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Zero-Rated Supplies & GST/HST

March 29, 2025 by SpenceDrake Tax Law Expenses, General, GST/HST
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Zero-Rated Supplies & GST/HST

The Goods and Services Tax (GST) and Harmonized Sales Tax (HST) are consumption-based taxes levied in Canada. These taxes are applied to the sale of most goods and services. However, not all supplies are taxed at the regular GST/HST rate. Some goods and services are classified as “zero-rated,” meaning they are subject to a 0% tax rate under certain conditions. This distinction can be critical for businesses and consumers alike, as it impacts tax reporting, claiming input tax credits, and overall costs.

What are Zero-Rated Supplies?

Zero-rated supplies are goods or services that are taxable under the GST/HST system, but the tax rate applied to them is 0%. This means that while these supplies are taxable, they are not subject to the usual GST/HST charges. A zero-rated supply does not mean that it is exempt from tax altogether; rather, it means that the transaction is taxable at a 0% rate.

Under the Excise Tax Act, R.S.C., 1985, c. E-15 (ETA), which governs GST/HST in Canada, zero-rated supplies are treated differently from exempt supplies. The primary distinction is that businesses involved in zero-rated transactions are still eligible to claim input tax credits (ITCs) for the GST/HST they paid on related purchases and expenses.

The Importance of Zero-Rated Supplies

Zero-rated supplies are a key feature of the GST/HST system because they help eliminate the tax burden on certain goods and services that are considered essential or are crucial for maintaining certain standards of living. For example, zero-rating ensures that businesses or individuals do not incur GST/HST costs on the supply of essential goods that may otherwise be an unnecessary tax burden.

This classification is crucial for sectors such as health care, education, and charity work. Furthermore, zero-rating helps to ensure the competitiveness of Canadian businesses in international markets by removing the tax from exports and other global transactions.

Examples of Zero-Rated Supplies

Zero-rated supplies include a variety of goods and services. Here are some of the key examples under Canadian GST/HST law:

  1. Basic Groceries: Most food and beverage items that are consumed in their basic form are zero-rated. This includes products like fresh vegetables, fruits, milk, and bread. However, prepared foods or luxury food items, such as restaurant meals or snack foods, may not qualify for zero-rating.
  2. Exports: Goods and services that are exported outside of Canada are typically zero-rated. This ensures that Canadian exporters are not subject to GST/HST when they sell their goods to customers outside of Canada, keeping Canadian goods competitive in the global market.
  3. Prescription Drugs: Medications that are prescribed by a licensed health professional are zero-rated under the GST/HST rules. This includes prescription medicines for both human and animal use.
  4. Medical Devices: Certain medical devices, such as wheelchairs, oxygen equipment, and prosthetics, are zero-rated, making them more affordable and accessible for those who need them.
  5. Services Related to International Travel: Services that are related to international travel, such as the provision of international flights or hotel accommodations for travelers going abroad, are typically zero-rated. This encourages tourism and global business interactions.
  6. Education: Certain educational services, such as tuition fees for primary and secondary education or specific post-secondary programs, are also zero-rated.
  7. Charitable Donations: Supplies made by registered charities, such as donations, are often zero-rated. This allows for the maximum benefit to be passed onto charities without any GST/HST burden.

Differences Between Zero-Rated and Exempt Supplies

It is important to understand the distinction between zero-rated supplies and exempt supplies. While both may seem similar, they have significant differences, particularly in how they impact businesses.

  • Zero-Rated Supplies: These goods and services are subject to a 0% GST/HST rate, meaning that businesses involved in providing these goods or services can still claim input tax credits (ITCs) on the GST/HST they paid related to those supplies.
  • Exempt Supplies: These goods and services are not subject to GST/HST at all. As a result, businesses that provide exempt supplies cannot claim ITCs on the GST/HST they paid to produce or deliver those supplies. Common examples of exempt supplies include financial services, health care services (other than those zero-rated), and residential rent.
 


Cris Best, BA, JD, LLM (Tax)

SpenceDrake Tax Lawyers

  
 

Disclaimer

Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.