Canadian VAT is a consumption tax because it is borne by the final consumer. It is not intended to be a cost for most businesses. Canadian VAT is charged at each stage in the production and distribution chain, unlike US-style sales taxes that apply only on retail sales, including on retail sales to other businesses. Canadian VAT payable on inputs is recoverable by businesses through the chain as an input tax credit which can be applied against the VAT collectible on the sales. Therefore, like for European VAT, Canadian VAT is neutral throughout the chain. There are no “cascading” taxes embedded in the goods or services sold to the ultimate consumer in the Canadian VAT regime.
Other key similarities between Canadian VAT and European VAT
- Both VAT are calculated as a percentage of the sale price.
- Registered VAT traders are given a registration number which they provide to their customer. If the customer is a VAT-registered business, the customer can claim a credit (or deduction) against the amount of VAT they have to collect on their sales, and essentially, they can remit the net of the two amounts. The name “value-added-tax” can be interpreted as meaning the net tax owing by each participant up the chain on the value they add to the process.
Example: Purchase of inventory for $1,000 by Company A plus Canadian 5% VAT of $50.
Sale of final product for $1,500 by Company A plus Canadian 5% VAT of $75.
VAT to be remitted by Company A (i.e., $75 - $50): $25
- The net amount of VAT to remit of $25 represents the tax calculated on the value added by Company A of $500 in the process.
- European VAT rates must be at least 15% and the reduced rate (applicable only on certain goods and services) must be at least 5%. The applicable Canadian VAT rate depends on the province in which the sale is made. The Canadian VAT includes a 5% federal component (the Goods and Services Tax or GST) and a provincial VAT component that varies between 8% and 10% for a total combined tax that is between 13% and 15% (i.e., the Harmonized Sales Tax or HST) in provinces that participate in the Canadian federal VAT regime.
- It must be noted that four provinces impose their own general-purpose sales tax in Canada. Quebec imposes a VAT that is fully harmonized with the federal VAT or GST/HST. The three other provinces (British Columbia, Saskatchewan and Manitoba) impose a retail sales tax similar to US state sales and use taxes.
When is a European company required to register for Canadian VAT purposes?
In simple terms, there is no clear line as to when a non-resident business is required to register for Canadian VAT. Generally speaking, European companies would not be required to register for Canadian VAT unless they carry on business in Canada. Therefore, there is always some degree of uncertainty as to whether a business, that is a non-resident in Canada, would be required to register for Canadian VAT.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.