Quick answer: Zero-rated supplies are taxed at 0% GST/HST, but you can still claim input tax credits on the expenses that relate to them. Exempt supplies have no GST/HST charged at all — and, critically, you cannot claim input tax credits related to them. They look identical on the customer's receipt ($0 tax) but are opposites in your books, and confusing the two is one of the more expensive GST/HST misclassifications a small business can make.
Key takeaways
- Zero-rated = 0% GST/HST charged, but related input tax credits are still claimable.
- Exempt = no GST/HST charged, and related input tax credits are not claimable.
- Common zero-rated examples: basic groceries, prescription drugs, many exports.
- Common exempt examples: most medical and dental services, residential rent, most financial services.
- Misclassifying a supply changes both what you charge and what you can recover.
On the surface, zero-rated and exempt supplies look like the same thing: the customer pays no GST/HST either way. That's exactly why the distinction trips up so many business owners — the difference only shows up on the input tax credit side, where it's easy to miss until CRA reviews your return. Get the classification wrong and you either give up money you were entitled to, or claim money you weren't.
The one-sentence difference
Zero-rated supplies are still, technically, taxable supplies — just taxed at a rate of 0%. Because they remain part of your taxable commercial activity, you can claim input tax credits (ITCs) on the expenses used to make them, exactly as you would for any standard-rated sale. Exempt supplies sit entirely outside the GST/HST system — no tax is charged, but as the trade-off, expenses related to making them don't generate ITCs at all.
Zero-rated supplies: 0% tax, full ITC recovery
Common examples of zero-rated supplies include basic groceries, prescription drugs, many agricultural and fishing products, and many goods and services exported outside Canada. If your business sells any of these, you still charge $0 in GST/HST on the invoice — but because the supply is technically taxable at 0%, you fully recover the GST/HST you paid on equipment, supplies and professional fees used to produce it, exactly the same as a business selling standard-rated goods.
Exempt supplies: no tax, no ITC recovery
Common examples of exempt supplies include most medical and dental services, long-term residential rent, most financial services, and many educational and childcare services. A business making these supplies doesn't charge GST/HST on the sale — but it also can't recover the GST/HST paid on expenses tied to that activity. If a business's revenue is entirely from exempt supplies, it generally can't register for GST/HST for that part of the business at all, no matter how much revenue it earns.
Every corporation’s situation is different. Book a free 30-minute consult with a CPA and get a straight answer — plus a fixed quote before any work starts.
Why the distinction is easy to get wrong
Both categories produce an invoice that reads "$0 GST/HST" — so a business owner glancing at pricing alone has no visual cue that anything is different. The real distinction only becomes visible when you look at the expense side of the ledger: is the ITC on that expense claimable, or not? Businesses that don't explicitly classify each revenue stream when they set up their books often default to treating everything the same way, which is where the mistakes start.
What misclassification actually costs
Treat an exempt supply as if it were zero-rated, and you may claim ITCs you were never entitled to — something CRA can reassess later, along with interest. Treat a zero-rated supply as if it were exempt, and you quietly give up ITCs you were entitled to claim, overpaying tax on your own business expenses year after year without realizing it. Either direction costs real money; the fix is getting the classification right from the start and keeping it consistent as your revenue mix evolves.
How to get it right
When you're unsure how a specific supply is classified, check CRA's published guidance for that type of good or service rather than assuming based on how a competitor handles it. Once classified, keep the treatment consistent in your bookkeeping so ITCs are tracked correctly against each revenue stream — and revisit the classification if you add a new product or service line, since it's easy to assume everything follows the same rule as your original offering.
The bottom line
Zero-rated and exempt look the same to your customer and completely different to CRA. Knowing which of your revenue streams falls into which category — and tracking ITCs accordingly — protects both what you charge and what you can claim back. If you're not sure how your services are classified, that's worth a conversation before your next filing, not after.
This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Tax rules change and your situation is unique — please speak with a CPA before acting on anything here.
Founder of EverStone CPA, an Abbotsford CPA firm, and a member of the Chartered Professional Accountants of British Columbia (CPABC). Sunny works with incorporated contractors and small business owners across Canada on tax, bookkeeping and advisory. More about Sunny →
Frequently asked questions
What's the difference between zero-rated and exempt supplies?+
Can I claim input tax credits on exempt supplies?+
What are examples of zero-rated supplies?+
What are examples of exempt supplies?+
Can a business make both taxable and exempt supplies?+
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