Return to PST Questions and Answers

Transcription

1 Return to PST Questions and Answers Is there a transitional period introduced in the Provincial Sales Tax Act ( PSTA )? When the Harmonized Sales Tax ( HST ) replaced the Goods and Services Tax ( GST ) and the Provincial Sales Tax ( PST ) in July 2010, there was a time frame during which the transition would occur. Many of the transitional provisions were based on the percentage completion of work or the time frame when the work was completed. The transition back to the PST will be far less complicated. The earlier of the date that consideration is paid or becomes due will be the basis for determining whether to charge HST or GST and PST. Example #1: A company sends monthly invoices for a lease. The March 1, 2013 invoice will charge HST whereas the April 1, 2013 invoice will charge GST and PST. Example #2: A customer pays for a product on March 31, The customer picks up that product and an invoice is generated on April 2, This sale will be subject to HST as March 31 is the earlier of the date that consideration is paid or becomes due. Example #3: A customer places an order for a product on March 31, The customer picks up that product and an invoice is generated on April 2, The invoice is paid on April 30, This sale will be subject to GST and PST as April 2, 2013 is the earlier of the date that consideration is paid or becomes due. We sell products to a customer with a billing address in BC, and a shipping address outside of BC. Is the place of supply the billing address or shipping address? Sale of Tangible Personal Property For sales of tangible personal property ( TPP ), generally the place of supply is where legal title to the goods is transferred. This can vary depending on each contract; therefore each case needs to be examined based on its specific facts. TPP is deemed to be delivered in a particular province where one of the following three criteria are met:

2 1. The supplier ships the TPP to a particular province 2. The supplier transfers possession of the TPP to a common carrier (eg. Fedex / Purolater) arranged by the supplier for delivery to a particular province (as opposed to where the purchaser arranges their own freight) 3. The supplier mails the TPP to a particular province Example #1: A BC supplier ships products to an Alberta address. The supplier retains custody and control of the product until it is delivered in Alberta. The place of supply is Alberta as the legal title is transferred in Alberta. Example #2: A BC supplier sells products to a company in Alberta. The purchaser arranges for freight and picks up the product at the BC location. The purchaser has custody and control of the product after it is picked up from the supplier. The place of supply is BC as the legal title is transferred in BC. Example #3: A BC supplier sells products to an Alberta address. The supplier arranges shipping on behalf of the purchaser. The supplier retains custody and control of the product until it is delivered in Alberta. The place of supply is Alberta as the legal title is transferred in Alberta. Sale of Services The place of supply rules for sale of services is slightly more complex. Generally, services will be deemed to have been supplied (and tax is therefore applicable) based on the following; 1. If an address in Canada is obtained, that address. Where more than one address in Canada is obtained, the address more closely connected with the supply. 2. Where Rule 1 does not apply because there is no Canadian address, the province where the service is primarily performed. 3. Where Rule 2 does not apply because services are provided equally in more than one province, the province with the highest rate of tax. In addition to the above general rule, there are exceptions made for services related to real property, services related to TPP and a variety of other categories. Example #1:

3 A BC supplier sells services to a company located outside of BC. The purchaser has multiple locations, including a BC location and an Ontario location. The purchaser provides both addresses to the supplier and the service is in relation to the Ontario location. The place of supply would be Ontario since more than one Canadian address is obtained and the Ontario location is more closely connected with the supply. The supplier will charge Ontario s rate of HST on this invoice. Example #2: A BC supplier sells services to a company located outside of Canada. There is no Canadian address for the client. The services are primarily performed in BC. The place of supply is BC as Rule 1 will not provide an address and Rule 2 states that the place of supply is deemed to be where the services are provided. We supply certain equipment to an individual, but are paid by a third party. Is the third party our customer or is the individual our customer for purposes of determining the place of supply? The answer depends on the specific terms of the agreement, but the general place of supply rules would suggest that the individual recipient is the customer. If the terms specify that the third party is acquiring the TPP or taxable service for the benefit of the individual, there is an argument that the individual is the beneficial recipient of the product or service and therefore the place of supply would be based on the location of the recipient. Where the terms of the agreement specify that the third party is acquiring the supply, and is simply having it shipped to the recipient directly, there is an argument that the shipping address obtained by the supplier would be the place of supply. A US company transfers assets to a related Canadian company located in BC. Is the BC company required to self-assess PST? The answer depends on the relationship between the parties and the type of asset that is transferred. Generally, if the asset transferred is TPP, self-assessment will be required unless a specific exemption applies. The asset would be imported into BC and would be subject to PST on the original cost of the asset less any depreciation allowance available. There is an exemption available for transfers of assets between related corporations. However, the definition of related corporations for purposes of PST is more restrictive than the Income Tax Act ( ITA ). The PSTA considers two corporations to be related in the following circumstances:

