Shelley asked:

I own an ON corporation that manufactures and dispenses zero rated supply, and I have been recently audited regarding gst that was to be applied to management salary to me from my corporation. The auditor added the gst on the income from the corporation and said I was now supposed to pay for 3 years past.

I understand that this is an accounting issue, but why am I being told to pay this gst when all along the company is involved in the service and supply of zero rated products?

Ram Madhavan answered:

The activity of a business (in this case the supply of zero rated products) generally does not impact whether or not the business must pay GST on the goods and services that it purchases. However, it will impact its ability to claim input tax credit for the GST paid on the goods and services purchased. In other words, a company that makes tax exempt supplies must still pay GST on the products and services that it purchases.

In this case, the shareholder is supplying management services to the corporation. The company would not have paid GST if the person was paid for her services in the form of a salary (i.e. she is on the corporation's payroll and gets a T4).

However, if she is supplying her services under a management services contract, GST will apply and she must therefore charge GST to the corporation.

Since the corporation is engaged in making zero-rated supplies, it will be able to claim input tax credits for the GST paid on the management services supplied by the shareholder.

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