5.1 Sales Taxes

On your recent cross-Canada road trip, you made purchases at many different Tim Hortons’ stores. At each store, your products retailed for $6.99. When you review your credit card receipts after returning home from your trip, you notice that you paid different totals everywhere. In Alberta, they only added GST and your combo cost $5.34. In British Columbia, they added both PST and GST, resulting in total cost of $7.83. In Ontario, they added something called HST, resulting in a total cost of $7.90. You find it interesting that the same combo came to different totals as you travelled across Canada.

Three Sales Taxes

A sales tax is a percent fee levied by a government on the supply of products. In Canada, there are three types of sales taxes: the goods and services tax (GST), provincial sales tax (PST), and the harmonized sales tax (HST). In this section you will learn the characteristics of each of these taxes and then the mathematics for calculating any sales tax.

Goods & Services Tax (GST)

The goods and services tax, better known as GST, is a national federal tax of 5% that applies to the purchase of most goods and services in Canada. Every province and territory has GST. The consumer ultimately bears the burden of this sales tax.

Businesses must collect GST on most of their sales and pay GST on most purchases in the daily course of operations. However, when remitting these taxes, businesses claim a credit with the federal government to recover the GST they paid on eligible purchases. The net result is that businesses do not pay the GST on these eligible purchases. While this may outrage some people, the logic is simple. If a business pays the GST, it becomes a cost of the business, which is then passed on to consumers as it is incorporated into retail prices. When the consumer purchases the product, the consumer would be charged the GST again! In essence, a consumer would be double-taxed on all purchases if businesses paid the GST.

Some goods and services are exempt from GST. While there are many complexities and nuances to the exemptions, generally items that are deemed necessities (such as basic groceries), essential services (such as health, legal aid, and childcare), and charitable activities are nontaxable. You can find a complete listing of exemptions on the Canada Revenue Agency website at www.cra.gc.ca.

Provincial Sales Tax (PST)

Provincial sales taxes, or PST, are provincially administered sales taxes that are determined by each individual provincial or territorial government in Canada. The table here lists the current PST rates in Canada.

Similar to GST, PST applies to the purchase of most goods and services in the province, and consumers bear the burden. For the same reasons as with GST, businesses typically pay the PST on purchases for non-resale items (such as equipment and machinery) and do not pay the PST on resale items. Businesses are responsible for collecting PST on sales and remitting the tax to the provincial government. Individual provincial websites list the items and services that are exempt from PST.

Harmonized Sales Tax (HST)

The harmonized sales tax, or HST, is a combination of GST and PST into a single number. Since most goods and services are subjected to both taxes anyway, HST offers a simpler method of collecting and remitting the sales tax—a business has to collect and remit only one tax instead of two. Because there are pros and cons to HST, not all provinces use this method of collection, as summarized in the table below.

Pros of HST

  • Items that are previously PST payable to a business are now refunded, lowering input costs and lowering consumer prices
  • Results in overall lower corporate taxes paid
  • Increases the competitiveness of businesses and results in job creation
  • Businesses only remit one tax and not two, resulting in financial and auditing savings

 

Cons of HST

  • Many items such as utilities, services, and children’s clothing that are ineligible for PST become taxed at the full HST rate
  • Consumer cost of living increases
  • Tax-exempt items see prices rise because HST is being applied to services and goods such as transportation and gasoline

Here is the summary of sales taxes across Canadian provinces and territories (as of 2021):

Province/Territory PST GST HST
British Columbia 7% 5%
Alberta 5%
Saskatchewan 6% 5%
Manitoba 7% 5%
Ontario 13%
Quebec 9.975% 5%
New Brunswick 15%
Nova Scotia 15%
Prince Edward Island 15%
Newfoundland and Labrador 15%
Nunavut 5%
Northwest Territories 5%
Yukon 5%

Calculating the Sales Tax Amount

A sales tax is a percent rate calculated on the base selling price of the product. Therefore, if you are interested solely in the amount of the sales tax (the portion owing), apply the general rule of rate calculation:[latex][/latex]

[latex]\text{rate of one quantity in relation to another quantity} = \frac{\text{one quantity}}{\text{another quantity}}[/latex]

In the context of sales tax rate, this becomes:

[latex]\text{rate of sales tax on price before tax} = \frac{\text{tax amount}}{\text{price before tax}}[/latex]

