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Citation: 28 LawNow 74 2003-2004

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TAX iaw

Don't Forget the GST!!

The goods and services tax (GST) came into effect on January 1, 1991 under Part
IX of the Excise Tax Act. Most readers are aware that GST of 7% applies when pur-
chasing certain products and services (every province except for Alberta also imposes
a retail sales tax of some variety; however the topic of provincial sales taxes is beyond
the scope of this article). GST is (unfortunately) often referred to in tax circles as
the "forgotten tax" since many participants in commercial transactions do not con-
sider the GST until after a transaction is completed, if at all. The purpose of this
article is to review the very basics of the GST and to highlight some common mis-
takes that tax practitioners see in practice.

The Basics
As a general starting point, the GST applies to every "supply". A "supply" is
defined as "the provision of property or a service in any manner, including sale,
transfer, barter, exchange, license, rental, lease, gift or disposition." With the excep-
tion of "small suppliers", every person that makes a taxable supply in Canada in the
course of a commercial activity must become a GST registrant, which requires filing
a form with the Canada Revenue Agency (the CRA). [In some situations the CRA
will register a supplier retroactively where a person has made supplies in Canada in
the course of commercial activity but has not registered.]
Small suppliers are not required to register for the GST A person is a small supplier
for a particular quarter if they received, or were due to receive, total consideration of
$30,000 or less for taxable supplies made during the previous four quarters.
The obligation for collecting GST and remitting it to the government is imposed
upon the registrant who is making the supply. Registrants that pay GST in the
course of their commercial activities are entitled to claim input tax credits (ITCs) for
GST paid. Registrants file "GST Returns" with the CRA on a monthly, quarterly or
annual basis (the frequency of GST Returns essentially depends on the sales volume
for the particular registrant). A GST Return is a standard CRA form on which the
registrant subtracts its ITCs from the GST it has collected and either remits GST
owing or claims a refund where ITCs are greater than GST collected.

Common Mistakes
Suppliers often mistakenly consider themselves to be small suppliers. It is critical
that suppliers realize that they are only a small supplier if they received consideration
of $30,000 or less - not if they earned income of $30,000 or less - during the pre-
vious four quarters. In other words, neither deductions for income tax or potential
ITCs are relevant for determining whether a person is a small supplier.

APRIL/MAY 2004

This article iscopyright 0 2004 by LawNow, Legal Studies Program, Faculty of Extension,
University of Alberta. Permission to reproduce material from LawNow may be granted on request.
TAX iaw
As a general rule, GST
registrant purchasers of real
property must selFassessfor
GST on the purchase price
of the property. This means
that the vendor is not
responsible for charging
GST, but rather the purchaser has the obligation to remit the GST themselves to the
CRA. ITCs are usually available for this GST so it is effectively a wash but failure to
report the GST may result in GST being assessed outside of the available period to
claim ITCs. There are several exceptions to this general rule (perhaps the most
common exception is sales of used residential property); however, the requirement to
self assess is frequently overlooked by purchasers of real property.
ITCs are only available for 50% of GST paid for the consumption of food or bev-
erages or for the enjoyment of entertainment. This mirrors the income tax treatment
of limiting the deductibility of meals and entertainment expenses to 50%.
Many businesspeople believe that they are only responsible for remitting GST if
they actually are registrants or if they actually charge GST to their customers.
Unfortunately, if a person was supposed to be registered or was supposed to charge
and remit GST, then they are responsible for the GST that they were supposed to
have collected. As mentioned above, the CRA can retroactively register businesses
so simply not registering does not relieve a business of the obligation to charge and
remit GST. Furthermore, businesses are responsible to remit GST that they were
supposed to have collected, not GST that they did collect and the CRA will audit
and assess businesses accordingly.
The single biggest mistake that GST registrants make is spending collected GST
on business or personal items instead of remitting it to the government. A regis-
trant that has collected GST, but not yet remitted it is deemed to hold these funds
in trust for the Crown. If the CRA assesses the registrant for unremitted GST, they
may commence collections action even when the total amount of GST owing is in
dispute. Perhaps more importantly, directors of corporations arejointly andsever-
ally liable for any unremitted corporate GST. Collections Officers with the CRA
are extremely aggressive when collecting unremitted GST and they will often not
hesitate to freeze bank accounts, shut down businesses, or even force directors into
bankruptcy.
Hopefully the foregoing has provided some insight into how the GST works.
However, the primary intended message is to not zgnore the GST The GST legisla-
tion is very complex (some say more so than the Income Tax Act) and businesses
should be proactive in seeking GST advice. Failure to do so can lead to unexpected
and disastrous results.

Richard Kirby is a lawyer with the firm of Felesky Flynn LLP in Edmonton, Alberta.

APRIL/MAY 2004

This article iscopyright 0 2004 by LawNow, Legal Studies Program, Faculty of Extension,
University of Alberta. Permission to reproduce material from LawNow may be granted on request.