Implementing Canadian Sales Tax (Oracle Receivables Help)


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Implementing Canadian Sales Tax

In Canada, sales taxes exist at the federal level and at the provincial level. Goods and Services Tax (GST) is a federal tax levied in the non-participating provinces and territories across Canada. In the participating provinces, which include Newfoundland, Nova Scotia, and New Brunswick, a federal and provincial "blended tax" called Harmonized Sales Tax (HST) is used. The recovery of tax is made through a rebate and/or an Input tax Credit (ITC), depending on whether the purchases are commercial. Some goods and services are exempt from GST/HST.

Sales tax at the provincial level varies by province. The tax rates within each province apply to the value of goods or services before GST is applied (this is known as the 'side-by-side' application). The only exceptions are Quebec and Prince Edward Island, where the sales tax applies to the value of goods or services after GST is applied (this is known as the 'compounding' application).

This essay provides a logical flow for implementing Canadian Sales Tax in Receivables; your specific requirements may differ. You should perform your tax setup when you set up the rest of your Receivables system. For a complete list of the steps required to set up Receivables, see: Setting Up Receivables.

Suggestion: To help you plan and complete your tax-specific setup steps, use this essay with the Oracle Applications Implementation Wizard. You can use the Implementation Wizard as a resource center to read online help for a setup activity and open the appropriate setup window and to see a graphical overview of setup steps. You can also document your implementation by using the Wizard to record comments for each step for future reference and review. For more information, see: Implementation Wizard Documentation.

Attention: If you use the Oracle Applications Multiple Organization Support feature, you need to perform this implementation for each of your operating units. For more information, refer to the Multiple Organizations in Oracle Applications manual.

Goods and Services Tax

Goods and Services Tax (GST) is tax levied on many consumer products and professional services. Currently, the rate is seven percent. Some goods and services are exempt from GST (for example, health and educational services). Depending on whether a purchase is considered commercial or not determines if the recovery of the tax can be made through a rebate, an Input Tax Credit (ITC), or both. Currently, the GST rate is seven percent.

With Goods and Services Tax, the purchaser can file for an Input Tax Credit (ITC), a rebate on taxes payable, or both. To claim the ITC or rebate, the purchaser must have on record the vendor's GST registration number. If purchases are used exclusively in commercial activities, the purchaser is eligible for a full ITC.

Non-profit organizations can also apply for rebates (at prescribed rates) for purchases not qualifying for ITC. In addition, an organization can claim an ITC on the purchased goods and services that qualify as commercial activities, and a rebate on the non-commercial portion. See the Input Tax Credit section below for more information.

Harmonized Sales Tax

Effective April 1, 1997, the provinces of Nova Scotia, New Brunswick and Newfoundland combined their Provincial Sales Tax (PST) with the federal sales tax to form a harmonized, value added tax called Harmonized Sales Tax (HST). The HST operates as a single rate of 15%, of which seven percent represent the federal component and eight percent the provincial component. Most tax registrants will operate on a tax-excluded basis. However, the government has reserved the right to legislate tax included if more than 51% of the population agree to adopt this blended tax rate.

Harmonized Sales Tax is similar to Goods and Services Tax in two ways. First, some goods and services are exempt from HST. Second, depending on whether a purchase is considered commercial or not determines if the recovery of the tax can be made through a rebate, an Input Tax Credit (ITC), or both.

To claim an ITC, a rebate on taxes payable, or both, the purchaser must have the vendor's HST registration number on record. If purchases are used exclusively in commercial activities, the purchaser is eligible for a full ITC.

Non-profit organizations can also apply for rebates (at prescribed rates) for purchases not qualifying for ITC. In addition, an organization can claim an ITC on the purchased goods and services (which qualify as commercial activities) and a rebate on the non-commercial portion.

Note: Any references to Goods and Services Tax in the following sections also apply to Harmonized Sales Tax.

Provincial Sales Tax

Provincial Sales Tax (PST) is levied by each Canadian province except Alberta, the Territories, and the participating provinces where the PST rate is now blended with the federal tax rate. Unlike GST, there is no recoverable input tax credit for provincial sales tax paid (except for Quebec where PST is recoverable as input tax credit, similar to GST). Each province has its own legislation that determines its own PST Rate and decides which goods and services are exempt from PST. The appropriate Provincial Sales Tax is based upon the destination of the goods or services, not their origin.

