Tax alert: How the federal GST/HST tax holiday will work

The Minister of Finance tabled Bill C-78 – Tax Break for All Canadians Act on November 27, 2024, providing legislation to govern the GST/HST tax holiday originally announced on November 21, 2024. 

Bill C-78 generally follows the measures described in the original announcement. In particular:

• the measure will begin on December 14, 2024, and end on February 15, 2025.

• GST/HST relief is available to the supply and importation of a variety of children’s clothing, toys, games, books, food and beverages.

Canada Revenue Agency has also released its guidance on the proposed measures, including detailed examples of qualifying and non-qualifying items under each of these broad categories. 

Below we highlight some of the key points and observations from this legislation and CRA guidance: 

Zero-rating 

Bill C-78 clarifies that the supplies of qualifying goods will be treated as a temporary zero-rating measure. It should not impact a business’ ability to claim input tax credits (ITCs).

Qualifying goods 

Bill C-78 imports many definitions existing elsewhere in the Excise Tax Act, certain GST/HST regulations, or the Excise Act, 2001 with certain modifications. However, some of the qualifying goods are unique to this legislation.

Toys and games 

Consistent with the original announcement, a comprehensive list of toys and games will qualify for this measure. However, the list is not exhaustive.

Bill C-78 has laid out specific characteristics that will qualify a toy or game. Retailers must carefully review their inventory against these requirements.

• Toys and games (excluding video games) for children 14 and under: It’s not clear how this is to be determined. Presumably, retailers would reference the manufacturer’s packaging or instructions for the product’s recommended ages.
• Examples of non-qualifying goods:
  
  • Collectables such as hockey cards or certain dolls
  • Toys and models marketed for adults (e.g., adult Lego and train sets)
  • Digital video game downloads and
  • Video gaming accessories (e.g., headsets)

Note: Painting supplies and other DIY crafting supplies do not appear to qualify for the GST/HST tax holiday.  

• Items without age requirements: There is no age requirement for jigsaw puzzles or video game discs/cartridges, controllers and consoles.

Christmas tree, or a similar decorative tree 

As initially announced, the legislation indicates that natural or artificial Christmas trees or similar decorative trees will qualify for the measure.

There is no clarification on exactly what a Christmas tree or similar tree might include. Note that decorations do not qualify for the GST/HST tax holiday. CRA guidance includes no further clarification with respect to these items.

Books and printed materials 

Printed books are generally defined by what they are not. Some notable exclusions from the GST/HST holiday are:

• Calendars 

• Journals 

• Scrapbooks

• Colouring books 

• Magazines/periodicals where more than five percent of the printed space is devoted to advertising.

Downloadable audio books and e-audio books are not eligible for this measure; it appears only physical audio recordings of printed books would be (i.e., cassette or CD).

Food and beverages 

Bill C-78 provides zero-rating for most food items that would normally be taxable, such as snacks and other pre-packaged and prepared meals. However, there is an exclusion for packaged food items sold through a vending machine.

Beverages eligible for this measure generally include beer, wine, sake, and other low alcohol packaged beverages. The measure excludes spirits or other hard alcohol.

Restaurant and catering services 

Catering services and the preparation or serving of food, non-alcoholic beverages, or eligible alcoholic beverages also qualify, provided all conditions are met during the specified timeframe (see discussion below). 

Timing of eligible supply 

Supplies of qualifying goods will be zero-rated under this temporary measure between December 14, 2024, and February 15, 2025, where both the following conditions are met: 

• all consideration for the supply is paid during the eligible period 

• the property is delivered or made available to the recipient during the eligible period 

Goods must both be delivered to the recipient and paid for during the eligible period to qualify for zero-rating. Delivery is considered complete on the date the supplier either transfers the item to a common carrier or sends the item by mail or courier.

E.g., Dad orders a new video game console from an online retailer for his children as a gift. If the order is placed and paid for on December 26, 2024, and received by Dad January 20, 2025, this would qualify as an eligible supply.  

Alternatively, if the item is paid for on December 26, 2024, but is not received by Dad or placed in the mail by the online retailer by February 15, 2025, this would not be an eligible supply. 

A similar condition for restaurant and catering services applies. Namely, the service must be delivered no later than February 15, 2025, and both the consideration for the supply must be paid and the service must be entirely rendered during the eligible period.

E.g., Anne’s Flower Shop Ltd. hosts a holiday party for their team of 10 employees on December 18, 2024. The catering services are all provided for and invoiced on that day. GST/HST would not be applicable.  

Alternatively, if the party was hosted on December 12, 2024, and paid for on December 14, 2024, this service would not be an eligible supply.  

Note that a supply of a product or service subject to deposit before December 14, 2024, may qualify for this measure, provided the entire balance is paid and the supply of the good or service is made within the eligible period.

However, not all pre-payments are deposits. Instances where deposits have been provided before December 14, 2024, and the supply of a product or service is made during the eligible period should be reviewed further to see if the tax relief applies.

Potential points of confusion

One might expect these timing conditions to be easy to follow for point-of-sale retailers and restaurant owners.

However, a point of confusion could arise for suppliers who issue invoices for their products or services with delayed payment terms (e.g. net 30). Specifically, should these invoices include GST/HST at the time the invoice is issued if the payment terms are not within the eligible period? Likewise, when ordering items online, it might not be known at the time payment is taken when the item will be available for shipping.

What next? 

This should be an interesting time for consumers and retailers. While consumers will benefit significantly from this tax holiday, retailers and restaurant operators must carefully consider the timing and other finer details of the legislation.

Affected businesses have a lot of work to do ahead of the December 14 implementation date, including adjusting point of sale systems, clarifying any areas of uncertainty, and educating team members.

Connect with an Indirect Tax Advisor to discuss how these proposed measures will impact your business.