Federal Goods and Services Tax (GST)
The GST is a federal tax levied at a rate of 5% on the supply of most property and services made in Canada. It is a value-added tax (VAT) applied at each level in the manufacturing and marketing chain. However, the tax does not apply to supplies that are zero-rated (i.e. taxed at 0%) or exempt (e.g. used residential real property and most health care, educational, and financial services). Examples of zero-rated supplies include basic groceries, medical and assistive devices, prescription drugs, feminine hygiene products, agriculture and fishing, and most international freight and passenger transportation services.
Generally, registrants charge GST on their sales and pay GST on their purchases, and either remit or claim a refund for the amount of net tax reported (i.e. the difference between the GST charged and the GST paid). Suppliers are entitled to claim input tax credits for the GST paid or payable on expenses incurred relating to making fully taxable and zero-rated supplies (i.e. commercial activity), but not on expenses relating to the making of tax-exempt supplies.
Harmonised Sales Tax (HST)
Five provinces have fully harmonised their sales tax systems with the GST and impose a single HST, which includes the 5% GST and a provincial component. HST applies to the same tax base and under the same rules as the GST. There is no need to register separately for GST and HST because both taxes are accounted for under one tax return and are jointly administered by the CRA. The HST rates follow.
|Province||HST rate (%)|
|Newfoundland and Labrador||15|
|Prince Edward Island||15|
Provincial retail sales tax (PST)
The provinces of British Columbia, Manitoba, and Saskatchewan each levy a PST (in addition to the 5% GST) at 7%, 7% (8% before 1 July 2019), and 6%, respectively, on most purchases of tangible personal property, software, and certain services.
PST generally does not apply to purchases of taxable goods, software, and services acquired for resale; registered vendors can claim this resale exemption by providing to their suppliers either their PST number or a purchase exemption certificate. Certain exemptions also exist for use in manufacturing, farming, and fisheries.
PST is administered by each province’s tax authority, separate from the CRA. Unlike GST/HST, PST is not a VAT and could apply to a business’ inputs that are not acquired for resale (e.g. charges for telecommunications services). Therefore, any PST paid on purchases by a business cannot generally be claimed as a credit or otherwise offset against PST charged on sales.
Alberta and the three territories (the Northwest Territories, Nunavut, and the Yukon) do not impose a retail sales tax. However, the GST applies in those jurisdictions.
Quebec’s sales tax is a VAT structured in the same manner as the GST/HST. The QST is charged in addition to the 5% GST and is levied at the rate of 9.975% on the supply of most property and services made in the province of Quebec, resulting in an effective combined rate of 14.975%. Registrants charge QST on taxable supplies (that are not zero-rated) and can claim input tax refunds for QST paid or payable on their expenses incurred and/or purchases made in the course of their commercial activity. The resulting net tax is reported to Revenu Québec (Quebec’s tax authority) and is either remitted or claimed as a refund. Revenu Québec also administers the GST/HST on behalf of the CRA for most registrants that are resident in the province.
The mandatory QST registration rules were recently expanded to non-residents of Quebec. Suppliers that are not residents of, and have no physical or significant presence in, Quebec, and that make digital and certain other supplies to ‘specified Quebec consumers’ may be required to register for QST under a new specified registration system, starting:
- 1 January 2019, for non-residents of Canada that make supplies of incorporeal moveable property (IPP) and services, and
- 1 September 2019, for residents of Canada that reside outside Quebec and make supplies of corporeal moveable property, IPP, and services.
The requirement to register also applies to digital property and services distribution platforms in regards to taxable supplies of IPP or services received by specified Quebec consumers if these digital platforms control the key elements of the transaction.