The vendor is responsible for charging and collecting PST. However, if the goods or services are purchased for resale, the vendor is not required to charge PST on the basis of the purchaser's licensed PST registration number. Most provinces, however, require a PST exemption certificate to be maintained on file by the vendor for those customers claiming 'exempt' status.

PST is payable by the ultimate consumer and is therefore levied once (except in Quebec). For example, the purchase of office supplies by a manufacturer for its own consumption would be subject to PST, but office supplies purchased for resale would not.

Provincial taxes paid to the purchaser are not recoverable and therefore become part of the cost of the goods and services purchased (except in Quebec).

Sales of goods to be delivered by the vendor to locations outside the province are exempt from PST in the province where the vendor is located, but are subject to PST in the province where they are consumed. Therefore, if a company ships goods to three provinces, it must comply with collection and remittance of three different provincial sales taxes (where applicable) to each of the three provincial tax authorities.

Note: This example assumes that the vendor has a registered permanent establishment in each ship-to province. If the vendor is not registered in the ship-to province, no provincial sales tax could be charged on the sale to that province. In this case, the customer is required to self-assess and remit the applicable provincial sales tax.

Attention: The preceding paragraphs generally describe the application of provincial sales taxes. However, there may be a situation in which a vendor sells not only to a PST-exempt distributor (who then sells to the ultimate consumer, responsible for PST), but also sells directly to the same consumer as the distributor. For example, when Madewell Inc. bills and ships goods to PST-exempt Value Hardware, no PST is applicable. If Value Hardware resells to Best Cleaning Supplies, it is Value Hardware's responsibility to charge PST. Similarly, no PST applies if Madewell Inc. sells to and bills Value Hardware, but ships directly to Best Cleaning Supplies (on behalf of Value Hardware). However, if Madewell Inc. also sells directly to Value Hardware (whose ship-to location is one of the vendor's permanent establishments), they must charge PST on the direct sale to Best Cleaning Supplies. In this case, the ship-to location is the same (Best Cleaning Supplies), there is no PST when the vendor bills Value Hardware, but PST applies when the vendor bills Best Cleaning Supplies.

Input Tax Credit

Businesses registered for Goods and Services Tax (GST) purposes are required to collect GST for goods and services that are subject to GST. They can then claim Input Tax Credits (ITC) for the GST that they paid to produce the goods and services which are subject to GST. The net amount (collectible GST, less ITC) is remitted to the federal government. In general, all purchasers are required to pay GST for goods and services subject to GST, unless they are specifically exempt by the federal government.

To illustrate how GST works, consider a simplified example of a washing machine, which begins with mining of iron ore. The mine sells ore to a steel maker for $100, plus $7 GST which is remitted to the federal government. In transforming the ore into steel, the steel maker adds $200 (including profits) to its value and sells the steel to the appliance manufacturer for $300. The steel maker charges $21 GST on the sale, but claims ITC of $7 and therefore remits $14 difference to the federal government. If the appliance manufacturer sells the washing machine to a retailer for $500, it charges $35 GST, claims ITC of $21 and remits the difference of $14 to the government. Similarly, GST is charged and refunded at various stages of the production and sale chain until the final sale to the consumer.

Tax Statuses

Taxable goods and services are either subject to the GST rate, exempt or are zero-rated. Certain goods and services (for example, exports) are zero-rated. No GST is charged on zero-rated goods and services. However, ITC can be claimed on purchases used to provide these goods and services. Certain goods and services are designated as exempt and are not subject to GST (for example, educational services). GST paid for materials used to provide exempt goods and services are not eligible for ITC claims.

Domestic Transactions

Domestic transactions are transactions between registered traders within Canada. These transactions may have GST and PST charged on goods and services with ship-to locations applying different PST rates to specific goods and services.

Export Transactions

Export transactions are transactions between a Canadian trader and a vendor or customer located outside of Canada. Customers and sites outside Canada may be tax exempt and should have a zero tax code assigned to all invoices. However, there are a few cases where GST is charged. For example, a magazine subscription with a US ship-to address should be charged GST.

Public Service Bodies

Public service bodies can be grouped into claimant types. There are different rebates for each type of claimant. To calculate the rebate, the claimant determines the GST eligible for rebate and multiplies it by the associated rebate factor.

In addition, a non-profit organization may fall into more than one category of the public service body rebate. For example, an organization may qualify as both a hospital authority and school authority, and each operation will use its respective rebate rate on the eligible purchases.