Prince Edward Island announces transitional rules for harmonized sales tax

Transcription

1 Prince Edward Island announces transitional rules for harmonized sales tax November 2012 Effective April 1, 2013, Prince Edward Island (PEI) is replacing its federal and provincial sales tax system with a new Harmonized Sales Tax (HST) regime. The HST will generally apply at a rate of 14% and will be administered by the Canada Revenue Agency (CRA). Although most supplies and services will be subject to the new 14% tax, it s proposed that certain supplies will be relieved from the 9% provincial component of the HST, specifically heating oil; infant and children s clothing, and footwear; and books. 1 On November 8, 2012, PEI s Department of Finance announced HST transitional rules. The purpose of these rules is to determine whether the existing PST or the new HST will apply to transactions that straddle the April 1, 2013 implementation date. The rules also illustrate how the old PST system will be wound down. At the same time, the province also announced a temporary restriction on the ability for large businesses to claim certain input tax credits, similar to rules that were introduced in Ontario and British Columbia in Summary of HST transitional measures General rules The general rule is that the HST will apply to the sale of goods where ownership is transferred on or after April 1, 2013 and to the provision of a service performed on or after April 1, Where services straddle the April 1 implementation date, the tax charged for the service may have to be split between the pre-april 2013 and post-march 1 The relief for books was announced as part of the government s recent throne speech.

2 2013 periods. As an exception to this rule, the HST will generally not apply to a service if all or substantially all (90% or more) of the service is performed before April Supplies of intangible property (e.g., goodwill, intellectual property or contractual rights) will be subject to the HST where the consideration becomes due or is paid without having become due after March Where the supply of goods and services are involved, four key timelines are important. These timelines are all based on the earlier of the time the consideration is either due 2 or is paid without having come due. 1. Consideration due or paid before November 9, 2012: The HST will generally not apply to consideration that becomes due, or is paid without having become due, on or before November 8, 2012(however, please refer to the comments below for new residential property.) 2. Consideration due or paid after November 8, 2012 and before February 1, 2013: Certain businesses and public service bodies may be required to self-assess the PEI component of the HST on consideration that becomes due, or is paid without having become due, after November 8, 2012 and before February 1, 2013 for property and services provided on or after April 1, Consideration due or paid on or after February 1, 2013 and before April 1, 2013: The HST will generally apply to consideration that becomes due, or is paid without having become due, on or after this date for property and services provided on or after April 1, The supplier is required to account for the provincial component of HST in the return for the reporting period that includes April 1, Consideration due or paid on or after April 1, 2013: Implementation date for the HST in PEI. After March 2013, the HST will generally apply to a supply of goods or services. An exception to this rule will be where ownership of the property is transferred before April 2013 or the invoice relates to services provided before April In addition to the above general rules, special rules will apply to a number of situations, some of which are addressed below. Transitional rules for real property Real property (other than residential property) HST is due where both possession and ownership of non-residential property occurs on or after April 1, In general, an amount is due for a supply on the date of the invoice (assuming no undue delay) or the day required to be paid pursuant to a written agreement.

3 Residential real property Many homes will be partially constructed as of April 1, To assist in the transition, the following rules have been introduced: Subject to grandparenting rules for certain contracts (see below), builders sales of newly constructed or substantially renovated homes will be subject to the single sales tax where both ownership and possession of the home are transferred after March 31, Where ownership or possession of the new home is transferred before April 1, 2013, the 9% provincial portion of the tax does not apply. 2. Sales of newly constructed or substantially renovated homes will be grandparented where the written agreements of purchase and sale are entered into on or before November 8, 2012 and both ownership and possession of the homes are transferred under the agreement after April 1, Such grandparented homes will not be subject to the provincial portion of the single sales tax. 3. In order to ensure that such grandparented homes are taxed equitably, a transitional tax adjustment is payable by the builder. The transitional tax adjustment is based on the total consideration for the home, as established for GST purposes, based on the degree of construction or substantial renovation as of April 1, 2013, as follows Degree of completion of construction or substantial renovation as of April 1, 2013 Transitional tax adjustment rate < 10 % 4.5 % 10 % and < 25 % 3.38 % 25 % and < 50 % 2.25 % 50 % and < 75 % 1.13 % 75 % and < 90 % 0.45 % 90 % 0.0 % Example: Ms. A has signed a contract for the purchase of new residence on October 30, 2012 The purchase price is $600,000 Ms. A will take delivery of the house on July 1, 2013 As of April 1, 2013, the house was 35% complete Ms. A will pay 5% GST but she will not pay the 9% provincial portion of the single sales tax The builder will have to pay $6,750 ($600,000 x 2.25% x 50%). This amount approximates the PST that would normally have been paid to completion had there been no harmonization.