Customs and import duties
Customs tariffs (also known as duties) are tariffs and/or taxes levied on goods imported into Canada. The amount of customs duty that applies to imported goods depends on a number of factors, including the nature of the duty (i.e. ad valorem or specific), tariff classification, country of origin, and value for duty declared. The Tariff Schedule to the Customs Tariff, which is based on the World Customs Organization’s Harmonized Commodity Description and Coding System, sets out the customs duty rates for goods imported into Canada. Goods that originate from most countries with which Canada does not have a free trade agreement (FTA) or other preferential tariff arrangement will generally attract the ‘Most Favoured Nation’ (MFN) duty rate or tariff treatment.
There are currently 14 FTAs available for benefits where applicable. The most significant FTA for Canada is the North American Free Trade Agreement (NAFTA). The NAFTA applies to goods imported from both the United States (US) and Mexico. Most goods that originate in the NAFTA territory and qualify as originating for the NAFTA are eligible for duty-free treatment when imported into Canada from the other NAFTA partner (some exceptions apply). NAFTA may be replaced by the United States-Mexico-Canada Agreement (USMCA) (see below).
Canada's newest FTA is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force on 30 December 2018 between Canada, Australia, New Zealand, Mexico, Singapore, and Japan; and on 14 January 2019 with Vietnam. The other four member countries (Brunei, Malaysia, Peru, and Chile) will enter into force once they complete their ratification process and notify the repository in New Zealand.
Canada’s other FTAs are with Chile, Colombia, Costa Rica, the European Free Trade Association (which includes Iceland, Liechtenstein, Norway, and Switzerland), the European Union (EU), Honduras, Israel, Jordan, the Republic of Korea, Panama, Peru, and Ukraine. Under these FTAs, the originating goods imported from these countries may be eligible for reduced tariff benefits at rates more favourable than the MFN rate.
Canada has negotiated a new FTA, the USMCA (known in Canada as the CUSMA), with the United States and Mexico. The CUSMA revises and updates the terms of the existing NAFTA, and will serve to replace NAFTA once it has been ratified and implemented by all three countries. Canada is also in negotiations with several other countries (e.g. Japan, India, and Dominican Republic) or country groupings (e.g. the Mercosur countries, consisting of Argentina, Brazil, Paraguay, and Uruguay). Like the NAFTA, these FTAs will set out the rules of origin for determining whether goods are eligible for preferential tariff treatment, among other things. Canada is also currently exploring the potential for FTAs with other countries (e.g. China, Turkey) or country groupings (e.g. the Association of Southeast Asian Nations, including Cambodia, Thailand, Vietnam, etc.).
Canada also extends preferential tariff rates to many (but not all) products imported from certain countries via the General Preferential Tariff, the Least Developed Countries Tariff, the Commonwealth Caribbean Countries Tariff, the Australia Tariff, and the New Zealand Tariff. To qualify for preferential tariff rates, goods must meet various requirements with respect to the rules of origin and transshipment, among other things.
Other import duties and levies
Importations into Canada may also be subject, in certain cases, to anti-dumping duties and/or countervailing duties, excise duties, and excise taxes. In limited circumstances, Canada may also impose a surtax on certain imports, as evidenced by the recent retaliatory tariffs on certain US origin goods (e.g. certain steel and aluminum) that were imposed in July 2018 and eliminated in May 2019.
Excise taxes and duties
Excise duties are levied at various rates on spirits, wine, beer, malt liquor, and tobacco products. When these goods are manufactured or produced in Canada, duty is payable on the goods at the point of packaging and not at the point of sale. When these goods are imported into Canada, duty is generally payable by the importer at the time of importation. Manufacturers who produce alcohol and tobacco in Canada must be licensed. Excise duties also apply to cannabis products, now that non-medicinal cannabis is available for legal sale. Persons who manufacture, produce, and/or sell cannabis products in Canada must be licensed.
Excise tax is imposed on automobile air conditioners and fuel-inefficient automobiles, in addition to aviation fuel, gasoline, and diesel fuel. A 10% federal excise tax is imposed on premiums paid for insurance against a risk in Canada if the insurance is placed by insurers through brokers or agents outside Canada or with an insurer that is not authorised under Canadian or provincial/territorial law to transact the business of insurance. Premiums paid under contracts for life, personal accident, marine, and sickness insurance, as well as reinsurance and insurance not available in Canada, are exempt.
