Zero-rated supplies

Taxable at nothing is not the same as outside the system

A zero-rated supply is still a taxable supply. The rate happens to be 0%, so the invoice shows no GST/HST and the customer pays none. Because the sale is taxable, a registrant making it generally remains entitled to input tax credits for the GST/HST paid on costs connected to the sale. That recovery is the main practical difference from an exempt supply.

The CRA lists examples such as basic groceries, most farm livestock, most fishery products, prescription drugs, certain medical devices, feminine hygiene products and many transportation services that start or finish outside Canada. Most goods and services exported from Canada are also zero-rated, but only when the conditions are met. Ontario’s 13% HST does not apply to these sales, and the 0% rate is the same in every province.

Illustration: a vegetable seller’s equipment purchase

Suppose a small Ontario business sells packaged vegetables and, in a separate illustrative line, buys $1,000 of equipment plus $130 of HST to prepare them. Its vegetable sales carry 0% tax, so it collects nothing from customers. Because those sales are zero-rated, the business generally can claim the $130 as an input tax credit, subject to the usual rules. If the same sales were exempt, that recovery would generally not be available.

This is why a zero-rated seller can end up with a refund on a return: credits can exceed the tax collected, which was nil. The figures here are illustrative only and do not describe any real business.

Where owners go wrong

The first mistake is treating zero-rated as a shortcut for any sale to a customer outside Ontario. Exports have their own conditions, and a service delivered to someone in another province is normally governed by place-of-supply rules rather than zero-rating. A second mistake is leaving zero-rated sales off the return because no tax was charged. They are still reported, and they generally count toward the small-supplier threshold, unlike financial services or capital property sales.

Keep a separate tax code in your software so zero-rated, exempt and standard-rated sales do not blend together. Retain the evidence for each export, such as shipping or customer documents, because the 0% rate depends on meeting the conditions.

What to discuss with your accountant

Bring a list of what you sell and where the buyer is located. Ask whether each item is zero-rated, taxable or exempt, how exports should be documented, and whether your software tax codes match that answer. Also ask how a mix of zero-rated and exempt sales would affect your credits. See also exempt supplies and taxable supplies for the neighbouring categories.