Taxable vs Exempt vs Zero-Rated Sales for GST/HST

Taxable vs exempt vs zero-rated sales: why this matters on your GST/HST return

If you’re incorporated and registered for GST/HST, classifying your sales correctly affects:

• whether you should charge GST/HST
• what you report on your return (especially Line 101 and Line 103)
• whether you can claim input tax credits (ITCs) (i.e., the GST/HST you recover on business expenses)

The confusing part: zero-rated sales are taxable (just at 0%). Exempt sales are not taxable. CRA treats them very differently.

What we cover:

• What “taxable,” “zero-rated,” and “exempt” mean (plain English)
• What to report on Line 101 and Line 103 (and why they won’t “match”)
• How each category affects ITCs
• Common real-world examples (including tricky ones)
• Mixed businesses (taxable + exempt) and ITC apportionment
• Practical bookkeeping tips to avoid CRA problems
• FAQ (based on common business-owner questions)

The definitions you need

1) Taxable sales (most common)

A taxable supply is a sale made in the course of a commercial activity that is subject to GST/HST - this includes zero-rated sales too.

• You charge GST/HST at the applicable rate (often 5%, 13%, 14%, or 15%, depending on place-of-supply rules and province).
• You can generally claim ITCs on GST/HST you pay on expenses related to those taxable sales.

2) Zero-rated sales (taxable at 0%)

Zero-rated supplies are taxable, but the rate is 0%.

• You do not charge GST/HST to the customer.
• But you can still claim ITCs on related expenses (because they’re still commercial activity).

CRA examples include basic groceries, prescription drugs, certain medical devices, and many exports.

3) Exempt sales (not taxable)

Exempt supplies are not subject to GST/HST.

• You do not charge GST/HST.
• And you generally cannot claim ITCs for expenses related to making those exempt sales.

Common exempt examples include long-term residential rent and the sale of housing last used as a personal residence (among others).

How this shows up on your GST/HST return

Here’s the key CRA rule that surprises many owners:

Line 101 includes taxable, zero-rated, AND exempt revenue

Line 101 (“total sales and other revenue”) includes your revenue from supplies of property and services, including zero-rated and exempt supplies, plus other revenue for the reporting period (and you don’t include GST/HST itself under the regular method).

So Line 101 is not “taxable sales only.” It’s basically your gross revenue reporting line for GST/HST purposes.

Line 103 is only GST/HST collected (or collectible)

Line 103 is the GST/HST you collected (or were required to collect) on your taxable supplies.

• Exempt supplies: no tax to collect → nothing for Line 103
• Zero-rated supplies: tax rate is 0% → nothing (or near nothing) for Line 103
• Taxable (non-zero-rated): tax collected → goes on Line 103

That’s why it’s normal for Line 101 and Line 103 to look “unrelated.”

Table 1: Taxable vs zero-rated vs exempt (quick reference)

Supporting CRA references: definitions and examples of zero-rated and exempt supplies, and ITC eligibility rules.

The ITC trap: exempt sales can quietly reduce your refund

ITCs (input tax credits) are how registrants recover GST/HST paid on expenses used in their commercial activities.

If your business has both:

• commercial activity (taxable + zero-rated sales), and
• non-commercial activity (often exempt sales),

you may have to apportion (split) your ITCs and only claim the commercial portion. CRA explicitly notes you may need to apportion when you have exempt supplies.

Common example:
You’re a corporation that earns:

• taxable consulting revenue, and
• exempt revenue (for example, certain exempt services)

Shared costs like rent, software, phone, and accounting fees may need an ITC split if they support both revenue streams.

Table 2: What goes on Line 101 vs Line 103 (and why they don’t reconcile)

CRA return instructions for Line 101 and Line 103 (regular method) and ITC overview.

Quick note if you use the “Quick Method” (many service businesses do)

If you file using the Quick Method, CRA’s instructions for Line 101 differ (it generally includes GST/HST in the Line 101 total for that method). Don’t mix the regular-method habit with quick-method reporting.

