What Is Value-Added Tax (VAT)?

Value-added tax, commonly called VAT, is a consumption tax applied to goods and services.

Businesses collect the tax throughout the supply chain, but the final cost is generally passed on to the consumer.

Canada does not commonly call its sales tax VAT. Instead, Canada uses the GST and HST, which operate using a similar value-added tax system.

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How Does VAT Work?

VAT is collected at different stages as a product or service moves through the supply chain.

For example, a manufacturer may charge VAT when selling a product to a retailer. The retailer then charges VAT when selling it to a customer.

Businesses can generally claim credits for eligible VAT they have already paid, which helps ensure the tax ultimately falls on the final consumer rather than being repeatedly taxed in full at every stage.

Does Canada Have VAT?

Canada does not normally use the term VAT.

Instead, the federal government charges the Goods and Services Tax (GST). Several provinces combine the federal GST with their provincial sales tax to create the Harmonized Sales Tax (HST).

Both GST and HST are forms of value-added taxation.

The GST is 5% in provinces and territories that do not participate in the HST system. Current HST rates are 13% in Ontario, 14% in Nova Scotia and 15% in the other participating provinces.

VAT vs. GST: What's the Difference?

VAT and GST are based on very similar concepts.

Both are:

• Consumption taxes

• Charged on many goods and services

• Collected by businesses

• Ultimately paid by consumers

• Structured so businesses can generally recover eligible tax paid on business purchases

The biggest difference is often terminology.

What Is HST?

HST stands for Harmonized Sales Tax.

It combines the federal GST with a participating province's provincial portion of sales tax into one tax.

HST is currently used in:

• Ontario

• New Brunswick

• Newfoundland and Labrador

• Nova Scotia

• Prince Edward Island

The tax rate depends on where the taxable supply is made.

Do You Pay GST or HST on Everything in Canada?

No.

Goods and services can generally fall into three categories:

• Taxable

• Zero-rated

• Exempt

Most goods and services are taxable.

Some products, including many basic groceries, are zero-rated. That means they are taxable at 0%.

Other supplies may be exempt from GST/HST altogether.

Who Actually Pays VAT?

Consumers ultimately bear the cost of VAT.

Businesses generally act as collectors. They charge the applicable tax to customers and remit the amount they owe to the government after accounting for eligible tax credits.

This is why VAT is considered a consumption tax rather than an income tax.

Why Do Countries Use VAT?

VAT provides governments with tax revenue based on consumer spending.

Because it is collected throughout the supply chain, it can also provide a structured way to collect tax while avoiding repeatedly taxing the entire value of a product at each stage.