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

On February 25, 2010, Canada's Department of Finance released its proposed harmonized sales tax (HST) place of supply rules which will be used to determine whether a supplier must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient must pay HST in connection with an acquisition or importation and at what rate. Simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.

The proposed HST place of supply rules for tangible personal property (goods) may surprise sellers of goods located in Alberta, Saskatchewan, Manitoba, Quebec and Prince Edward Island. Based on the Canada Revenue Agency's (CRA) views, some suppliers located in non-HST provinces may be required to charge, collect and remit HST. All suppliers of goods in Canada may need to consider whether they want to continue to ship goods to recipients in the HST Zone (and in particular Ontario and British Columbia). Some sellers of goods need to start working quickly to update their computer systems and accounting systems to account for HST on supplies of goods.

The proposed HST Place of Supply Rules to be in effect after July 1, 2010 are:

Rule #1: A supply of goods by way of sale is deemed to be made in a province if the supplier (Seller) of the goods delivers the goods or makes the goods available to the recipient (Buyer) in the province. For example, if an individual goes into a store in Ontario and purchases goods (e.g., a television), the store would charge HST at the rate of 13% (5% GST and 8% Ontario HST). The key fact is the place of delivery.

CRA Example: A supplier in Ontario agrees to sell to a purchaser in British Columbia. Based on the terms of delivery in the agreement for the supply of goods, legal delivery of the goods to the purchaser occurs in British Columbia.

CRA Position: The CRA takes the position that because legal delivery of the goods to the purchaser occurs in British Columbia, the supply of the goods is made in British Columbia and the supply will be subject to HST a rate of 12%.

CRA Example: A retailer in Ontario sells goods to a purchaser that is a resident of British Columbia and is visiting Ontario. The purchaser picks up the goods at the retailer's premises in Ontario and then transports the goods to British Columbia.

CRA Position: The goods are delivered to the purchaser in Ontario. The supply of goods is therefore made in Ontario and is proposed to be subject to HST at a rate of 13%.

Rule #2: A supply of goods by way of sale is deemed to be made inside the HST Zone (British Columbia, Ontario, Nova Scotia, New Brunswick, and Newfoundland and Labrador) if the legal delivery of the goods is made in that province. For the purposes of this rule, goods are deemed to be delivered in the HST Zone, and not outside the HST Zone, if the supplier either:

• (a) ships the property to a destination in the HST Zone that is specified in the contract for shipment of the goods;
• (b) transfers possession of the goods to a common carrier or consignee that the supplier has retained on behalf of the recipient (Buyer) to ship the goods to a destination in the HST Zone; or
• (c) sends the goods by mail or courier to an address in the HST Zone.

Pursuant to this rule, Incoterms, such as F.O.B. (freight or board) or C.I.F. (cost, insurance freight) are important if the location stated is within the HST Zone.

CRA Example: A supplier in Alberta agrees to sell goods to a purchaser in Ontario. Based on the terms in the agreement for the supply of the goods, legal delivery of the goods to the purchaser occurs in Alberta. However, the supplier agrees to have the goods shipped to the purchaser in Ontario.

CRA Position: Although legal delivery of the goods to the purchaser occurs in Alberta, delivery of the goods to the purchaser is deemed to occur in Ontario because the supplier ships the goods to Ontario. The supply of goods is therefore made in Ontario and is proposed to be subject to HST at a rate of 13%.

CRA Example: A mail-order company located in Nova Scotia sells greeting cards to customers across Canada. The company places the packages of greeting cards in the mail for delivery to customers in Ontario and British Columbia.

CRA Position: The supply of greeting cards mailed to Ontario is made in Ontario and is proposed to be subject to HST at a rate of 13%. The supply of greeting cards mailed to British Columbia is made in British Columbia and is proposed to be subject to HST at a rate of 12%.

Rule #3: Where a recipient of a supply of goods by way of lease, license or similar arrangement (Lessee) subsequently exercises an option to purchase the goods, the recipient lessee is deemed to take delivery by way of sale at the time and place at which the recipient lessee ceased to have possession of the property as a lessee and begins to have possession of the property as a purchaser. The key fact is the location of the goods at the time the option to purchase is exercised.

For example, if a person in Ontario leases a piece of manufacturing equipment from a lessor in Quebec and exercises an option to purchase the equipment at a late date when the equipment is in Ontario, HST will be applicable at a rate of 13% in respect of the option price.

The rate of HST will depend on which HST Zone province is the destination.

Rule #4: Where a supply of goods is made by way of lease, license or similar arrangement (other than a specified motor vehicle) (e.g. an equipment lease) for consideration that is attributed to a period (referred to as a "lease interval") and the lease, license or similar arrangement exceeds three months, the supply is deemed to be made in the HST Zone if the ordinary location of the property is within the HST Zone.