Real-world “gotchas” that cause CRA issues

1) “Exports are exempt” (often wrong)

Many exports are zero-rated (taxable at 0%), not exempt—meaning ITCs may still be available if conditions are met. Export rules can be detailed, especially for services and intangible property.

2) Residential vs commercial rent

Long-term residential rent is commonly exempt, while commercial rent is generally taxable. If you have both, your ITCs may need to be split.

3) Your bookkeeping categories aren’t set up for GST/HST

If your accounting system only has “Sales” without tax-status categories, you’ll end up guessing at filing time—which is when misclassifications happen.

Fix: set up separate income accounts (or tax codes) such as:

• Sales - Taxable (GST/HST)
• Sales - Zero-rated
• Sales - Exempt
• Sales - Out of scope (if applicable)

Does exempt revenue count toward the small supplier threshold?

For most businesses, the small supplier threshold is based on taxable supplies (including zero-rated)—not exempt supplies. CRA’s registration guidance also distinguishes taxable (including zero-rated) from exempt when determining “total annual revenue” for GST/HST registration purposes.

Practical checklist: how to classify a sale correctly

1. What are you selling? (good, service, digital product, rent, membership, etc.)
2. Is it specifically listed as exempt or zero-rated? (If yes, classification is determined.)
3. If taxable, where is the supply made? That affects the rate (GST vs HST).
4. If you have both taxable and exempt activities, decide how you’ll apportion ITCs for shared expenses and apply consistently.
5. Keep support for ITCs (invoices/receipts) and make sure the GST/HST number and required details are captured where applicable.

FAQ (common “People also ask” questions)

Are zero-rated sales considered taxable sales?
Yes. Zero-rated supplies are taxable at 0%, meaning you don’t charge GST/HST, but they’re still taxable and can support ITCs.

Do exempt sales go on Line 101?
Yes. CRA says Line 101 includes revenue from supplies including zero-rated and exempt supplies.

Do zero-rated sales go on Line 101?
Yes—same reason.

Do exempt sales go on Line 103?
No. Line 103 is GST/HST collected or collectible. Exempt supplies aren’t subject to GST/HST.

If I only make exempt supplies, should I register for GST/HST?
Often no—because you generally can’t claim ITCs on exempt activities anyway, and you aren’t charging GST/HST. But specific situations can be nuanced; get advice if you’re mixing exempt and taxable lines.

Why is my ITC refund smaller than expected?
A common reason is that part of your business activity is exempt, so ITCs must be reduced to the commercial-use portion.

What if I charged GST/HST by mistake on an exempt item?
The customer may have paid tax they didn’t owe, and you may still have reporting/adjustment work to fix it. This is one of the reasons correct classification matters (and why we like clean tax codes in bookkeeping). (CRA’s rules vary by facts - handle carefully.)

Do exports always mean zero-rated?
Not always. Many exports are zero-rated, but the conditions and exceptions matter (especially for services and intangibles).

Which provinces use GST vs HST rates?
CRA lists the current GST/HST rates by province (including participating vs non-participating provinces).

Can Line 101 and Line 103 be totally different?
Yes. Line 101 includes exempt and zero-rated revenue; Line 103 only includes GST/HST collected or collectible.

Final takeaway

On a GST/HST return, taxable, zero-rated, and exempt sales can all show up in Line 101, but only taxable (non-zero-rated) sales usually drive Line 103, and only taxable/zero-rated activity generally supports ITCs. If your books don’t clearly separate these categories, it’s easy to over-claim ITCs or misreport tax.

If you want, Coral CPA can review your revenue streams, set up clean GST/HST tax codes in your bookkeeping, and file or clean up past GST/HST returns so you’re claiming the right ITCs without triggering CRA issues.

Fill out this intake form to reach out to us.

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