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

I received the following question today:

I am a furniture manufacturer who works with interior designers.  When I invoice, if an item is being re-sold by the designer then I do not invoice the Ontario retail sales tax (ORST).  The designer will invoice ORST directly to the client. How will this change with the HST?  Will my clients be exempt if they are re-selling an item?   Also, when I purchase materials for manufacture many items such as wood, screws glue etc are PST exempt when I purchase them and get added into the cost once sold to the customer?  How will the HST deal with this?

The answer is that the furniture manufacturer will be required to charge HST when he/she sells to the interior designer.  The interior designer is no longer entitled to provide an ORST purchase exemption certificate to be exempted from payment of sales tax.  The interior designer will pay the GST/HST and claim an input tax credit (if he/she is registered for GST/HST purposes.  The interior designer will charge the final consumer GST/HST.

In addition, the furniture manufacturer will no longer purchase his/her inputs using an ORST purchase exemption certificate.  In other words, the furniture manufacturer must pay GST/HST on all materials and components used in the manufacture of the furniture.  The furniture manufacturer would be entitled to claim an input tax credit if he/she is registered for GST/HST purposes.

This will result in cost flow issues for both the manufacturer and the interior designer (the two businesses in the example).  The businesses will have to fund the GST/HST portion when paying invoices and will be able to claim input tax credits (and offset GST/HST collected) on their GST/HST returns for the period during which the supply occurred.  I am told that some businesses may need to increase their lines of credit in order to fund the HST component that was previously ORST exempt by virtue of the purchase exemption certificate.

To be clear, on July 1, 2010, purchase exemption certificates will be invalid for purchases after July 1, 2010.  The days of the sales tax relief will over gone for good.  The Canada Revenue Agency auditors will be auditing the entire supply chain to make sure that GST/HST was paid at each step in the supply chain.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

June 2010 may see an increase in last minute reorganizations by MUSH sector entities wishing to minimize unrecoverable harmonized sales tax (HST).  Here is a real life example with numbers. 

Example: A hospital needs to undertake a reorganization in order to remove unrecoverable HST in the current structure (the corporate structure has employees in one entity and that entity provides the services of the employees of that entity to other separate legal entities in the corporate structure, which results in GST being payable on the inter-company payments).

Let's say that the inter-company services of workers fees is $1,000,000 per year.  For the annual period July 1, 2009 to June 30, 2010, the GST payment would have been $50,000 and the hospital authority would have recovered 87% (or $43,500) by way of a MUSH sector rebate.  The unrecoverable GST would have been $6,500.

For the period July 1, 2010 to June 30, 2011, the same $1,000,000 inter-company fee for services would result in $50,000 in GST and $80,000 in HST (Ontario).  The MUSH sector rebate would be $43,500 of the GST portion and $66,400 of the HST portion (for Ontario) (and in BC it would be $70,000 in HST and a MUSH sector rebate of $40,600).  As a result, the unrecoverable combined GST/HST would be $20,100 (6,500 + $13,600).

The additional $13,600 will add up over time.  As a result, a reorganization is necessary based on this HST analysis and other considerations. 

When should the reorganization occur?  Let's assume that the fair market value of the assets involved in the reorganization is $10,000,000.  If the transaction is completed before July 1, 2010, the hospital entities in the structure would save $136,000 in unrecoverable HST.  Since the structure involves a number of charities, the unrecoverable HST is actually higher because the MUSH sector rebate for charities is 82%.  If you do the math, it makes sense to complete reorganizations before July 1, 2010.

As a result, it would be prudent for MUSH sector entities (which cannot recover GST/HST by way of input tax credits) to consider whether they should reorganize their structure in order not to "bleed" money after HST.  MUSH sector entities need all the money in their cash flow.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Canada Revenue Agency (CRA) has issued GST/HST Info Sheet GI-073 "Ontario and British Columbia: Transition to the Harmonized Sales Tax - Payment of the GST/HST by Ontario and B.C. Government Entities (May 2010) and the examples provided put the government entities in Appendix A outside the HST transition rules. So, I have to warn suppliers to the Appendix A government entities to be careful because CRA auditors may try to apply the transition rules.  I find it funny and sad that the Governments do not follow their own transition rules to save the HST (when businesses and consumers do not get the same breaks).

Example 3 in GI 073 provides as follows:

In may 2010, an Ontario ministry, which is listed on schedule A to the RTA, orders and pays for furniture, but the furniture will not be delivered and ownership will not be transferred to the Ontario ministry until August 2010.  The furniture is acquired in the name of the Province and the Ontario ministry provides a Crown funds exemption request or certification clause to the supplier.