Rearranging this formula to solve for the tax amount gives the following:

[latex]\text{ tax amount} = (\text{tax rate})\cdot(\text{price before taxes})[/latex]

Calculating a Price Including Tax

When calculating a selling price including the tax, you take the regular selling price and increase it by the sales tax percentage. This is a percent change calculation we did in Chapter 2:

The change is from price before taxes to price after taxes and the percent change is the sales tax percentage:

[latex]\text{price after tax}=(\text{price before tax})+(\text{tax rate})\cdot(\text{price before tax})[/latex]

or, equivalently,

[latex]\text{price after tax}=(\text{price before tax})(1+\text{tax rate})[/latex]

For example, assume a $549.99 product is sold in British Columbia and you wish to calculate the amount of the sales taxes and the price including the sales taxes.

The price before taxes is S = $549.99. In British Columbia, GST is 5% and PST is 7% (from the PST Table).

\begin{align*}
\text{price}_{at}&= \text{price}_{bt}+(\text{GST}(\text{price}_{bt})+(\text{PST}(\text{price}_{bt})\\
&=549.99+(0.05\cdot 549.99)+(0.07\cdot 549.99)\\
&=549.99+27.50+38.50\\
&= \$615.99
\end{align*}

Therefore, on a $549.99 item in British Columbia, $27.50 in GST and $38.50 in PST are owing, resulting in a price including sales taxes of $615.99.

A note on rounding

Round the price after tax to two decimals.

If two taxes are involved in the tax-inclusive price (such as GST and PST), you cannot combine the rates together into a single rate. For example, Manitoba has 5% GST and 8% PST. This is not necessarily equivalent to 13% tax since each tax is rounded to two decimals separately and then summed. If you use a single rate of 13%, you may miscalculate by a penny. Instead, expand the formula to include two separate tax amount calculations:

[latex]\text{total price after tax}=\text{price before tax}+\text{ROUND}(\text{PST tax amount})+\text{ROUND}(\text{GST tax amount})[/latex]

Paths To Success

You will often need to manipulate the tax rate formula. Most of the time, prices are advertised without taxes and you need to calculate the price including the taxes. However, sometimes prices are advertised including the taxes and you must calculate the original price of the product before taxes. When only one tax is involved, this poses no problem, but when two taxes are involved (GST and PST), combine them into a single amount before you solve for price before tax.

Give it Some Thought

  1. On any given product selling for the same price, put the following provinces in order from highest price to lowest price including taxes (GST and PST, or HST): Alberta, Saskatchewan, British Columbia, Ontario, Prince Edward Island.

 

Example 5.1 A: Calculating Sales Taxes Across Canada

Dell Canada lists a complete computer system on its Canadian website for $1,999.99. Calculate the price including taxes if the Canadian buyer is located in:

a. Alberta b. Ontario c. Quebec d. British Columbia (BC)

Answer:

a. Alberta: 5% GST

[latex]\begin{align*} (\text{price after tax})_{AB}&=(\text{price before tax})(1+\text{tax rate})\\ \\ &=1999.99(1+0.05)=\$2,099.99 \end{align*}[/latex]

b. Ontario: 13% HST

[latex]\begin{align*} (\text{price after tax})_{ON}&=(\text{price before tax})(1+\text{tax rate})\\ \\ &=1999.99(1+0.13)=\$2,259.99 \end{align*}[/latex]

c. Quebec: 9.975% PST, 5% GST

[latex]\begin{align*} (\text{price a.t.})_{QC}&=\text{price b.t.}+(\text{PST rate})(\text{price b.t.})+(\text{GST rate})(\text{price b.t.})\\ \\ &=1999.99+0.09975\cdot 1999.99+0.05\cdot 1999.99\\ \\ &=1999.99+199.50+100\\ \\ &=\$2,299.49 \end{align*}[/latex]

d. British Columbia: 7% PST, 5% GST

[latex]\begin{align*} (\text{price a.t.})_{BC}&=\text{price b.t.}+(\text{PST rate})(\text{price b.t.})+(\text{GST rate})(\text{price b.t.})\\ \\ &=1999.99+0.07\cdot 1999.99+0.05\cdot 1999.99\\ \\ &=1999.99+140+100\\ \\ &=\$2,239.99 \end{align*}[/latex]

Example 5.1 B: Calculating Taxes on a Tax-Inclusive Price

“The Brick is having its Midnight Madness sale! Pay no taxes on products purchased during this event!” While this is good marketing, it probably goes without saying that governments do not give up the sales taxes. Essentially The Brick is advertising a tax-inclusive price. Calculate GST and PST amounts for a product advertised at $729.95, including GST and PST, in Saskatchewan.