Property taxes are levied by municipalities in Canada on the estimated market value of real property within their boundaries and by provinces and territories on land not in a municipality. In most provinces and territories, a general property tax is levied on the owner of the property. Some municipalities levy a separate business tax, which is payable by the occupant if the premises are used for business purposes. These taxes are based on the rental value of the property at tax rates that are set each year by the various municipalities. School taxes, also generally based on the value of real property, are levied by local and regional school boards or the province or territory.
In British Columbia, starting in 2018, an annual speculation and vacancy tax (SVT) is imposed on residential property in certain urban centres in British Columbia (i.e. Metro Vancouver Regional District, Capital Regional District, Kelowna-West Kelowna, Nanaimo-Lantzville, Abbotsford, Chilliwack, and Mission; most islands are excluded). The SVT targets foreign and domestic homeowners who do not pay income tax in British Columbia, including those who leave their homes vacant. The tax rate, as a percentage of the property’s assessed value at 1 July of the previous year, is, after 2018 (for 2018, 0.5% for all property owners subject to the tax):
- 2% for foreign investors and satellite families.
- 0.5% for British Columbians and all other Canadian citizens or permanent residents who are not members of a satellite family.
Up-front exemptions are available for most principal residences and for qualifying long-term rental properties and certain special cases. A tax credit may also be available in varying amounts (depending on the type of owner) for owners subject to the SVT.
Land transfer tax
All provinces and territories levy a land transfer tax or registration fee on the purchaser of real property within their boundaries. These levies are expressed as a percentage, in most cases on a sliding scale, of the sale price or the assessed value of the property sold and are generally payable at the time title to the property is registered. Rates generally range from 0.02% to 3%, depending on the province or territory, but may be higher if the purchaser is a non-resident. Some exemptions (or refunds) are available. Additional land transfer taxes apply for properties purchased in the municipalities of Montreal or Toronto. Other municipalities may also impose these taxes and fees.
In British Columbia, a 20% land transfer tax (in addition to the general land transfer tax) is imposed on foreign entities (i.e. foreign nationals and corporations and certain Canadian corporations controlled by such foreign persons) and certain trusts and/or their trustees that have a foreign connection (a taxable trustee) that purchase residential property in the Metro Vancouver Regional District (but excluding residential property located on the Tsawwassen First Nations lands), the Capital Regional District, the Regional District of Central Okanagan, the Fraser Valley Regional District, and the Regional District of Nanaimo. Failure to pay this tax or file the required forms can result in interest, plus significant penalties, and/or imprisonment. Anti-avoidance rules capture transactions that are structured to avoid this tax. Relief from the additional land transfer tax is available to:
- foreigners who become Canadian citizens or permanent residents within one year of purchasing a principal residence, or
- foreign workers coming to British Columbia under the British Columbia Provincial Nominee Program who purchase a principal residence.
In an effort to stop tax evasion when property ownership is hidden behind numbered companies and trusts, the British Columbia government will, starting 16 May 2019, require trustees and corporations that acquire property to identify all individuals with a beneficial interest in the trust or significant interest in the corporation on the property transfer tax return. For beneficiaries of trusts that are corporations, information about each director must be disclosed. This will apply to all property types, including residential and commercial, with exemptions for certain trusts (e.g. charitable trusts) and corporations (e.g. hospitals, school, and libraries).
