What is the difference between zero-rated and exempt supplies?

Zero-rated: taxed at 0%, with input tax credits still available

A zero-rated supply is technically a taxable supply, just taxed at a 0% rate rather than 5%, 13%, or another applicable rate. Because it remains a taxable supply, the seller stays registered and inside the commercial-activity system, which means input tax credits on costs used to make that sale are still claimable.

Common zero-rated categories include basic groceries, prescription drugs, most medical devices, and exports of goods and services outside Canada. A farmer selling zero-rated grain, a pharmacy filling a zero-rated prescription, and an exporter shipping zero-rated goods to a US buyer are all still commercial activities for GST/HST purposes, even though no tax shows up on the invoice.

Because the sale still counts as a taxable supply, it also counts toward the $30,000 small supplier threshold, which surprises some exporters who assume a sale with no tax charged on it is irrelevant to their registration obligation. It is not; the value of the sale still matters, only the rate applied to it is zero.

Exempt: outside the system, with no input tax credits

An exempt supply is not a taxable supply at all. No GST/HST is charged, and because the activity is not a commercial activity under the Excise Tax Act, the seller cannot claim input tax credits on the costs used to make that supply, even if those costs themselves included GST/HST.

Common exempt categories include most health care services, tutoring and educational services, financial services such as interest and insurance, long-term residential rent of 30 days or more, and the sale of used residential housing. A landlord renting a long-term residential apartment charges no HST on the rent, but also cannot recover the HST paid on renovations, property management fees, or repairs to that building; see HST on commercial versus residential rent for how this plays out in practice.

Unlike a zero-rated sale, an exempt sale does not count toward the $30,000 small supplier threshold, since it falls outside the GST/HST system entirely rather than being taxed at a 0% rate within it.

Why the distinction changes a seller's real costs

Because a zero-rated seller can still recover input tax credits, the GST/HST they pay on inputs is essentially a wash, recovered dollar for dollar through their return. An exempt seller has no such recovery, so the unclaimed GST/HST on their costs becomes a real, permanent cost baked into their pricing.

This is one reason exempt sectors like residential landlords and financial institutions often build the embedded, unrecoverable tax into what they charge, even though the line-item price shows no GST/HST at all. It is invisible to the customer but very real on the seller's margin, and it is one reason some businesses that could structure their activity either way pay close attention to which category a given supply falls into before setting it up.

A business deciding between two ways of structuring the same activity, such as leasing equipment outright versus bundling it into a broader exempt service, should work through the ITC consequences of each option before committing, since the difference compounds every time the exempt structure generates a new HST-bearing cost it can never recover.

Mixed-supply businesses must apportion their input tax credits

A business that makes both taxable, including zero-rated, supplies and exempt supplies cannot simply claim full input tax credits on every cost. Instead, it has to apportion costs between the commercial activities that generate ITC-eligible tax and the exempt activities that do not.

• Costs used entirely for taxable sales, such as inventory for a retail counter, generate a full ITC.
• Costs used entirely for exempt sales, such as a mortgage broker's exempt commission activity, generate no ITC.
• Shared costs, like rent on a building used for both a taxable retail space and an exempt clinic, must be split using a reasonable method, commonly square footage or revenue proportion, and only the commercial-activity share is claimable.

The CRA expects the apportionment method to be reasonable and applied consistently from year to year, not chosen fresh each period to maximize the claim. A business with a genuinely mixed revenue stream, such as a clinic that also sells retail wellness products, should decide on a method early and document why it is reasonable, rather than reworking it retroactively during a review. Changing the method later is not necessarily off-limits, but it should reflect a genuine change in how the space or costs are used, not simply a more favourable number.

Keeping a short written note on file explaining why a particular apportionment ratio was chosen, and updating it when the underlying mix of activity actually changes, is a small habit that makes a mixed-supply GST/HST position far easier to defend than trying to reconstruct the logic from memory years later.

How we handle mixed-supply ITC apportionment for clients

We map a client's revenue lines to taxable, zero-rated, and exempt categories before setting up their chart of accounts, so the apportionment method is built into the bookkeeping from day one rather than reconstructed at year-end. For businesses that add a new exempt or taxable revenue stream partway through the year, we revisit the allocation so it still reflects how the space and shared costs are actually being used, and we keep the reasoning documented in case the method is ever questioned. Our GST/HST and tax services page covers this kind of registration and compliance work more broadly.

Source: CRA — GST/HST for businesses.