HST for Ontario What it really means Effective July 1, 2010, Ontario is implementing the Harmonized Sales Tax (HST). The HST replaces the existing provincial retail sales tax (RST) system. The new HST will generally apply to the provision of goods and services in the same manner as GST currently applies. That means that property and services that are currently subject to the 5% GST will now generally be subject to the 13% HST. This article is intended to help financial officers prepare their companies administratively for this new tax program. It is also intended to help those who provide professional services to the business community (lawyers, lenders, etc.) understand what their business clients need to know and do to be ready. Transitional Rules Transitional rules relating to the implementation of the harmonized sales tax (HST) by Ontario have now been released. The announcements give more clarity to the challenges businesses and organizations will need to address well in advance of the implementation date of July 1, 2010 in order to comply with the new rules. The transitional rules deal with determining the application of which of the HST or the GST plus any applicable PST will apply for payments that straddle the July 1, 2010 HST implementation date. The rules also deal with the phase out of the PST and specific matters such as the availability of transitional rebates, special filings and adjustments. These rules are intended to provide guidance to persons contemplating entering into transactions and to ensure some equity for transactions that straddle the implementation date. How the rules apply Services Scenario Services are performed on or after July 1, 2010. Services are provided on or after July 1, 2010, and the payment is paid between May 1, 2010 and June 30, 2010. Services are provided on or after July 1, 2010, and the payment is made between October 15, 2010 and April 30, 2010. Services straddle July 1, 2010. Rule Generally, HST will apply except where all or substantially all (90% or more) of the service is performed before July 1, 2010. HST will apply. HST applies only to supplies made to nonconsumers. Suppliers may be required to self-assess the HST in certain situations. The supplier of such services would have to apportion part of the payment that would be subject to the HST.
HST for Ontario What it really means Page 2 Goods Scenario When goods are sold and both ownership and possession are transferred on or after July 1, 2010, and the consideration is paid after July 1, 2010. When goods are sold and both ownership and possession are transferred on or after July 1, 2010, and the payment is made between May 1, 2010 and June 30, 2010. When goods are sold and both ownership and possession are transferred on or after July 1, 2010, and the payment is made between October 15, 2009 and April 30, 2010. When ownership or possession of the goods is transferred before July 1, 2010. Rule HST will apply. HST will apply. HST applies only to supplies made to nonconsumers. Suppliers may be required to self-assess the HST in certain situations. HST will not apply. Prepayments for goods or services Scenario When prepayments are made or become due on or before October 14, 2009 Rule HST does not apply When prepayments for goods and services become due on or after May 1, 2010 but before July 1, 2010, and ownership and possession of the goods are transferred, or the services are performed, on or after July 1, 2010 When prepayments for goods and services become due on or after October 15, 2009 but before May 1, 2010, and ownership and possession of the goods are transferred, or the services are performed, on or after July 1, 2010 When certain prepayments by non-consumers become due after October 14, 2009 but before May 1, 2010, and ownership and possession of the goods supplied are transferred, or the services are performed, on or after July 1, 2010 HST will be payable to the supplier HST will be payable to the supplier, only where the recipient is a non-consumer Self-assessment of HST may apply
HST for Ontario What it really means Page 3 Real property HST will generally apply to a sale of real property (other than residential housing) if both ownership and possession of the property are transferred to the purchaser on or after July 1, 2010. New home sales Where ownership or possession of a new home is transferred under a written agreement before July 1, 2010, only 5% GST is charged. Where ownership and possession are transferred after June 30, 2010, 13% HST is charged. However, if the purchase/sale agreement was signed before June 18, 2009, the transaction is grand-parented and only 5% HST is charged. Where a purchase is grand-parented, a transitional tax adjustment is payable by the builder, based on the percent of construction that is completed by July 1, 2010. A greater transitional tax adjustment occurs when the house is less complete at July 1, 2010. The transitional tax adjustment is to compensate for the HST that would otherwise be paid by the purchaser. However, no ITC is available on this amount. Where a purchase is not grandfathered, a transitional tax rebate is available to the purchaser. The rebate is based on the percent of construction that is completed by July 1, 2010. The greater the house is completed, the greater the transitional tax rebate (thus this is the inverse of the transitional tax adjustment). This is to prevent double taxation, ie the RST embedded in the cost of the home as well as HST charged on the purchase. Continuous supplies Where a supplier provides property or services on a continuous basis by means of a wire, pipeline, or similar conduit (e.g., cable or satellite television), HST will generally apply to the extent that the payment is for property or services that are delivered, performed or made available on or after July 1, 2010. Where this cannot reasonably be