In Ontario, a 15% land transfer tax (in addition to the general land transfer tax and Toronto’s land transfer tax) is imposed on foreign entities (i.e. foreign nationals and corporations and certain Canadian corporations controlled by such foreign persons) and taxable trustees (i.e. trustees of a trust that has at least one trustee or beneficiary that is a foreign entity) that purchase residential property in the Greater Golden Horseshoe (a defined region of Southern Ontario surrounding and including the City of Toronto). For this tax to apply, the land transferred must contain at least one, but not more than six, single family residence(s). The tax also applies to unregistered dispositions of a beneficial interest in such residential property when the purchaser of the interest is a foreign entity or taxable trustee. Failure to pay this tax can result in a penalty, fine, and/or imprisonment. Exemptions from the 15% land transfer tax are available in certain circumstances (including for foreign workers coming to Ontario under the Ontario Immigrant Nominee Program or for refugees under the Immigration and Refugee Protection Act, who purchase a principal residence), and rebates of the tax can be obtained in certain situations.
Federal capital taxes
The federal government does not levy a general capital tax. It imposes the Financial Institutions Capital Tax (Part VI Tax) on banks, trust and loan corporations, and life insurance companies at a rate of 1.25% when taxable capital employed in Canada exceeds CAD 1 billion. The threshold is shared among related financial institutions. The tax is not deductible in computing income for tax purposes. It is reduced by the corporation's federal income tax liability. Any unused federal income tax liability can be applied to reduce Part VI Tax for the previous three and the next seven years. In effect, the tax constitutes a minimum tax on financial institutions.
Provincial capital taxes
The provinces do not levy a general capital tax, but most do impose a capital tax on financial institutions. Capital taxes are deductible for federal income tax purposes. The federal government had proposed to limit the deductibility of capital taxes, but has delayed implementing this proposal indefinitely. The territories do not impose capital taxes.
Provincial capital taxes on financial institutions are imposed at the following rates for 31 December 2019 year-ends.
|Province||Banks, trust and loan corporations (%)|
|New Brunswick (2)||4 or 5|
|Newfoundland and Labrador (3)||6|
|Nova Scotia (4)||4|
|Prince Edward Island (5)||5|
- Financial institutions in Manitoba with taxable paid-up capital of an associated group under CAD 4 billion are not subject to capital tax.
- New Brunswick’s capital tax rate is 5% for banks and 4% for other financial institutions. The first CAD 10 million of taxable paid-up capital is exempt from capital tax.
- In Newfoundland and Labrador, a CAD 5 million exemption applies if taxable capital for the related group is CAD 10 million or less.
- In Nova Scotia, the first CAD 500,000 of taxable paid-up capital is exempt from capital tax. However, if a trust and loan company has its head office in Nova Scotia, a CAD 30 million exemption applies. The maximum capital tax payable by financial institutions in Nova Scotia is CAD 12 million annually.
- In Prince Edward Island, the first CAD 2 million of taxable paid-up capital is exempt from capital tax.
- In Quebec, financial institutions are subject to a compensation tax of 4.22% (4.29% before 1 April 2019; 4.14% after 31 March 2020; 2.8% after 31 March 2022; nil after 31 March 2024) on payroll. Payroll subject to the compensation tax is limited to CAD 1.1 billion annually.
- Saskatchewan's rate for financial institutions that have taxable paid-up capital of CAD 1.5 billion or less is 0.7%. Financial institutions that qualified for the 0.7% capital tax rate in taxation years ending after 31 October 2008 and before 1 November 2009 are subject to a 0.7% capital tax rate on their first CAD 1.5 billion of taxable capital and a 4% capital tax rate on taxable capital exceeding CAD 1.5 billion. In Saskatchewan, the capital tax exemption is up to CAD 20 million (CAD 10 million plus an additional CAD 10 million, which is shared with associated companies).
Additional taxes on insurers
All provinces and territories impose a premium tax ranging from 2% to 5% on insurance companies (both life and non-life). In addition, Ontario and Quebec impose a capital tax on life insurance companies. Quebec also levies a compensation tax on insurance premiums at a rate of 0.48% (0.3% after 31 March 2022; nil after 31 March 2024).
