GST/HST Zero-Rated vs Exempt Supplies in Canada

When Canadian businesses deal with GST/HST, there are three possible tax statuses for their sales: taxable (the standard case — 5% GST or 13–15% HST applies), zero-rated, or exempt. Zero-rated and exempt both mean "no GST/HST collected from the customer" — but they are fundamentally different in how they affect your ability to claim Input Tax Credits (ITCs).

Getting this wrong costs money. Businesses that incorrectly treat taxable supplies as exempt charge customers too little tax — and are personally liable to remit the uncollected amount to the CRA.

What Are Taxable Supplies?

The default: if a supply of goods or services is made in Canada in the course of a commercial activity, GST/HST applies at the applicable rate. You collect GST/HST from your customer and remit the net amount (collected minus ITCs claimed) to the CRA. This is the case for the vast majority of Canadian businesses.

What Are Zero-Rated Supplies?

Zero-rated supplies are taxable at 0%. You don't charge GST/HST to the customer, but because they are technically "taxable" supplies, you can still claim full Input Tax Credits on the expenses you incur to make those supplies. This is the key advantage over exempt supplies.

Common Zero-Rated Supplies in Canada

• Basic groceries: Most unprocessed or minimally processed foods — bread, milk, vegetables, meat, canned goods. (Not: restaurant meals, snacks, carbonated drinks, candy)
• Prescription drugs: Dispensed pursuant to a prescription
• Certain medical devices: Hearing aids, prosthetic limbs, wheelchair-accessible vehicles
• Exports: Goods or services supplied to customers outside Canada (exported goods, services consumed entirely outside Canada)
• International transportation: Tickets for travel from Canada to a foreign country
• Agricultural products: Grain, livestock, and certain farming products sold in commercial quantities

What Are Exempt Supplies?

Exempt supplies are not subject to GST/HST at all — and unlike zero-rated, they are not commercial activities for GST/HST purposes. This means you cannot claim ITCs on expenses related to exempt supplies. No GST/HST in, no ITCs out.

Common Exempt Supplies in Canada

• Healthcare services: Physician services, hospital services, most dental and optometric services
• Educational services: Most courses supplied by public educational bodies, tutoring of an individual in a course offered by an educational institution
• Financial services: Issuing credit cards, managing investment portfolios, providing insurance (the premiums themselves)
• Residential rents: Long-term residential accommodation (rentals longer than one month)
• Child care: Licensed daycare and nursery school services
• Legal aid services: Provided under a legal aid plan

Side-by-Side Comparison

Feature	Taxable	Zero-Rated	Exempt
GST/HST rate charged	5%/13%/15%	0%	0%
Must register for GST/HST?	Yes (if >$30K)	Yes (if >$30K)	No (if only exempt)
Can claim ITCs?	Yes	Yes	No
Example	Consulting fees	Grocery store sales	Medical clinic visits

Mixed Supplies: Businesses That Straddle Both

Many businesses make both taxable and exempt supplies — a dental clinic (exempt dental services + taxable teeth-whitening products), a university (exempt tuition + taxable bookstore sales), or a residential landlord who also has commercial tenants (exempt residential + taxable commercial).

These "registrant businesses" can only claim ITCs on expenses that relate to taxable activities. For shared expenses (like rent on mixed-use space), you must prorate: claim only the portion that relates to taxable supplies. This proration is complex and is a frequent source of CRA audit adjustments for clinics and educational institutions.

See also: Input Tax Credits (ITCs) in Canada — How to Claim Them and When to Register for GST/HST.