Vendors in Ontario and BC Face Audit Risk If Fail To Follow HST Transition Rules
Many businesses in Ontario and British Columbia are not prepared for harmonized sales tax (HST) transition, which starts on May 1, 2010. Yes, July 1, 2010 is the official implementation date for HST. However, the transition rules require businesses that deliver property and/or render services after (or lease goods beyond) July 1, 2010 to collect and remit HST with respect to consideration paid after May 1, 2010. In other words, any contracts entered into after May 1, 2010 where consideration is paid after May 1, 2010 for property delivered or leased or services rendered after July 1, 2010 would be subject to HST. The two key facts to remember for the HST transition rules at issue are (1) delivery/provision/rental after July 1, 2010 and (2) payment received after May 1, 2010.
It is not clear why the Governments decided to implement this transition rule - except the concern that consumers and exempt businesses would somehow circumvent HST in the months of May and June 2010.
In the end, it is businesses that are most at risk. If a vendor makes a mistake and fails to charge HST, they may be audited and assessed a penalty for failure to collect HST. When this happens, the HST is an unrecoverable cost to the business (unless the business can pursue the consumer).
If you consider goods, this is where the vendor may get hit hard. The vendor of goods would likely collect both GST and Ontario retail sales tax (ORST) (unless the goods are exempt from ORST) in May or June because most goods are subject to ORST. However, a Canada Revenue Agency auditor can come along and reassess the vendor for HST if the transition rules apply.
For example, if a vendor enters into a contract to sell a $200,000 motor home on May 15, 2010 and receives payment in full, he/she may collect GST in the amount of $10,000 and mistakenly collect ORST in the amount of $16,000. If the motor home is delivered in August 2010 (because it needed to be manufactured), the vendor should have collected HST and not ORST. If the vendor remits the GST to the Receiver General of Canada and the ORST to the Minister of Finance in Ontario, a Canada Revenue Agency auditor may assess the vendor for failure to collect and remit HST (or may even take the position that the ORST was actually HST and that the vendor collected and did not remit HST). The vendor may be assessed the $16,000 and interest and a penalty for making a mistake. This mistake could require the vendor to pay over $20,000 depending on when the audit occurs (taking into account interest and penalties).
If more than one mistake is made between May 1, 2010 and July 1, 2010, the amounts could really add up.
The HST transition rules are flawed. The vendor may face a catch-22 situation. If the vendor promises to deliver the motor home on June 25, 2010 and collects the $200,000 on May 15, 2010, the vendor would believe the $16,000 is ORST. The vendor must remit the ORST with its May ORST return that is due on June 23, 2010. If the motor home is not available by June 30, 2010 and the motor home is delivered after July 1, 2010, the HST transition rules would turn the ORST into HST. Under the HST transition rules, the vendor would be required to remit the HST with it GST/HST return for July 2010, which is due on August 30, 2010. In other words, the vendor is required to keep the HST a little bit longer and remit the amount to the Receiver General of Canada instead of the Minister of Finance.
It will be easy for an auditor to come along in 2012 and say what a vendor should have done in the circumstances. The auditor may not be sympathetic to the fact that the vendor did collect the right amount of sales taxes and that the Government of Ontario actually was not out any money.
Where the Government of Ontario would be out money is with respect previously non-taxable services and previously exempt goods. With respect to the ORST exempt goods, Ontario taxation policy effectively changes on May 1, 2010 (e.g., custom computer software, bicycles, manufacturing and production equipment, etc.).
With respect to services, this is really the focus of the HST transition rules, Here are some links to articles I have written that may help service providers:
- The HST transition rules for lawyers, accountants and other service providers http://tinyurl.com/y9t268x
- Make an harmonized sales tax preparedness list and check it twice http://tinyurl.com/328bgea
- HST Blog articles on transition rules http://www.thehstblog.com/articles/transition-rules/
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
