Canada to join in sales tax holiday fun

Introduced in late November, the Tax Break for All Canadians Act received Royal Assent on December 12, 2024. Businesses have mere hours to prepare for Canada’s sales tax holiday, which begins December 14, 2024, and runs until February 15, 2025.

During the sales tax holiday, qualifying food, beverages, and “holiday essentials” are exempt from Canada’s goods and services tax (GST)/harmonized sales tax (HST) . 

Here’s what you need to know.

A wide variety of transactions will qualify for the tax break.

Qualifying items include:

• Food
  • Prepared foods including salads, sandwiches, and pre-made meals
  • Snacks including baked goods, candy, and chips
  • (Many basic groceries are already tax-free)
• Beverages 
  • Non-alcoholic drinks such as carbonated beverages, juices, smoothies, coffee, and tea
  • Beer and malt beverages
  • Cider, wine, and sake that are 22.9% alcohol by volume (ABV) or less
  • Spirit coolers and premixed alcoholic beverages that are 7% ABV or less
• Restaurant food and beverages
• Children’s clothing and footwear
• Children’s diapers
• Children’s car seats
• Children’s toys
• Jigsaw puzzles (for all ages)
• Video game consoles, controllers, and physical video games
• Physical books
• Printed newspapers
• Christmas trees, Hanukkah bushes, and similar decorative trees

To be eligible for the tax relief, qualifying items must be both:

• Paid for in full between December 14, 2024, and February 15, 2025; and
• Delivered or made available to the buyer between December 14, 2024, and February 15, 2025

Tax relief applies to B2C and B2B transactions

While most sales tax holidays in the U.S. apply only to business-to-consumer (B2C) sales, Canada’s proposed sales tax holiday will apply to qualifying transactions throughout the supply chain, including sales to manufacturers and wholesalers (B2B sales).

Items that don’t qualify for the tax break include:

• Alcoholic spirits and liqueurs
• Cannabis products 
• Dietary supplements
• Pet food
• Qualifying food and beverages when sold from a vending machine
• Adult clothing and footwear, even if purchased for a child
• Adult diapers, even if purchased for a child
• Children’s diapers provided as part of a diaper service
• Costumes and make-up
• Jewelry
• Specialized clothing and footwear (e.g., bowling shoes, ski boots, wetsuits)
• Collectibles not intended for play or learning, such as collectible dolls or hockey cards
• Toys and model sets marketed for adults
• Downloadable or online-only games
• Certain gaming accessories such as chairs or headsets
• Ebooks
• Downloadable audio books and electronic audio books
• DVDs, CD-ROMs, and Blu-ray disks with textual or visual information
• Address books, agendas, calendars, diaries, and similar items for writing on
• Holiday decorations that aren’t an actual tree, including Christmas tree decorations
• Poinsettia plants

How does tax relief apply to food delivery?

Restaurants and delivery platforms will need to be particularly careful when updating their systems. The zero rate will apply to certain delivery charges but not to others.

When a restaurant or other eating establishment bills a customer directly for delivery of a prepared meal, the delivery service qualifies for the zero rate.

However, when a meal is ordered through a third-party delivery platform, the delivery is considered a separate transaction. Thus:

• Charges for the prepared meal are exempt
• Charges for delivery by a third party remain taxable

How does tax relief apply to bundled transactions?

Transactions that include both qualifying and nonqualifying items pose a similar compliance challenge for retailers. 

For example, if a customer orders exempt prepared food along with a taxable whiskey, the seller must not apply GST/HST to the prepared food charge but must collect the applicable GST/HST on the whiskey.

Does tax relief apply to provincial sales taxes (PST)?

The tax relief measure only applies to the GST and the HST, which is a combined provincial and federal tax. It does not apply to standalone provincial sales taxes (PST) or to the Quebec sales tax (QST) — unless provincial governments adopt a provincial sales tax holiday.

HST is used in the provinces of New Brunswick, Nova Scotia, Ontario, Prince Edward Island, and Newfoundland and Labrador. Therefore, all eligible sales will be fully tax exempt in these provinces.

The following provinces levy a GST and a PST instead of an HST:

• British Columbia
• Manitoba
• Quebec (GST and QST)
• Saskatchewan

While qualifying transactions in these provinces are exempt from GST during the sales tax holiday, PST will continue to apply.

See a list of Canadian GST, PST, and QST rates.

How long will the tax relief last?

Canada’s sales tax holiday will run December 14, 2024, to February 15, 2025. It’s expected to save Canadians (or cost the government) approximately $1.6 billion CAD. The compliance cost to businesses is yet to be determined.

Businesses are responsible for not charging GST/HST on qualifying goods and services while sales tax holiday is in effect. A temporary zero rate will apply, and per the Government of Canada, “zero-rated means that no GST/HST is charged when the supply is made because the tax rate is 0%.”

This may sound straightforward, but ensuring sales systems apply the zero rate of GST/HST to all qualifying transactions — and to qualifying transactions alone — will take time. And time is limited.

According to a survey of U.S. retailers conducted by Censuswide (on behalf of Avalara) in August 2024, last-minute sales tax holidays are a significant pain point for retailers. An astonishing 73% of the retailers surveyed reported difficulties in complying with sudden changes. 

Many of the surveyed retailers also incur additional costs as a result of sales tax holidays:

• 58% spend at least $10,000 annually on team, operational, and system processes to prepare for sales tax holidays

• 57% hire temporary staff to handle the increased demand and compliance rush

• 53% pay current employees overtime

The survey focused on U.S. sales tax holidays. However, the takeaways will almost certainly apply to Canada’s proposed sales tax holiday too. 

Avalara AvaTax will automatically apply the tax relief to qualifying transactions for Avalara customers set up to collect and remit Canada GST/HST. This is one of the benefits of automating tax compliance.