How to Set Up GST/HST in Xero for Canadian Businesses: A CPA's Complete Guide

Getting your GST/HST setup right in Xero is one of the most important steps when configuring the software for a Canadian business. It is also one of the most common places where things go wrong. We see it constantly at LedgerLogic: a business owner sets up Xero, accepts the default tax rates without verifying them, and six months later discovers their GST/HST return does not match what they actually collected and paid. For help with the basics, check our Xero Sales Tax Hub.

The consequence is either overpaying CRA (money you did not owe sitting with the government) or underpaying CRA (which means interest and potential penalties when the discrepancy is found). Neither is a good outcome.

This guide walks through the Xero GST/HST setup process step by step, starting with a quick primer on how Canada's sales tax system works, then covering the configuration in Xero, multi-province scenarios, filing your return from Xero, and the mistakes that catch people most often. If you are still deciding whether Xero is the right platform, see our Xero overview for Canadian businesses. If you are migrating from QuickBooks and need to get your tax codes right in the new system, our QuickBooks to Xero migration guide covers the tax mapping process.

Canada's Sales Tax System: A Quick Primer for Xero Users

This is not a comprehensive tax guide — for that, see our GST/HST tips for small business owners and our current GST/HST rates by province. But you need to understand the basics before configuring Xero.

Canada has four different sales tax structures depending on the province. You must know which one applies to your business.

HST Provinces (single combined rate):

GST + PST Provinces (two separate taxes):

GST + QST (Quebec):

GST Only (no provincial tax):

Alberta, Northwest Territories, Nunavut, Yukon — 5% GST only.

Why this matters for your Xero setup: If your business is in Ontario, you charge a single 13% HST. If you are in British Columbia, you charge 5% GST and 7% PST as two separate taxes. If you sell to customers in other provinces, you may need to charge the tax rate of the customer's province (place of supply rules). Each scenario requires different Xero tax rate configurations.

Xero's Default Canadian Tax Rates: What Is Pre-Built

When you create a Xero organisation with Canada selected as your country, the system pre-builds a set of standard Canadian tax rates. These include:

Locked default rates (cannot be deleted, can be edited):

• Tax Exempt — for supplies that are exempt from GST/HST (residential rent, most financial services, certain health care services)
• GST on Income / GST on Expenses — 5% federal GST
• HST on Income / HST on Expenses — varies by province (13% for Ontario, 15% for Atlantic provinces, etc.)
• Zero-Rated — for supplies taxable at 0% (basic groceries, exported goods, prescription medications)
• No Tax — for transactions with no tax implications (payroll, internal transfers, owner draws)

Province-specific rates (may need to be activated):

• PST rates for BC (7%), Saskatchewan (6%), Manitoba (7%)
• QST rate for Quebec (9.975%)
• Combined GST+PST/QST rates for provinces with two-component tax

What most businesses actually use: If you operate in a single HST province (like Ontario), you will primarily use HST on Income, HST on Expenses, Tax Exempt, Zero-Rated, and No Tax. That is five tax rates. You can safely ignore the others unless you sell into other provinces.

If you operate in a GST+PST province (like BC), you need both the GST and PST components active. Xero handles this by allowing you to create compound tax rates with multiple components.

CPA tip: The default tax rate on new Xero files is often set to "Tax Exempt" on revenue accounts. This is wrong for most businesses. If you are a GST/HST registrant selling taxable goods or services, your default revenue tax rate should be the applicable HST or GST rate for your province. We see this on new Xero files constantly — it is the single most common setup error.

How to Configure Your Tax Settings in Xero (Step by Step)

Here is the process we follow for every Canadian client setup.

Step 1: Verify your business details. Go to Settings → General Settings → Business details. Confirm your legal business name, address, and GST/HST registration number (BN15 — your 9-digit business number plus RT0001 or similar). This registration number should appear on your invoices. If you are also registered for QST in Quebec or PST in BC/SK/MB, record those registration numbers as well.

