The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

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The current plans are that Ontario and British Columbia will harmonize their provincial sales taxes ("PST") with the goods and services tax ("GST") on July 1, 2010. Whether you support the idea of harmonized sales tax ("HST") or not, all businesses must prepare for the sales tax reform or risk costly errors in the future.

In preparing for the HST, there is a very long list of questions that should be asked. The following list is only the "tip of the iceberg":

1.      Has your business changed the general ledger ("GL") accounts for your 2010 taxation year to reflect change on July 1, 2010? Since HST will be implemented on July 1, 2010, any business that does not have a June 30^th year end will need to ensure that the accounting records have the additional GL accounts so that PST is recorded pre-July 1, 2010, HST is recorded post-July 1, 2010 and that the tax base of depreciable capital costs include PST pre-July 1, 2010 and do not record recoverable costs post July 1, 2010. There are a number of other adjustments that will be required.

2.      Has your business adjusted its record-keeping to track restricted input tax credits? The Ontario and British Columbia HST proposals included the announcement that between July 1, 2010 and June 30, 2012, large businesses (businesses making over $10 million in taxable sales) will not be entitled to receive any input tax credits ("ITCs") (that is, recover HST paid) on purchases of:

• (a)    Energy (except where purchased by farms and for use in producing goods for sale;

• (b)   Telecommunication services (other than internet access and toll-free numbers);

• (c)    Certain automobiles and road vehicles; and

• (d)   Meals and entertainment expenses.

The time period for full restrictions on ITCs may be extended. The current plans are for the restrictions to be phased out between July 1, 2012 and June 30, 2015. As a result of the restrictions on the HST component, large businesses and any business that may become a large business (that is, may exceed the $10 million taxable sales threshold in an affected taxation year) should record the GST component and HST component separately in their books and records for these expense items.

3.      Has your business considered whether HST will affect cash flows and budgets? Many businesses have not yet considered whether payment of HST on commercial rent, electricity, production equipment and machinery, management fees, legal fees, accounting fees, temporary placement, rights to use intellectual property, etc. will affect their cash flow. Businesses that file GST/HST annually, quarterly or even monthly may have to address cash flow issues that will arise due to the upfront payment of GST/HST to suppliers and the delay before claiming permissible input tax credits.

4.      Has your business considered when the HST rules will start to affect your business decisions and activities? On October 14, 2009, the Ontario and British Columbia governments released publications outlining the transition rules for transactions that occur after October 14, 2009. The underlying purpose of the transition rules is to ensure that the provinces receive HST after July 1, 2010, even if arrangements were made prior to that date.

(There are many complex transition rules but these are not set in this abridged article. See the editor's note below. Indeed, there are a number of industry-specific transition rules relating to prepaid funeral and cemetery services, subscriptions to newspapers, magazines and periodicals, passenger transportation services, freight transportation services, commercial parking passes, memberships in clubs, organizations and associations, admissions to places of amusement, direct sellers, continuous supplies, real property construction, combined supplies, progress payments, holdbacks, etc.)

5.      Has your business undertaken a review of each existing contract to determine whether HST is going to be applicable? This question needs to be asked if your business is the vendor/supplier or the purchaser/recipient. If a business does not undertake this exercise, the business will be exposed to audit risk.

6.      Are there any changes required to your business' public statements on web-sites, quotation sheets, contracts, etc.?  Does your business communicate to customers/clients which sales taxes you will be charging or whether certain sales taxes are included in quoted prices? Do you sell to persons who may not be familiar with the proposed HST changes and who may challenge the charges at a late date in court? Do you sell to municipalities that will not be entitled to receive 100% of the HST by way of a public sector rebate? Do you sell to businesses and charities which are not able to recover the entire HST component? In short, the manner in which your business communicates information may expose your business to litigation risk with third parties.

7.      Are there any improvements that should be made to your documentation to ensure that you have the evidence necessary to justify non-collection of HST on export sales of goods and services that occurred outside Ontario or British Columbia? If a business does not charge, collect and remit the correct percentage of GST/HST (13% for Ontario and 12% for British Columbia), then a Canda Revenue Agency ("CRA") auditor may ask for evidence to justify a decision. If a business exports goods, the auditor may require proof of exportation and all shipping documents, including import documentation from the foreign jurisdiction. If the destination is another Canadian province, proof of delivery to that jurisdiction will likely be required. Contracts and invoices should indicate the place of delivery clearly. Since it is difficult to document the place of delivery of services and intangible property, questions should be asked concerning what documentation may be recorded and maintained. For example, a service provider may be required to present dockets on time spent outside Ontario or British Columbia performing services, hotel receipts, travel tickets, etc. 

8.      Has your business educated the accounting staff about the HST changes and trained the staff on recording information on incoming and outgoing invoices to account for the HST component? The CRA auditors require the business to review each and every invoice to ensure the GST/HST is correct. If a business fails to detect errors by suppliers, the recipient may be assessed unpaid GST/HST, penalties and interest. In addition, if an incoming invoice from a supplier does not satisfy the documentary requirements for claiming ITC's, an auditor may deny the credits.

9.      Has your business implemented codes of conduct or internal policies relating to sales taxes and income taxes in Canada that must be updated? If your business does not have internal controls, should internal checks & balances be established?

10.  Has your business considered whether the change to HST creates any opportunities to save money?

As mentioned, this list of questions is not definitive, but points to the scope of matters to be considered in preparing for harmonization.