1997, the provinces of Nova Scotia, New Brunswick and Newfoundland combined their Provincial Sales Tax (PST) with the federal sales tax to form a harmonized, value added tax called Harmonized Sales Tax (HST). The HST operates as a single rate of 15%, of which seven percent represent the federal component and eight percent the provincial component. Most tax registrants will operate on a tax-excluded basis. However, the government has reserved the right to legislate tax included if more than 51% of the population agree to adopt this blended tax rate.
Harmonized Sales Tax is similar to Goods and Services Tax in two ways. First, some goods and services are exempt from HST. Second, depending on whether a purchase is considered commercial or not determines if the recovery of the tax can be made through a rebate, an Input Tax Credit, or both.
To claim an ITC, a rebate on taxes payable, or both, the purchaser must have the supplier's HST registration number on record. If purchases are used exclusively in commercial activities, the purchaser is eligible for a full ITC.
Non-profit organizations can also apply for rebates (at prescribed rates) for purchases not qualifying for an ITC. In addition, an organization can claim an ITC on the purchased goods and services (which qualify as commercial activities) and a rebate on the non-commercial portion.
GST and HST Tax Recovery (ITC)
Businesses registered for Goods and Services Tax (GST) purposes are required to collect GST for goods and services that are subject to GST. They can then claim Input Tax Credits for the GST that they paid to produce the goods and services which are subject to GST. The net amount (collectible GST, less ITC) is remitted to the federal government. In general, all purchasers are required to pay GST for goods and services subject to GST, unless they are specifically exempt by the federal government.
To illustrate how GST works, consider a simplified example of a washing machine, which begins with mining of iron ore. The mine sells ore to a steel maker for $100, plus $7 GST which is remitted to the federal government. In transforming the ore into steel, the steel maker adds $200 (including profits) to its value and sells the steel to the appliance manufacturer for $300. The steel maker charges $21 GST on the sale, but claims ITC of $7 and therefore remits $14 difference to the federal government. If the appliance manufacturer sells the washing machine to a retailer for $500, it charges $35 GST, claims ITC of $21, and remits the difference of $14 to the government. Similarly, GST is charged and refunded at various stages of the production and sale chain until the final sale to the consumer.
Design Manager Implementation
Charging tax to the client is fairly straight forward: simply setup a sales tax code for each HST /GST providence that needs to be analyzed separately. Examples below:
Example of one Sales Tax Code in detail is shown below.
NOTE: ACTUAL TAX PERCENTAGES MAY NOT BE UP-TO-DATE. ALWAYS CHECK WITH YOUR PROPER TAX AUTHORITY FOR CORRECT PERCENTAGES AND TAXABLES.
To track ITC, one of the Design Manager Component Types must be used for this purpose. In the example below, we have edited the 5th component type and changed it for ITC.
See the article here on how to change a component type.
Each Sales Category can be edited and the COGS account changed to a common account number for the ITC type for each Category. Below is an example of a Sales Category changed for the ITC component type.
It is not necessary to include GST on the Purchase Orders but the GST can be recorded using the ITC Component Type when the Vendor Invoice is entered. The ITC should not be passed onto the client. The Account Inquiry Report or Purchases Journal can be used to report the ITC to claim.
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