Part III.1 tax on excess designations
Federal Part III.1 tax applies at a 20% or 30% rate if, during the year, a CCPC designated as eligible dividends an amount that exceeds its general rate income pool (GRIP), or a non-CCPC pays an eligible dividend when it has a positive balance in its low rate income pool (LRIP). A corporation subject to Part III.1 tax at the 20% rate (i.e. the excess designation was inadvertent) can elect, with shareholder concurrence, to treat all or part of the excess designation as a separate non-eligible dividend, in which case Part III.1 tax will not apply to the amount that is the subject of the election.
Eligible dividends are designated as such by the payer and include dividends paid by:
- public corporations, or other corporations that are not CCPCs, that are resident in Canada and are subject to the federal general CIT rate (i.e. 15% in 2018), or
- CCPCs, to the extent that the CCPC's income is:
- not investment income (other than eligible dividends from public corporations), and
- subject to the general federal CIT rate (i.e. the income is active business income not subject to the federal small business rate).
Non-eligible dividends include dividends paid out of either income eligible for the federal small business rate or a CCPC's investment income (other than eligible dividends received from public companies).
Social security taxes
For 2019, employers are required to pay, for each employee, government pension plan contributions up to CAD 2,748.90 and employment insurance premiums up to CAD 1,204.31. However, Quebec employers instead contribute, per employee, a maximum of CAD 2,991.45 in Quebec government pension plan contributions, CAD 929.25 in employment insurance premiums, and CAD 563.04 to a Quebec parental insurance plan.
The government pension plan was enhanced starting 1 January 2019. Employers and employees are required to pay higher government pension plan contributions (to be phased-in over seven years).
Provincial/territorial payroll taxes
Employers in British Columbia, Manitoba, Newfoundland and Labrador, Ontario, and Quebec are subject to payroll tax. Maximum rates range from 1.95% to 4.3%. In addition, Quebec employers with payroll of at least CAD 2 million must allot 1% of payroll to training or to a provincial fund. Employers in the Northwest Territories and Nunavut must deduct from employees' salaries a payroll tax equal to 2% of employment earnings.
Withholding tax for non-resident employees
Under Regulation 102 of the Income Tax Act, employers (whether residents of Canada or not) that pay salaries or wages or other remuneration to a non-resident of Canada in respect of employment services rendered in Canada are required to withhold personal income tax (PIT) unless a waiver has been received prior to commencing work physically in Canada. There are no 'de minimis' exceptions, and this requirement applies regardless of whether the non-resident employee in question will actually be liable for Canadian income tax on that salary pursuant to an income tax treaty that Canada has signed with another country. Complying is time-consuming and administratively burdensome.
An amount paid by a ‘qualifying non-resident employer’ to a ‘qualifying non-resident employee’ is exempt from the Regulation 102 withholding requirement.
Generally, a ‘qualifying non-resident employer’ must meet the following two conditions:
- is resident in a country with which Canada has a tax treaty (treaty country), and
- is at that time certified by the Minister.
A ‘qualifying non-resident employee’ must meet the following three conditions:
- is resident in a treaty country
- is exempt from Canadian income tax under a tax treaty, and
- is present in Canada for less than 90 days in any 12-month period that includes the time of payment, or
- works in Canada for less than 45 days in the calendar year that includes the time of payment.
To become certified, a non-resident employer must file Form RC473 (Application for Non-Resident Employer Certification) with the CRA. Certification is valid for two calendar years (after which time employers must submit a new Form RC473), subject to revocation if the employer fails to meet certain conditions or to comply with its Canadian tax obligations.
The conditions to maintain non-resident employer certification include:
- track and record, on a proactive basis, the number of days each qualifying non-resident employee is either working in Canada or present in Canada, and the income attributable to these days
- evaluate and determine whether its employees meet the conditions of a ‘qualifying non-resident employee’
- obtain a Canadian Business Number
- complete and file the annual T4 Summary and slips, if required
- file the applicable Canadian CIT returns if the corporation is ‘carrying on business in Canada’, and
- upon request, make its books and records available to the CRA for inspection.