Because the Ontario ministry is listed on Schedule A to the RTA, and the consideration for the supply of the furniture is paid before July 1, 2010, the Ontario ministry will continue to claim an exemption from GST/HST.  Therefore, the supplier does not charge GST/HST on the consideration for the supply of the furniture to the Ontario ministry.  In this case, the supplier may accept the Ontario ministry's Crown funds exemption request or certification clause requesting relief from both the GST and the HST as the consideration for the supply was paid before July 1, 2010.

The HST transition rules applicable to everyone else were released on October 14, 2009. The HST transition rule for tangible personal property (goods) provided that if tangible personal property was purchased after May 1, 2010 and consideration was paid between May 1, 2010 and July 1, 2010 and the tangible personal property was delivered on or after July 1, 2010, HST would be applicable.  To save the HST, the tangible personal property would have to be purchased before May 1, 2010 and the consideration paid before May 1, 2010. As a result, the Ontario and B.C. Governments have beneficial treatment not available to others. 

The other interesting issue relating to Example 3 is that Ontario retail sales tax or B.C. social service tax would be payable if the furniture had been delivered before July 1, 2010.  So, it looks like (according to the CRA's GI-073) the rules applicable to Ontario and B.C. provide the Government entities with a tax holiday between May 1, 2010 and June 30, 2010.  How is that fair?

All I can say is for suppliers to the Ontario Government and BC Government to beware.  This does not seem correct.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Here is a copy of my latest PowerPoint presentation that I delivered on May 25, 2010 entitled "Let's Talk About HST and Customs Duties".  Yes, it is an odd combination of information.  The presentation was delivered in the context of supply chains involving Canada (Ontario in particular).  The focus was on non-income tax compliance.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

On Thursday, May 13, 2010, the House of Commons Finance Committee agreed to report Bill C-9 to the House of Commons without amendment, and the Bill was presented, as such, to the House of Commons on the following day, Friday, May 14, 2010.

At the request of the opposition members of the Finance Committee, the Committee took a separate vote on, inter alia, clause 55 (which contains the GST amendments at issue ). All of the Conservative members of the Committee present (5) voted in favour of clause 55 without amendment, and all of the opposition members who voted (5) voted against that clause. The chair (Conservative) cast the deciding affirmative vote. One Liberal member, who was recorded as present for the meeting, apparently did not vote.

After Bill C-9 passes third reading in the house of Commons, Bill C-9 will head to the Senate. Stay tuned ....

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Canada News Wire reported the following on May 18, 2010:

Yesterday Dalton McGuinty broke yet another promise when he betrayed an all-party agreement in order to kill an Ontario PC motion that would have allowed all MPPs to freely vote on delaying the implementation of the HST.

All three Ontario political parties had an agreement-in-principle to a 'programming motion' which would have allowed the Ontario PC Caucus to introduce a single motion on an issue of important public policy. After learning the Ontario PC Caucus intended to introduce a motion that recalled Dalton McGuinty's promise not to raise taxes without the consent of Ontarians and calling for the HST to not be implemented until after the next provincial election, McGuinty quickly backtracked on his handshake deal.

This is the third time in a week that the McGuinty Liberals have been caught playing dirty political tricks with Ontario's democratic rules. Previously the Liberals were caught leaking confidential legislative information as part of an unprecedented smear campaign against Ontario Ombudsman Andre Marin and blocking Opposition MPPs from taking their seats on Budget Day.

    QUOTES:

    "Dalton McGuinty would rather break yet another promise than permit his
    own MPPs to vote on delaying the HST. These are clearly the desperate
    tactics of a desperate man."
    -- Lisa MacLeod, Ontario PC MPP for Nepean - Carleton and critic for
       Revenue and Accountability

    "It is hard to work in good faith with people who are so quick to break
    their promises and betray their commitments."
    -- John Yakabuski, Ontario PC MPP for Renfrew Nipissing Pembroke and
       Opposition House Leader

    QUICK FACTS:

      -  The Ontario PC Motion that Dalton McGuinty broke his promise to kill
         reads as follows:

         "That, in light of Premier McGuinty telling Ontario families the HST
         will be revenue-neutral when he knew all along "there will be an
         increase in taxation" as a result of it; the Legislative Assembly of
         Ontario calls upon the McGuinty government to delay implementation
         of the HST until a date following the next provincial general
         election."

