Income Tax versus Sales Tax: What are the Differences?

Everyone’s favourite topic: taxes.

You’ve got income tax and sales tax, but what is the difference between them?

I’ve been asked this question many times by my fellow small business owners, so I decided to write this blog to lay it all out.

As Signal Operations is a Canadian business, I’ll be looking at both income and sales tax from a Canadian accounting lens, as that is not only where I am but where my clients are as well!

Sales Tax

First, let’s get into sales tax, specifically what it is, and its key aspects.

Sales tax is based on the cost of the item or service being purchased. To be more technical, sales tax in Canada is composed of the Goods and Services Tax (GST) and the Provincial Sales Tax (PST). GST is a federal tax applicable across the entire country, currently set at 5%. However, the PST rates and regulations vary from one province or territory to another. For example, in Ontario, the Harmonized Sales Tax (HST) combines the GST and PST into a single tax of 13%.

Key aspects to keep in mind when it comes to Sales Tax are:

Sales tax is applied to most goods and services consumed in Canada, such as everyday items like clothing, electronics, and restaurant meals, as well as professional services such as legal advice and accounting services (oh hey there).

In regards to collection, businesses are responsible for collecting sales tax on behalf of the government. They then remit these taxes to the appropriate tax authority, ensuring compliance with the law (CRA).

There are some exemptions and caveats. For example, certain items, such as basic groceries, prescription medications, and healthcare services, are exempt from sales tax to ensure essential goods and services remain affordable for all Canadians (big fan of that).

Income Tax

Income tax is a tax that is applied to a person's income or earnings, while sales tax is a tax on the sale of goods and services. Income tax is generally based on a person's total earnings. For example, you may have a higher income tax rate for higher earners, but the sales tax rate is the same for everyone.

There are key things to keep in mind when discussing income tax which are:

Individuals are taxed on their total income, which includes earnings from employment, investments, and other sources. It is important to note that Canada employs a progressive tax system, meaning higher incomes are taxed at a higher rate.

Businesses operating in Canada are subject to corporate income tax on their profits. The rates and regulations differ for small businesses and corporations, impacting their overall tax liability. If you have questions about which rates and regulations apply to your business, ask a bookkeeper and book an Ask a Bookkeeper Clarity Session!

Individuals and businesses must file annual tax returns, reporting their income, deductions, and credits. Failure to comply with tax regulations can result in penalties and legal consequences, so it’s important to file accurately and on time (but there are extensions available for those who may want or need them).

The Big Differences between Sales and Income Tax

Now that we’ve gone through each individually, here are some of the key differences between the two and other things to keep in mind:

Sales tax is collected by businesses and remitted to the government, while Income tax is self-reported by individuals and corporations, with the responsibility of accurate reporting lying with the taxpayer (that’s YOU).

Income tax rates vary based on income levels, ensuring higher earners contribute a larger percentage of their income. In contrast, Sales tax is a flat rate, meaning everyone pays the same percentage on their purchases, regardless of their income.

The big difference between the two is that Sales tax is applied at the point of sale on goods and services, impacting consumers directly and Income tax is levied on individuals and businesses, calculated based on their earnings and other financial activities.

Whether you’re just beginning your business or deep in the trenches of growing/developing your business, it’s important to give yourself a refresher on these terms and understand how they impact your business. It’s also important to ensure that you keep track of any and all filing dates that pertain to your business, as it keeps you organised and in the good books (pun intended).

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