For the purposes of the place of supply rules, the ordinary location of the property is deemed to be the location where the supplier and the recipient mutually agree. This is a concession because the supplier may not be in the best position to know where the recipient has the goods. The CRA states that, "In other words, the mutual agreement of the supplier and the recipient will be determinative even where the property is actually located in a different place at the relevant time than what had been agreed upon."

The CRA will look to the contract and any subsequent amendments to agreements to determine the location of the leased goods.

A separate supply of the goods is deemed to be made for each lease interval of the earliest of the first day of the lease interval, the day on which the lease payment attributable to the lease interval becomes due and the day the payment is made.

Rule #5: Where a supply of goods is made by way of lease, license or similar arrangement (other than a specified motor vehicle) (e.g. an equipment lease) and the lease, license or similar arrangement does not exceed three months, the supply is deemed to be made in province in which the supplier delivers the goods or makes the goods available to the recipient. For the purposes of this rule, goods are deemed to be delivered in the HST Zone, and not outside the HST Zone, if the supplier either:

• (a) ships the property to a destination in the HST Zone that is specified in the contract for shipment of the goods;
• (b) transfers possession of the goods to a common carrier or consignee that the supplier has retained on behalf of the recipient (Buyer) to ship the goods to a destination in the HST Zone; or
• (c) sends the goods by mail or courier to an address in the HST Zone.

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The Ontario government will harmonize the provincial retail sales tax (RST) with the federal goods and services tax (GST) on July 1^st, 2010. One of the benefits being discussed in certain circles as a reason to support harmonization is that  Ontario businesses will receive input tax credits (ITCs) and recover harmonized sales tax (HST) and GST paid on business purchases. They say business will essentially be able to recover the 13% paid on business purchases, including the HST component paid on previously non-taxable and exempt purchases for RST purposes.

However, this is not quite correct.  Not all businesses in Ontario will benefit immediately to the tune of 13% ITCs. Specifically, businesses with annual taxable supplies greater than $10 million (including corporate groups and related companies), as well as certain financial institutions, municipalities, charities, universities, colleges and schools, hospitals, nursing homes, etc., will be restricted from claiming ITCs for the provincial portion (currently 8 per cent) of the HST, until 2015.

The restricted ITCs are on a few business inputs, such as certain uses of energy; certain telecommunications services; certain road vehicles and their fuel; and food, beverages and entertainment. The ITCs restrictions will be in place for the first five years of the HST, after which ITCs on the exempt items will be phased out over the following three year period.

Ontario has released an Information Notice on Restricted Input Tax Credits to provide additional information to businesses.

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First, I should say, DO NOT CALL WOLF. Asking to include to the auditor's manager or the senior manager at a meeting with you (the vendor or taxpayer) and the auditor should be used in limited (but greater than occasional) circumstances. If you ask for a meeting, the general rule is that a meeting must be arranged.

In this blog post, I focus on Ontario retail sales tax. However, the concept also applies to goods and services tax (GST).

I have asked for a meeting with the auditor's manager or senior manager when there is a fundamental disagreement of the applicability to a taxing provision to a client's situation. I have asked for a meeting when the auditor does not appear to understand the facts (often the facts are complex) and I feel that the auditor is going to raise an assessment incorrectly. I ask for a meeting with the auditor's manager when there is a serious personality conflict between my client and the auditor (it has happened) and I feel that the auditor may be biased and intent on punishing my client.

I do not ask to speak to the auditor's manager to intimidate the auditor - it does not work. I do not ask to speak to the auditor's manager regarding little issues. I do not ask to speak to the auditor's manager on the first day of the audit. I do not ask to speak to the auditor's manager when my client is clearly in the wrong.

In Ontario, if a retail sales tax assessment is issued, then the auditor's job is complete and the only recourse a vendor or taxpayer has is to file a notice of objection. It currently takes over 2 years for a notice of objection to be reviewed by the Ontario Ministry of Revenue Tax Appeals Branch. Usually, the tax assessment must be paid within 18 months and interest continues to accrue. For this reason, I feel it is my role to make sure the auditor gets the assessment correct.

If I receive an audit summary (which is a summary of the auditor's findings), which usually precedes the actual assessment, I ask for the reasons for the assessment. When there is a disagreement over the law or an interpretation of the law, an administrative statement or a court decision, I ask to speak to the auditor's manager, who usually has more discretion and more experience. Sometimes I for the auditor to write Tax Advisory for a ruling and that I will help with the facts so that the answer received is more likely to be correct (does not always happen that way).

There is a fine line between being assertive and aggressive, proactive and reactive. That being said, recently, managers have agreed with me (when I have known that i am correct) and some assessments have been reduced (1) Case 1: from over $1 million to close to $0, (2) Case 2: from approximately $500,000 to about $25,000 and (3) Case 3: by over $300,000. These results obviously depended on the particular circumstances of the file.

