Taxable, Zero-Rated, and Exempt Supplies

Definition

Canadian GST/HST law divides every supply into three categories. Taxable supplies are subject to tax at 5% GST or 13% to 15% HST and entitle the supplier to claim Input Tax Credits on related inputs. Zero-rated supplies (ETA Schedule VI) are technically taxable but taxed at 0%, so tax is not collected yet ITCs can still be recovered. Exempt supplies (ETA Schedule V) are outside the tax base entirely: no tax is charged on the sale and no ITCs can be claimed on related inputs.

Key rules

• Taxable at full rate: the default treatment for most commercial goods and services, including professional fees, retail sales, digital products, and commercial rent.
• Zero-rated (Schedule VI): basic groceries, prescription drugs, medical devices, most agricultural and fishing products, feminine hygiene products, exports of goods and services to non-residents, and most international transportation.
• Exempt (Schedule V): most financial services, long-term residential rent (one month or more), sales of used residential housing, most health-care services provided by licensed professionals, most educational services leading to a certificate or diploma, child-care services for children under 14, and most supplies by public-sector bodies.
• ITC recovery follows the classification of the output: 100% recoverable for taxable and zero-rated supplies, 0% recoverable for inputs attributable to exempt supplies, and apportioned for inputs used in both.
• A single business can make all three types of supplies (mixed use) and must track each stream separately to apply ITCs correctly under ETA s.141.01.

Example

A BC corporation operates two lines of business: software consulting (taxable) and a small long-term residential rental property (exempt). In Q3 2026 it has the following:

Consulting revenue (taxable 5%):      $80,000
GST collected (5%):                    $4,000

Residential rent (exempt):            $18,000
GST collected:                             $0

Office rent paid (taxable input):      $6,000
GST paid on office rent:                 $300
Repair to rental unit (taxable input): $2,000
GST paid on repair:                      $100

ITC analysis
Office rent used 100% for consulting:   $300  (fully claimable)
Rental repair used 100% for exempt:     $0    (no ITC allowed)

Remittance
GST collected                         $4,000
Less: ITCs claimed                     ($300)
Net GST owing                         $3,700

The $100 of GST on the rental repair becomes an operating cost of the exempt business, not a recoverable tax.

Common mistakes

• Treating zero-rated as exempt. Zero-rated sales still entitle the supplier to full ITCs, which is the whole point of the category for exporters.
• Charging GST on residential rent. Rent of a residential unit for one month or more is exempt under Schedule V, Part I.
• Claiming full ITCs when the business has a mix of taxable and exempt outputs. ETA s.141.01 requires an apportionment based on the extent of use in commercial activity.
• Missing the exempt status of used residential housing resale. Only new homes are taxable, and usually with a New Housing Rebate. See real property.
• Assuming all food is zero-rated. Prepared food, restaurant meals, candy, carbonated beverages, and snacks are taxable.

Related concepts

Supply classification drives ITC eligibility and the amount on the return. For real estate and housing, see real-property GST, and consult place of supply to confirm which province's rate applies when the supply is taxable.