Zero-rated vs exempt supplies

Both kinds of supply leave the customer paying no GST/HST, so they look alike at the till. The Excise Tax Act separates them by list: a zero-rated supply is one included in Schedule VI, and an exempt supply is one included in Schedule V. A buyer of a grocery, health or export business can meet the distinction when reading the seller’s tax filings.

Why the label matters for credits

The Act sets the tax rate on a zero-rated supply at zero, and treats it as a taxable supply. Its definition of commercial activity, by contrast, excludes a business to the extent it involves making exempt supplies. Because the input tax credit rule in section 169, which applies subject to the rest of that Part of the Act, turns on the extent to which property and services are acquired for use in commercial activities, the two categories can change what a registrant recovers on its own purchases. The CRA says the zero rate applies throughout Canada.

What to check or ask

• Which Schedule each product or service falls under, rather than how the seller describes it
• Whether the business makes only one kind of supply or a mix of both
• How the seller’s accountant has calculated its input tax credit claims
• Whether the return history matches the answers above

See how to check HST compliance when buying a business and the section 167 election.