What Is GST/HST? What Is VAT?

A backgrounder on how Canada’s sales tax works and why GST/HST is called a value-added tax.

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By L.Kenway BComm CPB Retired
This is the year you get all your ducks in a row! Start by starting ... and keep it simple. Consistency beats perfection.

Published May 9, 2026 | Originally published on Bookkeeping-Essentials.com in 2010

WHAT'S IN THIS ARTICLE
The Canadian Tax System | Understanding GST/HST | What Is GST/HST? What Is VAT? | What Does VAT Mean? | Why It Matters To You | Bottom Line

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Happy freelancer getting a GST/HST refundGST/HST is visible, broad-based, and recoverable by businesses

Insight Into Canada's Tax System and GST HST

The Canadian Tax System: A Brief Overview

The taxation framework in Canada is designed as a progressive system, meaning that those who earn more are expected to pay more in taxes. This system aims to ensure a balanced distribution of wealth across society and funds public services such as health care, education, infrastructure, and social security. When businesses participate in the underground economy, they are sidestepping their fair share of funding these public services they use. 

Canadian taxes are administered at both federal and provincial/territorial levels. The federal government collects personal income tax, corporate tax, and the federal portion (GST) of the sales tax. Provincial or territorial governments collect taxes on properties, payroll, and the provincial portion (PST) of the sales tax. In some provinces, federal and provincial taxes are combined into a Harmonized Sales Tax (HST). 

Income tax forms the bulk of the government's revenue. It includes personal income tax levied on wages, salaries, and other forms of income and corporate tax levied on a company's profits. Canada also has an international tax system that holds liability for its residents' worldwide income.

Understanding GST/HST

One notable aspect of the Canadian tax system is the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST). GST is a federal value-added tax, meaning that it applies to most goods and services sold or provided in Canada. The standard GST rate is currently 5%.

The HST is a combined tax structure that merges the federal GST and the provincial sales tax. It's implemented in certain provinces called the 'participating provinces'. These include New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island. The HST rates vary among these provinces, ranging from 13% to 15%, as they include the 5% GST plus the respective provincial sales tax.

The GST HST provides a significant revenue stream for the Canadian government. Various businesses collect this tax and remit it to the government. Small businesses, however, may be exempt from this collection obligation if they qualify as 'small suppliers'.

In essence, GST/HST is designed so the consumer is the one who pays the tax. For most commercial activities, the tax is meant to be neutral to the business because input tax credits flow through the system.

So remember this ... the Canadian tax system is a multifaceted mechanism designed to promote social and economic balance. Understanding this system, particularly the GST and HST, is pivotal for every business operating in Canada.

What is GST HST? What is VAT?

You may know you pay GST HST when you are out and about, but as a small business owner, do you actually know what GST HST in Canada is besides an administrative burden you must carry?

Goods and services tax (GST) is a value-added tax (VAT) on goods and services produced by businesses. This tax is passed along to the consumers of the products and services, so sometimes it is also referred to as a consumption tax (as opposed to income tax, which is a tax on your earnings).

Harmonized sales tax is a combination of the federal GST along with a provincial sales tax component. Instead of two separate taxes, it is a single value-added tax. The HST is administered by the federal government who then remits to each participating province.

Businesses operating in Canada that are GST HST registrants are responsible for collecting both taxes and remitting the tax funds to the government ... which means they, not the government, bear the costs associated with the collection.

MORE >> What is a non-participating province? What is a participating province?


What does VAT mean?

I touched on VAT above, but let’s dig a bit deeper.

VAT stands for value-added tax. This means the tax is applied at different stages of production and sale, but businesses generally recover the GST/HST they pay on eligible business purchases through input tax credits. Because of this recovery mechanism, the tax is designed to be neutral for most commercial activities.

That is one of the key ideas behind GST/HST. The tax is not supposed to become a permanent business cost at every step in the supply chain. Instead, each business in the chain charges GST/HST on its sales, claims back the GST/HST paid on eligible purchases, and remits the difference. The result is that the tax is effectively passed along until it lands with the final consumer.

This is why GST is often described as a better-designed sales tax than older forms of retail sales tax. A value-added tax reduces double taxation and avoids tax cascading in a way that a traditional retail sales tax often does not.

GST/HST applies broadly to most goods and services, although some are zero-rated or exempt. It is meant to be visible, broad-based, and recoverable by businesses when the rules allow.


Why Does This Matter To A Small Business Owner?

It matters because GST/HST is more than just another filing chore. It affects your pricing, your bookkeeping, your cash flow, and how you understand the tax system you are operating inside.

When you understand that GST/HST is a value-added tax, several things become clearer:

  • why registrants must track sales tax carefully;
  • why input tax credits matter;
  • why the tax is considered neutral for most businesses;
  • and why the consumer, not the business, is intended to bear the tax.

This is also why accurate bookkeeping matters so much. If your records are incomplete or your GST/HST is tracked incorrectly, you can lose input tax credits, file inaccurate returns, or create problems during a CRA review or audit.


Bottom Line

GST is Canada’s federal value-added tax. HST is that same federal tax combined with a provincial component in participating provinces. VAT is the broader term for this type of tax system.

Once you understand that GST/HST is a tax on final consumption rather than a tax meant to stick to business inputs, the logic behind registration, collection, remittance, and input tax credits starts to make a lot more sense.


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