Step 2: Set your sales tax basis and filing frequency. Under Settings → General Settings → Financial Settings, configure:

• Sales tax basis: Choose Accrual or Cash. If you are incorporated, you almost certainly need Accrual (you remit GST/HST based on invoice date, not payment date). Sole proprietors with revenue under $500,000 can elect the Cash basis (remit when payment is received).
• Filing frequency: Set this to match your CRA-assigned frequency — Monthly, Quarterly, or Annually. Xero uses this to generate your GST/HST return for the correct period.
• Tax ID name: Enter "GST" or "HST" depending on your province. This is the label that appears on your invoices.

Step 3: Review the default tax rates. Go to Accounting → Advanced → Tax Rates. Review the pre-built rates and ensure the correct ones are active for your province.

• For an Ontario business: confirm HST on Income (13%) and HST on Expenses (13%) are active and correctly configured.
• For a BC business: confirm GST on Income (5%) and GST on Expenses (5%) are active, plus BC PST on Sales (7%) and BC PST on Purchases (7%). You may need to create compound tax rates that include both GST and PST components.
• For a Quebec business: confirm GST (5%) and QST (9.975%) are configured as a compound rate with both components set to non-compounding. This is important — QST is calculated on the pre-tax price, not on the price plus GST.

Step 4: Set default tax rates on your chart of accounts. This step is critical and saves enormous time during daily reconciliation. Go to Accounting → Chart of Accounts and edit each account to assign the correct default tax rate:

• Revenue accounts for taxable sales → HST/GST on Income (your province's rate)
• Revenue accounts for zero-rated sales → Zero-Rated
• Revenue accounts for exempt sales → Tax Exempt
• Expense accounts for taxable purchases → HST/GST on Expenses
• Bank fees → No Tax
• Insurance premiums → Tax Exempt
• Salaries and wages → No Tax
• Owner draw/shareholder loan → No Tax

For a complete guide on setting up your accounts, see our Xero chart of accounts for Canadian businesses.

Step 5: Configure your GST/HST filing frequency. Under Financial Settings, confirm your filing period matches what CRA assigned when you registered. Getting this wrong means your Xero GST/HST return generates for the wrong period, which causes confusion at filing time.

CPA tip: If you are an HST registrant in Ontario, your default sales tax rate should be "HST on Income (13%)" — not "Tax Exempt," which we see on new Xero files constantly. Check this immediately after setup. One incorrect default can mean months of transactions coded with no tax when they should have HST.

Common GST/HST Mistakes in Xero (and How to Fix Them)

These are the errors we fix most often in client Xero files.

Using "No Tax" when it should be "Zero-Rated." These are not the same thing. Zero-Rated means the supply is taxable at 0% — you still report it on your GST/HST return and can claim ITCs on related expenses. No Tax means the transaction is not subject to GST/HST at all (like owner draws or internal transfers). If you code exported goods as "No Tax" instead of "Zero-Rated," you lose the ability to claim ITCs on expenses related to those exports. The difference can be worth thousands of dollars per year for businesses with significant zero-rated sales.

Forgetting to code tax on imported goods or services (reverse charge). When you purchase goods or services from a non-resident supplier who does not charge GST/HST, you may be required to self-assess the tax. In Xero, this means recording the GST/HST on the expense yourself. Many businesses miss this entirely, which means they also miss the corresponding ITC claim.

Not updating tax rates when legislation changes. Xero typically updates standard tax rates automatically, but you should verify after any announced change. When Nova Scotia dropped from 15% to 14% HST in April 2025, businesses needed to confirm that transactions after the effective date used the new rate. Custom tax rates you created manually do not update automatically.

Coding personal expenses as business with full ITC claims. If personal expenses end up in your business Xero file and get coded with GST/HST, you are claiming ITCs you are not entitled to. This is a common CRA audit trigger. Every Xero file needs proper owner's draw/shareholder loan accounts to handle personal transactions. See our chart of accounts guide for the recommended setup.

