Exempt supplies

No tax charged, and usually no credits

When a supply is exempt, GST/HST does not apply to it. You do not add tax to the invoice, and the customer pays none. The trade-off is that you generally cannot claim input tax credits to recover the GST/HST you paid on costs connected with those sales, so that tax becomes part of your cost. The CRA also notes that you generally cannot register for a GST/HST account if you provide only exempt supplies.

The CRA’s examples include long-term rentals of residential accommodation of one month or more, most health, medical and dental services performed by licensed physicians or dentists for medical reasons, child care for children 14 and under for periods of less than 24 hours a day, music lessons, most services of financial institutions, insurance policies, and most property and services supplied by charities and public institutions.

Illustration: a landlord’s repair bill

Imagine an Ontario landlord who rents a basement apartment on a 12-month lease. The rent is exempt, so no HST is added. If the landlord then pays an illustrative $1,000 plus $130 HST to a contractor for repairs, that $130 generally cannot be recovered as an input tax credit because the repairs relate to an exempt activity.

For income tax, the repair cost may still be a deductible expense. The income-tax deduction and the GST/HST credit are separate questions, and exempt status only closes off the second one.

Mixed activities need extra care

Many owners make a mix of taxable and exempt sales, such as a clinic that also sells taxable products, or a landlord who rents both residential and commercial space. Only the part of a purchase used in commercial activities may support a credit, so you need a sensible way to split shared costs and a record of how you did it.

Exempt is also not the same as small supplier. A small supplier makes taxable sales but is not required to register below the threshold, while an exempt-only business is exempt by the nature of what it sells. Both can look similar on an invoice, which is why the status should be confirmed rather than assumed.

What to discuss with your accountant

Bring your service list, lease terms and invoices. Ask which items are exempt, whether any of your sales are taxable or zero-rated, how shared expenses should be allocated, and whether registration is required or optional. Compare with zero-rated supplies and taxable supplies, which treat credits differently.