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  • Writer's pictureMuib Khan, CPA, CGA, ACCA

Exempt Vs Zero Rated supplies - What's the difference?

Exempt Supplies:

  • Definition: Exempt supplies refer to goods and services that are not subject to the HST. When a supply is exempt, it means that no HST is charged on the sale of those goods or services.

  • Implications: Since no HST is charged, businesses making exempt supplies cannot claim input tax credits (ITCs) for the HST paid on related expenses. Exempt supplies are typically specific goods and services designated by the Canada Revenue Agency (CRA).

  • Examples: Certain health and dental services, educational services, and most financial services are examples of exempt supplies.


Zero-Rated Supplies:

  • Definition: Zero-rated supplies, on the other hand, are taxable supplies, but the rate of tax applied is 0%. This means that the sale of these goods and services is subject to the HST, but the rate charged is zero.

  • Implications: Although the rate is zero, businesses making zero-rated supplies can still claim ITCs for the HST they pay on related expenses. This is a crucial distinction from exempt supplies, where ITCs cannot be claimed.

  • Examples: Basic groceries, prescription drugs, and certain exports are examples of zero-rated supplies.


Key Differences:


Tax Treatment:

  • Exempt Supplies: No HST is charged, and businesses cannot claim ITCs on related expenses.

  • Zero-Rated Supplies: HST is charged at a rate of 0%, and businesses can claim ITCs on related expenses.


Examples:

  • Exempt Supplies: Certain health and dental services, educational services, etc.

  • Zero-Rated Supplies: Basic groceries, prescription drugs, certain exports, etc.


Input Tax Credits (ITCs):

  • Exempt Supplies: ITCs cannot be claimed on expenses related to exempt supplies.

  • Zero-Rated Supplies: Businesses can claim ITCs on expenses related to zero-rated supplies.


Impact on Consumers:

  • Exempt Supplies: Consumers do not pay HST on exempt supplies.

  • Zero-Rated Supplies: Consumers do not pay HST on zero-rated supplies, but businesses can claim ITCs.


Understanding the distinction between exempt and zero-rated supplies is important for businesses to appropriately apply the correct tax treatment and ensure compliance with Canadian tax regulations. It also has implications for the costs associated with providing goods and services in these categories.

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