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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Whenever the government announces tax reform or a tax auditor plans to conduct an audit, these events that businesses cannot control present an opportunity to revisit past planning.  For example, harmonized sales tax implementation in Ontario and British Columbia on July 1, 2010 and the change in the HST rate in Nova Scotia on July 1, 2010 should encourage proactive businesses to go over their 2010 budget plans.  Some budget items will be affected by the outside changes and, therefore, should be adjusted upwards or downwards so that the business stays within budget.

For example, hospitals, doctors offices, dentists offices, nursing homes/long term care homes, residential rental property businesses, charities, day cares, schools, colleges, universities and other educational institutions, an other businesses engaged in whole or on part in exempt activities will see their costs increase and will not be able to recover 100% of the increased costs.  These are the businesses that will benefit most from the exercise of taking their 2010 Budget, adjusting for new HST costs, recalculating, and then making changes.

In addition, large businesses and large corporate groups (where the business or corporate group makes taxable and zero-rated sales in excess of $10 million per 12 month period) will be subject to the restricted input tax credit rules and, therefore will see certain costs increase by 8% without the corresponding recovery.  Where costs go up, and offsetting change may be required.

These businesses have an opportunity (I know, it does not seem like a positive event)  to review budget plans and make adjustments.  It may be that certain expenses will have to be cut.  it may be that profit margins will have to increase.  It may be that the review of commercial rent (which will be subject to HST after July 1, 2010) will cause a reconsideration of the location of the business and a better location may be identified.  It may be that cost savings opportunities may be identified (e.g.,  subscriptions are a less expensive option if paid before July 1, 2010).   It may be that new technology may be installed to control/reduce energy costs in the long term.  It may be that ORST recovery or GST/HST recovery opportunities will be identified (that the business had been overlooking).  It may be that the investigation will result in a new road map for the business to more profits.

In an unrelated matter last week (which I will use as an example), I assisted a client with a NAFTA verification.  The review of the business operations in preparation of a visit from the United States Customs and Border Protection, the client undertook the analysis of the bill of materials and the costs to produce a product.  That analysis resulted in the client identifying changes in costs due to the appreciation of the Canadian dollar and the squeezing of the profit margin.  As a result of the unwelcome verification, changes were made on the purchase side and sales side of the business.  The result will be a healthier balance sheet at the end of 2010.

Change is not fun.  Change is rarely welcome.  Usually change means more work.  The question is whether the results of the new work will be positive for the business.