determined, the consideration received may be prorated in equal parts according to the number of days in the period to which the payment is attributable. Budget payment arrangements Equal payment plans for natural gas or electricity are examples of budget payment arrangements. If the reconciliation date for the payment plan occurs prior to July 1, 2011, suppliers will be required to adjust the HST owing on the supplies made on or after July 1, 2010 by determining when the supplies were made and collecting or crediting the amount of HST owing by the recipient accordingly. If the time of delivery cannot be reasonably determined, the supply will be prorated in equal parts based on the number of days in the reconciliation period. Combined supplies There are situations in which a combination of property and/or services is supplied as a single supply (e.g., the supply and installation of a dishwasher). If ownership or possession of the property component (the dishwasher) is transferred to the recipient prior to July 1, 2010, but was not installed until after July 1, 2010, HST would apply only on the installation service but not on the dishwasher itself. Is this section below related to property? Progress payments and holdbacks Progress payments: HST will apply to progress payments on contracts to construct, renovate, alter or repair ( construct ) real property to the extent that the progress payments can reasonably be attributed to property delivered or services performed on or after July 1, 2010. These rules also apply to ships or other vessels but do not apply to sales of newly constructed or substantially renovated homes which are subject to the special transitional rules for new residential housing. For progress payments that become due or are paid without becoming due after October 14, 2009 and before July 1, 2010, that relate to property delivered or services performed on or after July 1, 2010, the supplier would be required to account for the provincial component of the HST in the GST/HST reporting period of the supplier that includes July 1, 2010. The recipient of the supply would also be entitled to claim any input tax credits or public service body rebates for the provincial component of the tax. There is no requirement to account for HST on
HST for Ontario What it really means Page 4 progress payments that relate to property delivered to service performed on or after July 1, 2010 where the payments became due or were paid without becoming due before or on October 14, 2009. Real property contracts greater than three months: There are special rules for real property contracts that expand more than three months. Specifically, where it is reasonably expected that a written contract to construct real property will require more than three months to complete, and the construction is substantially completed (90 per cent or more) before June 2010, the construction will be considered to have been substantially completed on June 1, 2010. Any consideration or part of the consideration payable on such a contact that had not been paid or becomes due on or before July 31, 2010, would be considered to have become payable on July 31, 2010 and any portion of such payment attributable to construction on or after July 1, 2010 would be subject to HST. Holdbacks: A holdback from a progress payment is considered part of the progress payment from which it is held. The holdback would be subject to the same allocation as under the progress payment even if the holdback becomes due or is paid on or after July 1, 2010. How HST will be administered The HST will be administered by Canada Revenue Agency (CRA). Generally, the HST will be charged and collected in the same manner as GST currently applies and input tax credits will also be determined in the same manner. HST registrants will file a single HST return (the return form is the same form as the GST return and is completed in the same way with the same filing deadlines as GST filing deadlines) and will no longer be required to file RST returns with the Ministry of Finance. Input Tax Credits (ITCs) GST/HST paid by a supplier is netted against GST/HST collected by a supplier. The difference is then remitted or claimed as a refund. Under HST, ITC s may be claimed at 13%, rather than 5%. The rules for claiming ITC s remain the same as under the current GST rules, with some restrictions. ITC Restrictions Businesses that exceed sales of $10 million will be restricted in claiming ITC s in certain areas: Energy Telecommunications services (other than internet or toll-free access) Vehicles under 3,000 kg Fuel for vehicles under 3,000 kg Meals and entertainment The restrictions will only apply to the provincial component of the HST and they will be in place for five years following implementation. This period will be followed by a three year phase-in period. Here are some examples. A company that has revenues under $10 million receives an electricity bill for $1,000 + HST of $130.The company is not restricted in claiming the provincial component of the HST and therefore is able to claim an ITC for the full amount of the HST (13 % or $130). A second company that has revenues greater than $10 million receives an electricity bill for $1,000 + HST of $130.The company is restricted in claiming the provincial component of the HST (8% of $1,000 or $80). The company may only claim the federal component of the HST (5% or $50). These restrictions will require businesses to separately track HST paid on these items for two reasons, audit purposes and so that they can properly restrict the ITCs for filing purposes. At the end of the phase-in period, it is anticipated that the restrictions will be fully lifted. Interesting to note however is that Quebec implemented similar restrictions that were intended to be temporary, but never lifted them and they are now permanently part of the QST.
HST for Ontario What it really means Page 5 Place of Supply Because HST is not a uniform tax practice in all provinces, place of supply will need to be determined when a service is performed. The place of supply will determine the appropriate rate of GST/HST that is charged on an invoice. Participating Provinces include Newfoundland, Nova Scotia, New Brunswick, Ontario (effective July 1, 2010), B.C. (effective July 1, 2010). They charge HST at 13%, with the exception of B.C., which will charge HST at 12%. Non-Participating Provinces include Alberta, Saskatchewan, Manitoba, Quebec, P.E.I. and charge GST at 5%. If all or substantially all (i.e., >90%) of the service is performed in one province, the place of supply is deemed to be in that province. For example, an Ontario law firm provides services to a client located in Ontario, with all services being rendered entirely in Ontario, HST applies at 13%. The same law firm provides services to the same client, but this time all services are rendered in New Brunswick. Since New Brunswick is a participating province, HST applies at 13%. The same law firm provides services to the same client, but this time all services are rendered in Quebec. Since Quebec is a non-participating province, HST applies at 5%. If services were provided in multiple provinces, then a supply of a service will be deemed to be made in the province of negotiation of the supply, provided that >10% of the services are performed in that province. For example, a law firm in Ontario is hired to perform services for a client with headquarters in Ontario and offices in Quebec, Alberta, and Nova Scotia. The agreement is negotiated with one of the firm's partners working out of the Ontario office. The services are performed 60% in the Ontario office. The remaining 40% is evenly distributed between the other three provinces. The Ontario rate of HST applies on this service, since the place of negotiation is in a participating province and more than 10% of the service is performed in that province. If services were provided in multiple provinces, and <10% of the services were performed in the province of negotiation, then the supply is deemed to have taken place in the province where the greatest proportion of the service was rendered. For example, the same law firm in Ontario is hired to perform additional services for its client, but this time, only 5% of the work is to be done in Ontario, and the remainder of the work will be done in various locations: 15% in Quebec, 20% in Alberta, and 60% in Newfoundland. In this instance, even though the arrangements for the supply are negotiated with the Ontario office, <10% of the service was provided in Ontario. Therefore the determining factor is the location where the greatest proportion of the service is performed, which is Newfoundland. The supply is therefore taxable at the 13% HST rate. Where a supply of real property is made, the supply is deemed to occur in the province in which the real estate in located. Generally, when a supply of real property is made, the buyer self-assesses the GST/HST, rather than the seller collecting it. This rule does not change with the introduction of HST. For example, an Ontario company owns real estate situated in Saskatchewan. The Ontario company sells the land to a company in Quebec. HST applies at 5%, since the rate is determined by the location of the land, in this case Saskatchewan. Generally, when a supply of real property is made, the buyer self-assesses the GST/HST, rather than the seller collecting it. This rule does not change with the introduction of HST. Key dates October 15, 2009 October 15, 2009 to April 30, 2010 HST will not apply to payment that becomes due or is paid on or before October 14, 2009. Certain businesses and public services bodies engaged in GST/HST exempt activities may be required to self-assess the provincial component of the HST on payment that becomes due or is paid after October 14, 2009 and before May 2010 for goods and services supplied after June 30, 2010.
HST for Ontario What it really means Page 6 May 1, 2010 July 1, 2010 October 31, 2010 HST will generally apply to payment that becomes due or is paid after April 30, 2010 for property and services supplied after June 30, 2010 HST will generally apply to payment that becomes due or is paid on or after July 1, 2010. Any applicable PST that has not become payable by October 31, 2010 will be deemed to be payable on October 31, 2010 to facilitate the wind-down of the PST. What should businesses do now to get ready? First, they should budget for the financial and cash flow implications of the harmonization. Next, review their accounting and IT systems to determine if they are able to accommodate HST. Then we recommend the following: Educate people in charge of billings on the transitional and place of supply rules. If possible, defer large purchases until after July 1, 2010 you will save the 8% RST on the purchase since you would be able to claim an ITC on the full 13% HST added. All in all, it s anticipated that the proposed harmonization should save businesses significant tax dollars (through the ITCs) but will likely require considerable effort to prepare for the required changes. With about eight months before implementation, now is the time for businesses to consider the implications of harmonization on their operations, processes, systems and relationships with customers and suppliers. Winding down PST Effective July 1, 2010, the PST will generally cease to apply to: a sale of PST taxable goods where the goods are delivered and ownership of the goods is transferred to the purchaser on or after July 1, 2010. a sale of PST taxable services to the extent the services are performed on or after July 1, 2010. However, PST will apply where all or substantially all of the service is provided before July 2010. a supply of PST taxable goods by way of lease, licence or similar arrangement for the part of the lease or licence interval that is on or after July 1, 2010. However, the PST will apply if the lease interval begins before July 2010 and ends before July 31, 2010. Final PST returns will generally be required to be filed on or before July 23, 2010. When an amount of PST is collected or becomes payable after June 2010, the vendor will be required to account for that amount in a supplemental PST return to be filed no later than the 23 rd day of the following month. There s a lot to cover on this topic. Please feel free to contact me should you require additional detail or if you would like to talk through a scenario you re preparing for. Gordon Jessup is a Partner in the Tax Practice of Fuller Landau LLP. He can be reached at 416-645-6508 or gjessup@fullerlandau.com