4 After March 31, 2013, builders will generally be able to recover the provincial portion of the HST as an input tax credit (similar to the GST), subject to certain limitations for builders whose annual revenue exceeds $10 million. PST transitional new housing rebate Newly constructed or substantially renovated homes completed in full or in part prior to April 1, 2013 will have PST embedded in the cost of the homes. In order to ensure that there is no double taxation, a PST transitional housing rebate will be available. The PST transitional new housing rebate will be calculated as a proportion of the estimated embedded PST, based on the degree of completion of the home as of April 1, Eligible applicants will be able to calculate the estimated embedded PST (estimated PST content) by choosing one of the following two methods: 1. Floor space method: Estimated PST content calculated at a prescribed amount of $60 per square metre of floor space in the home; or 2. Selling price method: Estimated PST content based on the selling price of the home, calculated at 4.5% of the total price established for GST purposes. The rebate will be calculated as follows (based on the degree of completion as of April 1, 2013) Degree of completion of construction or substantial renovation as of April 1, 2013 Transitional rebate (per cent of estimated PST content) < 10% 0% 10% and < 25% 25% 25% and < 50% 50% 50% and < 75% 75% 75% and < 90% 90% 90% 100% Example: A house was sold on June 15, 2013 for $500,000 (pursuant to a written agreement entered into on November 30, 2012) The builder started construction of the house on January 15, 2012 The house was 40% complete as of April 1, 2013 The transitional tax rebate will be equal to $11,250 (4.5% x $500,000 x 50%) using the selling price method.

5 Transitional rebate timeframes If the rebate calculation is based on the floor space method, the applicant will be eligible to file a rebate application anytime after April 1, If the selling method is utilized to compute the transitional tax rebate, then such claim can be made no earlier than the day that the single sales tax or the transitional tax adjustment would be payable. In all cases, the transitional tax rebate will need to be filed before April 1, 2017 (subject to an extension where the request for extension is received by the CRA before April 1, 2017). Other circumstances Newly constructed or substantially renovated homes built by owners for their personal use, as well as mobile homes and modular homes, will not be eligible for the PST transitional housing rebate as the transitional rules will apply differently to these types of homes or construction (see the grandparenting rules discussed above). Other transitional rules Memberships The supply of a membership in a club, organization or association is deemed to be a supply of a service for purposes of the transitional rules. HST will apply to the extent that the service is performed after March 31, Special rules apply to lifetime memberships where consideration becomes due or is paid without having become due after November 8, 2012, and before April Admissions The supply of an admission to a place of amusement, a seminar, an event or an activity is deemed to be a supply of a service for purposes of the transitional rules. HST will apply to the extent that the event or activity to which the admission relates occurs on or after April 1, Newspaper and magazine subscriptions Notwithstanding the general transitional rules, HST will not apply for a subscription to a newspaper, magazine, or other periodical publication where consideration is paid before April 1, Leases and licences Where a lease or licence of goods, intangible property, transient accommodation and nonresidential real property straddles the implementation date, HST will generally apply to lease intervals or payment periods on or after April 1, The general rules as described above for the key timelines will apply. However, where a lease interval begins before April 1, 2013 and ends before May 1, 2013, an exception is made and that particular lease payment is not subject to HST. PEI retail sales tax will apply to that payment if the lease is subject to PST.