4 1. One corporation is a wholly owned subsidiary of the other. 2. Two corporations are wholly owned subsidiaries of the same corporation. Wholly owned is further defined as beneficially owning 95% of each class of shares of the corporation. Therefore, an exemption on this transfer would be available for a wholly owned subsidiary, but not where there is 50% ownership. Planning Point: Companies could consider transferring cash to Canadian subsidiaries to purchase TPP directly while they qualify for the HST input tax credit. We purchased assets in one sales tax jurisdiction and are importing them into BC. Is there any recovery of sales tax in the jurisdiction in which the assets were purchased? Each province has a different mechanism with respect to collecting, remitting and refunding sales taxes. Therefore, each specific sales tax act would need to be examined in order to determine if there is a recovery mechanism in place. Planning Point: Based on the place of supply rules, consider having the item delivered directly to BC, thereby only charging one rate of tax. We have entered into long-term financing contracts which will end after we transition to PST. What will happen to the remaining payments after the transition? Each long term financing arrangement can have different terms. The key date for purposes of PST is when the sale has occurred. If the financing arrangement is structured such that the sale has occurred and the payments are being made before possession takes place, the date of sale will be the basis for charging tax. If the sale occurs on or before March 31, 2013, HST will apply. If the financing arrangement is structured where amounts are invoiced on a monthly basis, the March invoice would be subject to HST and the April invoice would be subject to GST and PST. For the portion of the bill related to financing fees, the rate of tax should decrease from 12% to 5% as services related to financing will not be a taxable supply for PST purposes. Do the real property rules apply to both commercial and residential property? Real property is defined as land. It also includes buildings and structures affixed to land. There is no distinction between real property for residential or personal use and real property for commercial use. Therefore, the real property rules will apply to both residential and commercial property.

5 How do we determine whether a service is in relation to tangible personal property or is an improvement to real property? Services in connection with real property are generally exempt from PST, whereas services in connection with TPP are generally taxable. Improvements to real property According to PST Notice : Real Property Contractors, improvements to real property will include integral components of land and building, such as windows, doors, plumbing etc. Improvements to real property could also include large machinery or equipment that is constructed on site, unless that machinery or equipment would be considered affixed machinery. Affixed Machinery Affixed machinery is generally considered TPP unless it meets any of the specific exceptions in PST Notice : Real Property Contractors. Affixed machinery generally includes machinery or equipment that is used in connection with the production of goods which is installed or affixed to a building or a structure such that it ceases to be personal property. Although it ceases to be personal property, it is still considered TPP for PST purposes. There is a general exemption for services related to affixed machinery as was the case under the SSTA. Repairs to other TPP will still be subject to PST unless a specific exemption applies. It is also important to note that affixed machinery that is removed from the site at which it is affixed is tangible personal property while it is removed. Registration of Real Property Contractors Registration is required by a contractor providing services related to real property IF the contractor will enter into agreements in writing for the customer to pay the PST directly. Contractors must register, as although the customer will pay the PST, the contractor will still be required to collect and remit the tax. We charge a non-refundable deposit for our services which are booked up to a year in advance. How do we account for this deposit when issuing the final invoice? The general transitional rule provides that PST will apply to the purchase of goods for which consideration becomes due after April 1, 2013 and is not paid before April 1, There are three components to this rule; 1. Date payment is received if a customer pays for a product or a service prior to April 1, 2013, PST will not apply because the purchase is subject to HST

6 2. Date consideration is due where an invoice is issued prior to April 1, 2013, PST will not apply as the invoice will be subject to HST 3. Where possession is transferred prior to consideration being due or paid, the date that is the end of the month following the month in which possession takes place PST Notice : General Transitional Rules for the Re-Implementation of the PST indicates in its footnotes that retainers under the PST will be subject to the same tax treatment as any other deposit. Deposits will not be consideration for the purchase or lease of goods, purchase of software or purchase of taxable services until the seller or lessor has applied the deposit as consideration of that purchase of lease. Based on this notice, deposits would be considered an interim billing and the date that an invoice is rendered would become the relevant date for purpose of determining which tax would apply. What are the rules regarding sales to Status Indians? Sales of TPP or taxable services are exempt from PST if they are sold or supplied to a Status Indian on the reserve. Where the sale or delivery is made off the reserve, Status Indians will be required to pay PST. Where a product is being purchased off reserve, but is being delivered to the reserve, the sale would be exempt from PST based on the place of supply rules. We sell goods subject to PST and administer the freight/delivery to the customer which is charged separately on the invoice. Does PST apply to the freight charge? Where freight is charged separately on an invoice, PST would not be charged on the freight service. PST is only applicable to taxable services, and transportation services are not included in the list of taxable services. We purchase software from a company outside of Canada for use in multiple locations, including offices in BC. Do we self-assess PST on the usage of this software? PST will need to be self-assessed and remitted based on the usage of the software in BC. The purchase price of the software will need to be pro-rated for the BC usage component to apply the tax. If the software is customized (modified in any way from the off the shelf product) this supply would be exempt and no PST would be applicable. Services related to the software are also not taxable.

7 Will the province of BC pay PST? The province will continue to pay PST on all purchases of TPP or taxable services supplied to them. In contrast, the Government of Canada will be exempt from any PST. Late Filing, Interest and Penalties Under the PSTA, there are penalties applicable for failure to register for PST, failure to levy tax, providing incorrect information in relation to an exemption, and failure to remit or pay tax. Failure to Register as Required Where a person has not registered with PST as required, a penalty can be applied equal to 25% of the amount of tax that should have been levied and collected during the period in which the vendor should have been registered. Failure to Levy Tax Where a collector should have levied tax, and failed to do so, a penalty in the amount of the tax that should have been collected can apply. Failure to Remit or Pay Tax In addition to any other penalty assessed, failure to remit or pay tax will attract a normal penalty of 10% of the amount not remitted or repaid. In limited circumstances, this 10% penalty can be reduced. Where the circumstances of the failure to remit or pay tax indicate that the vendor willfully failed to remit the tax or evaded the payment of tax by willfully making a false or deceptive statement, this penalty can increase to 25% or even 100% of the tax that should have been remitted. Interest is charged based on prescribed rates and the amount of tax and/or penalty owing. The transition back to the PST will impact different industries in different ways. For more information about your specific circumstances, please contact your Manning Elliott advisor.