Withholding tax on payments to non-residents for services rendered in Canada
Under Regulation 105 of the Income Tax Act, every person (including a non-resident), paying to a non-resident, a fee, commission, or other amount in respect of services rendered in Canada (excluding remuneration paid to non-resident employees that are subject to payroll withholding requirements, see Withholding tax for non-resident employees above) is required to withhold and remit 15% of the payment to Canadian tax authorities unless a waiver has been received before payment. Regulation 105 withholding is not a final tax, but an instalment payment against possible Canadian tax liability if the non-resident is determined to have a PE in Canada. A non-resident corporation that does not have a PE in Canada and is eligible under one of Canada’s tax treaties can file a ‘treaty-based’ corporate tax return to have the previously withheld Regulation 105 amounts refunded. These tax returns may result in the Canadian tax authorities challenging the non-resident’s assertion that no PE exists within Canada.
To advance the objectives of the Pan-Canadian Framework on Clean Growth and Climate Change (the Framework) and reduce greenhouse gas emissions, the federal government passed the Greenhouse Gas Pollution Pricing Act, which received royal assent on 21 June 2018. In accordance with the Framework, all provinces and territories are required to adopt a form of carbon pricing. The federal government established a Federal Carbon Pricing Backstop (FCPB) programme for provinces and territories that either do not have their own carbon tax programme or whose provincial or territorial programme does not meet federal standards (or who cancel their own system in the future). The FCPB programme has two components:
- Carbon levy: A charge on certain fuels, effective 1 April 2019 in Manitoba, New Brunswick, Ontario, and Saskatchewan; 1 July 2019 in Nunavut and the Yukon; and 1 January 2020 in Alberta. The carbon levy is generally imposed on producers, distributors, emitters, importers, and certain users of fuel and combustible waste, along with air, marine, rail, or road carriers, that have business activities in these provinces and territories. Rates vary by type of fuel and are equivalent to CAD 20 per CO2e tonne in 2019, increasing annually until they reach CAD 50 per CO2e tonne in 2022. There are different types of registration, depending upon the operations of the particular business.
- Output-based pricing system (OBPS): Applies as of 1 January 2019 to industrial facilities whose greenhouse gas emissions exceed certain thresholds. Facilities below the thresholds may elect to opt in to the OBPS, allowing for similar treatment as their competitors with varying emissions outputs.
Each type of registration will trigger specific calculations and reporting requirements. Returns are filed on a monthly or quarterly basis, depending on each particular entity's type of registration. Provinces and territories that have their own carbon programme are not subject to the FCPB. The provincial and territorial carbon programmes vary by province, as follows:
- Alberta: Alberta's new government repealed the province's carbon pricing programme, the Carbon Competitiveness Incentive Regulation (CCIR) (which was levied at a rate of CAD 30 per tonne), effective 30 May 2019. The CCIR will be replaced by the Technology Innovation Emissions Reduction (TIER) on 1 January 2020, a kind of cap-and-trade system, which is mandatory for emitters whose greenhouse gas emissions exceed the 100 kilotonnes CO2e annual threshold. The federal government has accepted that the large industrial facility portion of the TIER system meets the federal carbon pricing standard. However, the federal carbon levy imposed on fossil fuels will still apply for emitters that are not part of the TIER industrial facility programme. As a result, the federal carbon tax will also apply in Alberta, effective 1 January 2020.
- British Columbia: Carbon tax is levied at CAD 40 per tonne as of 1 April 2019, and will increase by CAD 5 per tonne each year, until it reaches CAD 50 per tonne on 1 April 2021.
- Newfoundland and Labrador: Carbon tax is levied at a rate of CAD 20 per tonne in 2019.
- Northwest Territories: Carbon tax, which will be effective 1 July 2019, will be levied at CAD 20 per tonne, increasing annually to CAD 50 per tonne by 2022.
- Nova Scotia: Cap-and-trade system.
- Prince Edward Island: Carbon tax, became effective 1 April 2019, is levied at CAD 20 per tonne, increasing to CAD 30 per tonne on 1 April 2020.
- Quebec: Cap-and-trade system.