Answer: PST tax amount = ?, GST tax amount = ?

Saskatchewan: 6% PST, 5% GST [latex]\Rightarrow[/latex] total tax rate = 11%

To calculate tax amounts, we need the price before taxes.

[latex]\begin{align*} &\text{price after tax}=(\text{price before tax})(1+\text{tax rate})\\ \\ &\Rightarrow \text{price before tax}=\frac{\text{price after tax}}{1+\text{tax rate}}=\frac{729.95}{1+0.11}=\$657.61 \end{align*}[/latex]

[latex]\text{PST amount}=0.06\cdot 657.61=\$39.46[/latex]

[latex]\text{GST amount}=0.05\cdot 657.61=\$32.88[/latex]

 

The GST/HST Remittance

When a business collects sales taxes, it is a go-between in the transaction. These sales tax monies do not belong to the business. On a regular basis, the business must forward this money to the government. This payment is known as a tax remittance.

The Tax Remit Formula

Generally speaking, a business does not pay sales taxes. As a result, the government permits a business to take all eligible sales taxes that it paid through its acquisitions and net them against all sales taxes collected from sales. The end result is that the business is reimbursed for any eligible out-of-pocket sales tax that it paid. The formula below expresses this relationship.

[latex]\text{remit}=\text{tax collected}-\text{tax paid}[/latex]

where

Remit is GST/HST remittance: This is the dollar amount of the remittance.

  • If this amount is positive, it means that the business collected more tax than it paid out; the company must remit this balance to the government.
  • If this amount is negative, it means that the business paid out more taxes than it collected; the government must refund this balance to the company.

Tax collected and tax paid: Both of these parts of the formula represent the total amount of sales tax from all taxable amounts at the appropriate sales tax rate. The taxes collected are based on total tax-eligible revenues. The taxes paid are based on the total tax-eligible acquisitions.

 

For example, assume a business has paid GST on purchases of $153,000. It has also collected GST on sales of $358,440. Calculate the GST remittance.

GST remittance = ?

[latex]\begin{align*} \text{remit}&=\text{tax collected} -\text{tax paid}\\ \\ &=\text{GST on sales}-\text{GST on purchases}\\ \\ &=0.05\cdot 358440-0.05\cdot 153000\\ \\ &=\$10,272 \end{align*}[/latex]

The business should remit $10,272 to the government.

Paths To Success

A shortcut can help you calculate the GST/HST Remittance using Formula 5.2. If you do not need to know the actual amounts of the tax paid and collected, you can net GST/HST–eligible revenues minus acquisitions and multiply the difference by the tax rate:

Remit = (Revenues − Acquisitions) × Rate

In the example above, Remit = ($358,440 – $153,000) x 5% = $10,272. If this calculation produces a negative number, then the business receives a refund instead of making a remittance.

Example 5.1 C: Calculating GST/HST Remittance

An Albertan lumber company reported the following quarterly purchases and sales in its 2013 operating year:

example 5.1-c quarterly purchases and sales table

Assuming all purchases and sales are eligible and subject to GST, calculate the GST remittance or refund for each quarter.

Answer: remit for each quarter = ?

example 5.1-c quarterly remit calculation table

Give it Some Thought Answers:

  1. PEI (15% HST), Ontario (13% HST), British Columbia (5% GST, 7% PST), Saskatchewan (6% GST, 5% PST), Alberta (5% GST, no PST)

Exercises

Mechanics

You are purchasing a new BlackBerry at the MSRP of $649.99. Calculate the price including taxes in the following provinces or territories:

  1. Northwest Territories
  2. New Brunswick
  3. Nova Scotia
  4. British Columbia

The Brick is advertising a new Serta mattress nationally for a price of $899.99 including taxes. What is the price before taxes and the sales tax amounts in each of the following provinces?

  1. Ontario
  2. Saskatchewan
  3. Audiophonic Electronics is calculating its HST remittance in Prince Edward Island. For each of the following months, calculate the HST remittance or refund on these HST-eligible amounts.