6 Progress payment and holdbacks HST will apply to progress payments and holdbacks attributed to property delivered or services provided on or after April 1, These payments will relate to contracts to construct, renovate, alter or repair real property or ships or other vessels. For such payments due after November 8, 2012 and before April 1, 2013, the supplier will be required to account for the provincial component of the HST in the reporting period that includes April 1, Special rules will apply for construction substantially complete on March 1, Progress payments for newly constructed or substantially renovated homes will be subject to the rules for new residential housing. Transportation Notwithstanding the transitional rules for services, HST will not apply to a passenger transportation service performed on or after April 1, 2013 if it is part of a continuous journey that begins before April 1, For passenger transportation passes, HST will apply to the extent the pass period is after March 31, 2013, if the pass becomes due or is paid after November 8, HST will not apply for a pass period beginning before April 2013 and ending before May HST will not apply to a freight transportation service that is part of a continuous freight movement of goods that begins before April Prepaid funeral and cemetery services HST will not apply for funeral or cemetery services performed on or after April 1, 2013 if the service is supplied pursuant to an arrangement in writing that was entered into before April 1, Continuous supplies Property or services provided on a continuous basis such as electricity, gas, cable TV or cell phone will be subject to the HST for supplies provided after March If the supplier cannot reasonably determine when the property or service is supplied, the consideration will be pro-rated into equal parts according to the number of days in the period to which the consideration is attributable. Combined supplies Special rules apply where property and/or services are supplied together as a single supply and one of the items is property where ownership or possession is given before April 1, If HST would not have applied to the property if it was supplied separately, then the property is deemed to be a separate supply for purposes of the general rules. The combined supply rule will not apply to newly constructed or substantially renovated homes. Winding-down the PEI PST As of April 1, 2013, PST in PEI will generally not apply to

7 the sale of goods where ownership transfers after March 31, 2013; the supply of services to the extent performed after March 31, 2013; the supply of property by way of lease, license or similar arrangement for the lease interval that begins after March 31, Lease intervals that begin before April 1, 2013 and end before April 30, 2013 may still be subject to PST; the supply of a continuous transmission or continuous supply of a service such as natural gas or cable television where the property or service is made available after March 31, 2013; the sale of an admission or ticket for entry to a place of amusement after March 31, 2013; and the importation of goods after March 31, Notwithstanding the general wind-down rules, PST will apply where consideration for the sale of goods, services or admissions becomes due, or is paid on or before November 8, Final PST returns Final PST returns for the month of March 2013 are to be filed on or before April 20, Supplemental PST returns will be required for each month after March 31, 2013, where PST becomes collectible. All supplemental returns must be filed on or before the 20 th day of the following month and by no later than August 20, PST refunds and rebates Generally, refunds and rebates of PST will remain in place until the existing time limits for claiming them have expired for the transactions to which they relate, or March 31, 2017, whichever is earlier. An exception will be provided for refunds for returned goods (see below). Tax-included pricing For tax-included sales where the consideration becomes due or is paid after November 8, 2012 and before February 1, 2013, the stated price will be deemed to include PST if the PST would have applied to the sale notwithstanding any other transitional rule that may apply. Transitional PST inventory rebate for residential real property contracts This rebate will be available to a real property contractor for the PST paid on construction materials that are purchased or produced for the contractor s own use, held in inventory at the end of the day on March 31, 2013 and used in a residential real property contract to which the HST will apply. Returns and exchanges The following rules will generally apply where a person purchases property before April 2013 that is subject to PST, but returns it on or after April 1, 2013 and before August 1, 2013:

