Tax and accounting terms
Zero Rated vs Exempt Supplies: The GST/HST Difference That Matters
0%GST/HST on a zero rated supply, with input tax credits still claimable. An exempt supply carries no tax either, but the credits are lost.
Sources checked October 20263 min read
Key points
- Zero rated supplies are taxable at 0%, so the seller still claims input tax credits
- Exempt supplies carry no GST/HST, and the seller generally cannot claim credits
- Zero rated sales count toward the $30,000 small supplier threshold, while exempt sales do not
- A business making both apportions its credits on a fair and reasonable basis
Three kinds of supply
Every supply a business makes falls into one of three groups for GST/HST: taxable at the regular rate, zero rated, meaning taxable at 0%, or exempt. Most goods and services are taxable at the regular rate. The difference between the other two is invisible on the customer's receipt, since neither shows any tax, but it changes the seller's position completely.
| Type of supply | Charge GST/HST? | Claim input tax credits? | Examples |
|---|---|---|---|
| Taxable | Yes, at the rate where the supply is made | Yes | Clothing, car repairs, legal and accounting services, hotel rooms |
| Zero rated | Yes, at 0% | Yes | Basic groceries, prescription drugs, most farm livestock, exports |
| Exempt | No | Generally no | Long term residential rent, most health and dental services, child care, music lessons, most financial services |
Why zero rated is better for the seller
A grocer selling bread, milk and vegetables charges no tax on them, yet still claims input tax credits for the GST/HST it pays on rent, equipment and supplies, so a business selling mainly zero rated goods often receives refunds. A dental clinic providing exempt dental care also charges no tax, but cannot claim credits for the tax on its equipment and rent, so that tax becomes a cost built into its fees.
Registration follows the same split. Zero rated sales are taxable supplies, so they count toward the $30,000 small supplier threshold, and a business selling zero rated goods usually gains by registering. A business that makes only exempt supplies generally cannot register at all, the exception being listed financial institutions resident in Canada.
Businesses that make both
Many businesses make taxable and exempt supplies side by side. Where 90% or more of an expense is used in commercial activities, which include taxable and zero rated supplies, the full credit can be claimed; where substantially all of it goes to exempt supplies, none can. In between, the tax is apportioned using a method that is fair and reasonable and used consistently through the year.
Take the owner of a building with a ground floor shop rented to a business and an apartment above rented to a long term residential tenant. Commercial rent is taxable and long term residential rent is exempt. If a utility bill covering both carries $200 of GST/HST and a fair allocation puts 60% of the use in the shop, the credit is $120.
Getting the classification right
Status depends on the exact supply, not the type of business. Soft drinks, candy and chips are taxable while basic groceries such as milk, bread and vegetables are zero rated; a sale of a home last used as a residence is exempt while a new home is taxable. Mistakes cost money either way: charging tax on an exempt supply overcharges customers, and treating a taxable supply as exempt leaves the business owing tax it never collected, because a supplier that fails to charge GST/HST is still liable for it.
Quick answers
Is a zero rated supply the same as an exempt supply?
No. Neither shows tax on the invoice, but a zero rated supply is taxable at 0% and the seller can claim input tax credits, while an exempt supply carries no tax and the seller generally cannot claim credits.
Do exempt sales count toward the $30,000 GST threshold?
No. The small supplier test measures taxable supplies, which include zero rated supplies but not exempt ones.
Is residential rent subject to GST?
Long term residential rentals of one month or more, and residential condominium fees, are exempt. Commercial rent is taxable.
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Important. This article provides general educational information, not legal or tax advice for a specific business. Rules, administrative policies, rates and deadlines can change. Confirm your facts and current obligations with the responsible government agency and a qualified adviser.