Not reconciling the GST/HST payable account before filing. Before filing your return, check the balance of your GST/HST Payable account in Xero. It should approximately match the net tax amount on your GST/HST return. If there is a significant discrepancy, something is miscoded. Investigate before filing rather than discovering the error after submission.

Using the default "Tax Exempt" on revenue accounts. As mentioned above, new Xero files often default revenue accounts to Tax Exempt. If you are a registered business selling taxable goods or services, this is wrong. Every invoice you create with the wrong default goes out without tax — and you still owe the tax to CRA. Fix this immediately during setup by changing the default tax rate on all revenue accounts.

Multi-Province Sales Tax Setup (The Hard Part)

If your business sells only within your own province, the setup above is sufficient. But if you sell across provincial lines — which is increasingly common for e-commerce, SaaS, and service businesses — you need to handle multi-province tax configuration.

When to charge which rate (place of supply rules):

• For tangible goods, you generally charge the tax rate of the province where the goods are delivered. If your Ontario business ships a product to a customer in Alberta, you charge 5% GST (Alberta has no provincial tax). If you ship to Nova Scotia, you charge 14% HST.
• For services, the rules depend on the type of service. Generally, you charge the rate where the service is performed. For digital services and intellectual property, the rules can be more complex. This is a topic where professional advice is worth the investment.

How to set up customer-level tax defaults in Xero:

You can assign a default tax rate to individual contacts in Xero. If you have a client in BC, set their contact record to use GST+PST for BC. When you create an invoice for that client, Xero will automatically apply the correct rate. This is the cleanest approach for businesses with a manageable number of clients in different provinces.

For e-commerce businesses with high-volume, multi-province sales, consider using an integration like A2X (for Shopify/Amazon) that handles the tax rate assignment per transaction based on shipping destination.

How to handle inter-provincial invoicing:

When invoicing a client in another province, change the tax rate on the invoice line to match the customer's province. Do not use your own province's rate. For example, an Ontario business invoicing a BC client for consulting services should charge 5% GST (not 13% HST), assuming the place of supply is BC.

When to register for PST/QST in other provinces:

If you regularly sell into a province that has separate PST (BC, SK, MB) or QST (Quebec), you may need to register for that province's tax and collect it from customers. The registration thresholds and rules vary by province. This is an area where the cost of getting it wrong (retroactive assessments, penalties) far exceeds the cost of professional advice.

CPA opinion: If you are regularly selling into 3 or more provinces, the $200 to $300 to have your accountant configure the multi-province tax setup correctly in Xero will save you thousands in filing errors down the road. This is one of the areas where we see the most expensive mistakes from DIY setups.

Filing Your GST/HST Return from Xero

Xero has a built-in GST/HST return feature for Canadian businesses. Here is how to use it.

Step 1: Run the GST/HST return report. Go to Accounting → Reports → GST/HST Return. Select your filing period (Xero uses the frequency you set in Financial Settings).

Step 2: Review the report. Xero generates the return with automatic calculations for most lines. The report maps to the GST34 form (or GST34-2 for quarterly filers). Key lines to verify:

• Line 101 (Total sales and other revenue): Does this match your revenue for the period? If it seems high or low, check for miscoded transactions.
• Line 105 (Total GST/HST collected): This should be the tax collected from customers on taxable sales.
• Line 106 (Total ITCs claimed): This is the GST/HST you paid on business expenses. Verify it is reasonable relative to your expenses.
• Line 109 (Net tax): The difference between what you collected and what you paid. If positive, you owe CRA. If negative, you are due a refund.

Step 3: Check the Transactions by Line Number tab. This is one of Xero's most useful features for Canadian tax compliance. It shows every individual transaction that contributes to each line of the return. Use this to spot miscoded items (an expense coded as Tax Exempt that should have been HST, or a revenue transaction coded with no tax).

Step 4: Finalize and file. Once satisfied with the report, finalize the return in Xero (this locks the period). File through CRA My Business Account, or have your accountant submit it. You cannot currently e-file directly from Xero to CRA.

Step 5: Record the payment or refund in Xero. After filing, record the payment to CRA (if you owe) or the refund received (if CRA owes you) against the GST/HST Payable liability account. This clears the balance and keeps your books accurate for the next period.

Common discrepancy: The most frequent issue we see is the GST/HST return not matching what the business owner expected. In almost every case, the cause is one or more transactions coded with the wrong tax rate. The Transactions by Line Number tab is your diagnostic tool — review it line by line if the totals are off. For a step-by-step filing walkthrough, see our GST/HST filing guide.

Frequently Asked Questions

How do I set up HST in Xero for Ontario?

When you create a Xero organisation with Canada as your country and Ontario as your province, Xero automatically creates an HST on Income (13%) and HST on Expenses (13%) tax rate. Verify these are active under Accounting → Advanced → Tax Rates. Set HST on Income as the default tax rate on your revenue accounts and HST on Expenses as the default on your expense accounts. If you also sell to customers in non-HST provinces, you will need to activate additional tax rates for GST, GST+PST, or GST+QST as applicable. For setting up your bank rules with the correct HST rates, see our dedicated guide.

What is the difference between Zero-Rated and Tax Exempt in Xero?

This distinction matters for your Input Tax Credits (ITCs). Zero-rated supplies (like basic groceries or exported goods) are taxable at 0% — you charge no tax, but you can still claim ITCs on related business expenses. Tax exempt supplies (like residential rent or most financial services) carry no tax obligation and you cannot claim ITCs on expenses related to providing exempt supplies. In Xero, using the wrong code means either claiming ITCs you are not entitled to (Zero-Rated when it should be Tax Exempt) or missing ITCs you could claim (Tax Exempt when it should be Zero-Rated). If you are unsure, consult your accountant.

How do I file my GST/HST return using Xero?

Go to Accounting → Reports → GST/HST Return (or Sales Tax Report). Select your filing period and Xero generates the return with automatic calculations for most lines. Review the report, check the Transactions by Line Number tab for audit detail, then finalize it in Xero. File the return through CRA My Business Account or have your accountant submit it. Record the payment or refund in Xero to clear the GST/HST liability balance.

Can Xero handle multi-province sales tax in Canada?

Yes, but it requires manual configuration. You need to activate the correct tax rates for each province where you sell and set customer-level or transaction-level tax defaults. Xero supports HST, GST+PST, GST+QST, and GST-only configurations. For businesses selling into 3 or more provinces, we recommend having your accountant configure this to avoid errors with place of supply rules. See our Xero invoicing guide for how CRA-compliant invoices should display multi-province tax.

How do I set up QST for Quebec in Xero?

In Xero, create a tax rate with two components: GST at 5% and QST at 9.975%. Set both components as non-compounding (QST is calculated on the pre-tax price in Quebec, not on the price plus GST — this changed in 2013). Name the rate clearly (e.g., 'GST+QST on Sales — Quebec'). You will also need to display both your GST and QST registration numbers on invoices, which may require customising your Xero invoice template.

What happens if I use the wrong tax code on a transaction in Xero?

The transaction will be included in your GST/HST return with the wrong tax amount, which means you will either over-remit or under-remit to CRA. To fix it, edit the transaction and change the tax rate to the correct one. If the transaction is in a finalised period, you may need to make an adjustment in the current period. Xero's GST/HST return includes a Transactions by Line Number view that makes it easier to spot miscoded items before you file.

Do I need to update tax rates in Xero when rates change?

Xero typically updates the standard Canadian tax rates automatically. However, you should verify after any announced rate change. For example, when Nova Scotia reduced its HST from 15% to 14% on April 1, 2025, Xero updated the rate, but businesses needed to confirm the new rate was being applied to transactions after the effective date. Custom tax rates that you created manually will not update automatically — you must edit those yourself. Check our GST/HST rates page for the latest provincial rates.