Month

Purchases

Sales

January

$48,693

$94,288

February

$71,997

$53,639

8. Airwaves Mobility is calculating its GST remittance in Alberta. For each of the following quarters, calculate the GST remittance or refund on these GST-eligible amounts.

Quarter

Purchases

Sales

Winter

$123,698

$267,122

Spring

$179,410

$158,905

Summer

$216,045

$412,111

Fall

$198,836

$175,003

Applications

  1. Elena lives in Nova Scotia and has relatives in Alberta, Saskatchewan, and Quebec. She gets together with them often. She wants to purchase a new aerobic trainer and would like to pay the lowest price. If a family member buys the item, Elena can pick it up at one of their regular family gatherings. The price of the trainer for each province is listed below:

Province

Regular
Selling Price before Taxes

Nova
Scotia

$1,229.50

Alberta

$1,329.95

Saskatchewan

$1,274.25

Quebec

$1,219.75

a. Where should Elena have the aerobic trainer purchased and how much would she pay?

b. How much money would she save from her most expensive option?

10. Mary Lou just purchased a new digital camera in Nunavut for $556.49 including taxes. What was the price of the camera before taxes? What amount of sales tax is paid?

11. Marley is at Peoples Jewellers in New Brunswick wanting to purchase an engagement ring for his girlfriend. The price of the ring is $2,699.95. If the credit limit on his credit card is $3,000, will he be able to purchase the ring on his credit card? If not, what is the minimum amount of cash that he must put down to use his credit card?

12. In the IKEA store in Vancouver, British Columbia, you are considering the purchase of a set of kitchen cabinets priced at $3,997.59. Calculate the amount of GST and PST you must pay for the cabinets, along with the total price including taxes.

13. A company in Saskatchewan recorded the following GST-eligible purchases and sales throughout the year. Determine the GST remittance or refund per quarter.

Quarter

Purchases

Sales

1st

$2,164,700

$2,522,000

2nd

$1,571,300

$2,278,700

3rd

$1,816,100

$1,654,000

4th

$2,395,900

$1,911,700

14. A manufacturer in Nova Scotia recorded the following HST-eligible purchases and sales in its first three months of its fiscal year. Determine the HST remittance or refund per month.

Month

Purchases

Sales

March

$20,209

$26,550

April

$28,861

$20,480

May

$22,649

$42,340

Challenge, Critical Thinking, & Other Applications

  1. If the selling price of an item is 6% higher in Yukon than in Ontario, will the price including taxes be higher in Yukon or Ontario? What percentage more?
  2. Colin just travelled across the country on a road trip. He bought some skis in Alberta for $879.95 plus tax, a boombox in British Columbia for $145.58 including taxes, a Niagara Falls souvenir in Ontario for $99.97 plus tax, and some maple syrup in Quebec for $45.14 including tax. Overall, how much GST, PST, and HST did Colin pay on his trip?
  3. Cisco Enterprises in Ontario purchased the following in a single month:
  • 16,000 units of network routers at $79.25 each, priced at $97.97 each
  • 12,000 units of wireless LAN adapters at $129.95 each, priced at $189.55 each
  • 13,500 units of computer boards at $229.15 each, priced at $369.50 each.

Assuming that all units purchased are sold during the same month and that all purchases and sales are taxable, calculate the tax remittance or refund for the month.

  1. In Quebec, the PST used to be calculated on the price including GST. When the PST was calculated in this manner, what PST rate did Quebec set to arrive at the same price including taxes?
  2. For each of the following situations, compute the selling price of the product before taxes in the other province/territory that would result in the same selling price including taxes as the item listed.

Price
before Tax

Sold
In

Find
Equivalent Price before Tax in This Province

a.

$363.75

British
Columbia

Prince
Edward Island

b.

$1,795.00

Alberta

Manitoba

c.

$19,995.95

Saskatchewan

Ontario

d.

$4,819.35

New
Brunswick

Quebec

20. A company made the following taxable transactions in a single month. Compute the GST remittance on its operations assuming all sales and purchases are eligible for GST.

Transaction
Type

Unit
Price

Quantity
Involved

Purchase

$168.70

5,430

Sale

$130.00

4,000

Sale

$148.39

3,600

Purchase

$93.47

2,950

Purchase

$24.23

3,325

Purchase

$121.20

2,770

Sale

$188.88

6,250

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