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Harmonized Sales Tax (“HST") will become a reality in Ontario and British Columbia on July 1, 2010. However, some businesses will be required to start collecting HST on May 1, 2010. In addition, some businesses outside the HST Zone ( HST Zone = Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador) will also be required to charge collect and remit HST to the Federal Government in accordance with the place of supply rules when the place of supply is within the HST Zone.

It is time to make a “To-Do" list to get ready for HST. The Canadian Federation of Independent Businesses (CFIB) has released an HST checklist this week.

The CFIB list applies for businesses with gross revenues less than $10 million. This is not limited to corporations, trusts, partnerships or sole proprietorships, it also includes family of businesses that are related to each other as the threshold test would be applicable to persons and their related entities.

The checklist below builds on the CFIB list is as follows:

• Formulate an internal committee of persons who will oversee the HST conversion - the group includes more than top management and the tax specialist/chief financial officer. Plan to meet weekly and prepare checklists.
• Calculate a budget to address HST conversion issues, including information technology programmers to update your systems and advisors on HST.
• Contact the persons in your business responsible for information technology as they will be on the front-lines in updating your computer systems.
• Conduct a sales side audit and determine whether the supplies made by your business are subject to HST. Your business may be required to charge HST on goods that were not subject to retail sales tax.
• Update sales equipment (e.g. cash registers) and computer systems in order to properly charge HST.
• Ensure your invoices properly state whether HST is applicable, the HST rate, your GST/HST registration number, and all other information required by the input tax credit regulations.
• Consider whether your business may offer point of sale rebates and make adjustments to record-keeping.
• Conduct a purchase side audit and determine whether your purchases are subject to HST. HST will affect what you sell and what you buy. Purchase exemption certificates will no longer be usable when your business buys what were previously RST exempt goods, such as goods that are purchased to be resupplied.
• Determine your largest expense items and review your largest contracts to determine what will change with the implementation of HST.
• Identify which suppliers to your business may not be sophisticated enough about HST and ensure they charge the correct amount of HST. Since the Canada Revenue Agency may assess both suppliers and recipients, purchasers have a duty to check the invoicing of their suppliers.
• Consider whether HST will affect your cash flow and make arrangements for credit. Commercial rent, inventory, electricity, production equipment & machinery, goods purchased for resupply, custom computer software, etc will be subject to HST (and was not subject to RST).
• Review the transition rules to see when you must start to collect HST or pay HST and when you must self-assess HST.  It can be as early as May 1, 2010.
• Determine whether the restricted ITC rules apply to your business/related businesses. If your business is over the $10 million threshold, you will not be able to recover HST paid on certain purchases for the first three years of HST. You will be required to set up accounting records to track and report restricted input tax credits on a province-by-province basis. The reporting on HST returns will start on July 2010 GST/HST return, which must be filed electronically.
• Determine whether you are required to file GST/HST returns electronically, what method of filing electronically your business must use and make arrangements to be able to file electronically starting in July 2010.
• Determine whether the place of supply rules require your business to charge HST. If your business operates in more than one province, the assessment must be made on a province-by-province and supply-by-supply basis.
• Set up accounting records for each applicable HST province.
• Establish internal policies and procedures to ensure HST is properly charged
• Prepare written materials for sales staff to follow and train your staff on HST.
• Update sales equipment so that HST is charged at the point of sale.
• Update computerized payments so that HST is charged where applicable. In some cases, computer programs will need to be rewritten/updated so that the place of delivery (e.g. goods) is reviewed in determining whether HST is applicable.
• Adjust online payment software or web interfaces used for selling via the Internet (or receiving payments for services and intangibles via the Internet) to reflect the applicable HST rates.
• Update the information communicated on websites.
• Prepare and publish new written materials if the publications include information on sales taxes charged.
• Update internal computer/record keeping, record keeping on input tax credit claims, rebates, refunds, etc., accounts payable record keeping, accounting records on meals and entertainment expenses and taxable benefit calculations.
• Update internal reports - e.g., expense reports spreadsheets, employee cars, inter company transactions, etc..
• Determine whether your business must pay HST on imported goods, services and/or intangible property.
• Determine whether any inter company payments are subject to HST and make adjustments to records and expectations.
• Take steps to ensure that the business stops collecting retail sales tax/social services tax on July 1, 2010 and that the final returns are prepared
• Prepare PST/RST/SST records to be audited as both Ontario and British Columbia have said they plan to conduct four years of audits in the next two years.
• Consider whether the job descriptions of employees need to be updated to reflect HST responsibilities.
• Public relations - consider whether you need to educate your customers about HST.

This list is not all-inclusive.

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