8 if the property is returned and a full refund is given, the PST will be refunded; if an exchange is made resulting in neither a refund nor an additional payment, there will be no PST refund and the provincial component of the HST will not be payable; if an exchange is made resulting in a partial refund, the provincial component of the HST will generally not be payable on the replacement property and the purchaser will be entitled to recover the PST applicable to the amount refunded; and if an exchange is made resulting in an additional payment, no PST will apply but the HST will apply to the additional payment. Additional details on the transitional rules can be found in Revenue Tax Guide 185 Implementation of the Harmonized Sales Tax in Prince Edward Island. Temporary recapture of certain provincial input tax credits Large businesses generally, those making taxable supplies of more than $10 million annually, and certain financial institutions will be temporarily restricted in their ability to claim the provincial portion of input tax credits (ITCs) for certain property and services acquired, or brought into PEI, by a large business for use by that business in the province. The supplies that will be affected by this restriction are telecommunication services other than internet access or toll-free numbers; energy except where purchased by farms or used to produce goods for sale; road vehicles weighing less than 3,000 kg. and parts, certain services and fuel (other than diesel fuel) to power those vehicles; and food, beverages and entertainment. The rate of ITC recapture will be 100% for the first five years that the HST is in effect, and will be gradually phased out during the next three years as follows 100% for the period from April 1, 2013 to March 31, 2018; 75% for the period from April 1, 2018 to March 31, 2019; 50% for the period from April 1, 2019 to March 31, 2020; 25% for the period from April 1, 2020 to March 31, 2021; and 0% on or after April 1, Restricted ITCs will be recaptured, rather than denied. Businesses subject to this recaptured input tax credit (RITC) restriction will have to separately identify recaptured ITCs in their GST/HST NETFILE returns for the reporting period when the ITCs first became available. They will not be able to simply forego claiming input tax credits on a specific good or service. Failure to recapture input tax credits in the appropriate reporting period may expose large businesses to interest and penalties. Who is subject to the recaptured input tax credit (RITC) requirement? As noted, large businesses and certain financial institutions are subject to these rules. A large business is defined as one whose RITC threshold exceeds $10 million for the

9 recapture period. 3 The $10 million threshold calculation will include, among other amounts, taxable (including zero-rated) supplies made in Canada and supplies made outside Canada through a permanent establishment in Canada, by the person and its associates. A person will be considered to be a large business even if the person does not have a permanent establishment in PEI. In particular, financial institutions that have activities in PEI and another province(s) need to consider their reporting obligations under these rules. Also, although the definition of a financial institution can be very broad, for the purposes of the RITC rules, it is proposed that only the following financial institutions 4 will automatically be subject to the recaptured input tax credits: banks, trust companies, credit unions, insurers, segregated funds of insurers and investment plans. Members of partnerships and joint venture participants can also be subject to these rules. The following entities are not subject to the RITC rules persons who are not large businesses, persons who are not HST registrants, most government entities, public service bodies, and persons whose chief source of income for income tax purposes is farming. Optional proxy methods To simplify compliance, a large business producing tangible personal property for sale (provided they carry on such production activities primarily in PEI) would generally be able to elect to use a production proxy to determine what portion of the specified energy that it acquires for use in PEI would be considered to be used directly in the production of tangible personal property for sale (and hence not subject to the RITC requirement). Optional proxy methods are also available where a supply includes specified telecommunication services and other services and/or goods. 3 The recapture period generally means a one year period that begins immediately after June 30 and ends immediately before July 1 of the following calendar year. Special rules address other changes during a recapture period e.g., the acquisition of a small business by a large business, exceeding the threshold during a recapture period, etc. 4 Or a person that is related (for purposes of the ETA) to the financial institution.

10 Additional details on these new rules can be found in Revenue Tax Guide 186 Temporary Recapture of Certain Provincial Input Tax Credits. Conclusion You will need to take steps soon to adjust your business s accounting and administrative systems in order to properly collect, remit and report the new harmonized sales tax. Is your business or organization ready? Your Grant Thornton LLP sales tax adviser can help you determine which measures apply to your business and can help you undertake the necessary steps you need to make to ensure that your business is prepared for these changes. About Grant Thornton in Canada Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has more than 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member and correspondent firms operate across100 countries worldwide. The information contained herein is prepared by Grant Thornton LLP for information only and is not intended to be either a complete description of any tax issue or the opinion of our firm. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein. You should consult your Grant Thornton LLP adviser to obtain additional details and to discuss whether the information in this article applies to your specific situation. A listing of Grant Thornton offices and contact information can be found on our Web site at: