Sales Tax Harmonization – July 1, 2010 – Time to Start Planning

In the Ontario provincial Budget, the government announced its intention to harmonize its retail sales (RST) with the federal GST effective July 1, 2010.  The new harmonized sales tax rate would include the 5% GST and 8% RST for a combined Ontario HST rate of 13%.  The tax would be administered by the federal government and would use the same tax base and structure as the federal GST subject to several exceptions.

Similarly on July 23, 2009, the government of British Columbia (B.C.) also announced its intention to harmonize its RST with the federal GST effective July 1, 2010.  The B.C. HST rate would combine the 5% GST and the 7% RST for a total rate of 12%.  This is currently the lowest HST rate in Canada.

Current and proposed HST Rates:

Newfoundland & Labrador, Nova Scotia and New Brunswick
Quebec (GST and QST)
Proposed Ontario
Proposed B.C.
13%
12.875% / 13.925% (2011)
13%
13%

Ontario HST

The provincial portion of the Ontario HST would not apply to the retail sale of:

  1. Books
  2. Children’s clothing and footwear
  3. Children’s car seats and car booster seats
  4. Diapers
  5. Feminine hygiene products

There would be a temporary restriction for large businesses (those with annual taxable sales in excess of $10 million and financial institutions) from claiming input tax credits on the provincial portion of the Ontario HST for the following common types of business expenses:

  1. Telecommunication services other than internet access or toll-free numbers.
  2. Energy, except where used to produce goods for sale or purchased by farms.
  3. Road vehicles weighing less than 3,000 kg, as well as parts and certain services and fuel to power those vehicles.
  4. Food, beverages and entertainment.

The restrictions would apply for the first five years after which input tax credits would be permitted on a phased-in basis over a three year period.

A one-time Small Business Transition Credit of up to $1,000 will be provided to most businesses (other than financial institutions) with less than $2 million in annual taxable sales.

Transitional credits and Enhanced New Housing Rebates would be available to builders and purchasers of new housing in Ontario. These credits and rebates are introduced to effectively equate the total tax payable to the current tax burden of a new home up to a value of $400,000 (Consult recent tax publication; Ontario PST Harmonization and the Residential Real Estate Sector).

Rebates would be available to public service bodies on the provincial portion of the Ontario HST as follows:

Municipalities
Universities
Schools
Hospitals
Charities / Eligible non-profit organizations
78%
78%
93%
87%
82%

Ontario will maintain a separate sales tax for private transfers of used automobiles and for certain types of insurance premiums such as group insurance.

Impact on Business in Canada

Although formal legislation implementing these new changes has not yet been released, it is still important to start planning for the changes that will impact many businesses across Canada.

As a GST registrant, a business located outside Ontario and B.C. will have to adjust their accounting systems if they sell taxable goods (tangible and intangible) or provide taxable services to customers in these provinces.  The basic rules are expected to be very similar to the changes that were introduced in April 1997 when the provinces of Newfoundland & Labrador, Nova Scotia and New Brunswick harmonized their RST with the GST.

In addition, a business carrying on commercial activities and located outside Ontario and B.C. that incurs expenditures in these provinces (i.e. travel expenses, delivery charges, salesman expenses) will now be entitled to claim input tax credits on the provincial portion of the HST (in addition to the GST) subject to any specific restrictions.

Accordingly, the following list is just a few points that require careful consideration and planning to ensure businesses are ready for these changes:

  1. Computer software systems changes will be required to account for the following expected changes;
  • Invoicing the Ontario HST or B.C. HST versus the current GST / HST
  • Capturing input tax credits, as applicable, for expenses incurred in those provinces
  • Cash register adjustments to provide for point-of-sale rebates of the provincial portion of Ontario HST or B.C. HST in those provinces
  1. Reviewing impact of these changes on costing and pricing for businesses operating in these provinces.
  2. Determining cash-flow impact on collecting and paying more tax.
  3. Planning for large capital expenditures on Ontario and B.C. – consideration should be made to defer large capital expenditures that currently are subject to non refundable RST until July 1, 2010.
  4. Reviewing the availability of any sales tax elections to minimize cash flow considerations (i.e. elections for closely related corporations and partnerships).
  5. Reviewing existing contracts that will straddle July 1, 2010.

The time to start planning is now.  The proposed date of July 1, 2010 is not that far off and businesses will have to be ready to deal with the harmonization of these sales tax regimes.

For further information on how these changes may affect your particular business, please call Joe Truscott at 905-528-0234 or email Joe at joetruscott@josephtruscott.com.