For further information: Christine Bujold, (416) 325-8505, christine.bujold@pc.ola.org

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A representative of the federal government confirmed this week that the amounts paid by the Ontario Government as small business transition support payments will be considered to be income for income tax purposes and will be taxable.  As a result, the $300 - $1000 just became a smaller amount that can be spent on harmonized sales tax (HST) compliance.

What is an interesting twist is that Ontario signed on to HST after the Federal Government agreed to provide a certain amount of money.  Did the Ontario negotiators realize that some of that money would go right back to the federal government in the form of income tax?

Small businesses must remember to include this one small time payment as income when reporting their 2010 income.  if they forget, the Canada Revenue Agency (the entity that is responsible for making the list of who is to receive the transition payment and how much they are to receive) may assess unreported income tax, penalties and interest.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On May 19, 2010, the federal Department of Finance released "Financial Institution Rules for the Harmonized Sales Tax (HST)", which is a rather long and complicated document. The good news is that only financial institutions (including de minimis financial institutions) must figure out how this document changes their way of doing business and imposes new obligations.  The bad news is that financial institutions may charge higher service fees to cover their compliance costs / assessment risks.

The released document provides information on changes to rules for selected financial institutions (also known as SLFIs).  The changes include changes to the test for determining whether an entity is an SLFI.  As a result, it will be important for entities to apply the new test to see whether they are still SLFIs and whether they are now considered to be a SLFI.  The release states:

British Columbia and Ontario's decision to join the HST, effective July 1, 2010, will significantly increase the number of FIs that are SLFIs. For example, a bank with branches in Ontario and Manitoba and in no other provinces would become an SLFI only as a result of Ontario harmonization.

This statement suggests that some entities (were not considered to be SLFI before and are considered to be a SLFI now) now have a lot of work to do to prepare before July 1, 2010.

The released document also provides information to financial institutions about the "special attribution method" (friendly name "SAM") that they are required to use.  This complicated formula will likely appear in the coming weeks in regulations and, therefore, will not be subject to scrutiny by opposition MPs and the Canadian Senate.

The SAM attribution methods are briefly discussed for:

i. banks

ii. insurance corporations

iii. trust and loan corporations

iv. investment plans and segregated funds

v. other corporations, individuals and trusts

The publication also covers the following topics:

• information requirements
• penalties
• MTFs that are ETFs
• timing of PVAT (provincial HST component) determination under SAM
• compliance rules
• transitional rules for SLFIs re Ontario and BC
• recapture of ITC rules for SLFIs
• SLFI transition installment base
• Imported supplies - non resident trusts
• SLFI rules respecting deemed pension supplies and pension rebate
•  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The federal HST implementing legislation does something unusual --- it permits a wide range of matters to be determined in the future by way of regulation.  This means that the Department of Finance (with input from other government departments and agencies) will write the regulations and the Governor-in-Council (a.k.a. the ruling Cabinet) will promulgate the rules.

To date (May 19, 2010), no HST regulations (relating to Ontario and British Columbia harmonization) have been promulgated.  We are told to expect three (3) sets of regulations soon.  The first (likely the HST place of supply rules) will be promulgated  (so we are told) by the end of May 2010.  Two other sets of regulations should be promulgated around mid-June 2010.  The regulations may include new penalties - so we are told.

Practitioners expect that the Department of Finance will post the regulations on their website www.fin.gc.ca. It may take up to 10 days for the regulations to be published in the Canada Gazette.

Yes, we are running out of time.  Yes, the rules will apply to more provinces than just Ontario and British Columbia. Yes, businesses need to know the rules in order to prepare for HST. Yes, consumers want to know the rules.  Yes, businesses will want to undertake transactions before July 1, 2010.  Yes, the fact the regulations have not yet been promulgated is a problem. Yes, we should expect problems with the regulations because they regulations will not be subject to the scrutiny of opposition parties and the Senate. Yes, there will be a degree of trial and error.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

When a owner of a business in Ontario is registered for Ontario retail sales tax purposes, he/she/it must obtain a purchase exemption certificate pursuant to subsection 6(1) of the Retail Sales Act (Ontario) when it disposes of a stock of goods to which the Bulk Sales Act (Ontario) applies.  If the vendor does not obtain a purchase exemption certificate,  and does not provide the purchase exemption certificate to the purchaser, the purchaser may be pursued for the unpaid sales tax debts of the vendor.

After harmonization on July 1, 2010, section 6 of the Retail Sales Tax Act will continue to be applicable.  Representatives of the Ontario Ministry of Revenue confirmed this today at the Southern Ontario Commodity Tax Group meeting at the Toronto Board of Trade.

Section 6 of the Retail Sales Tax Act has not been repealed.  The Ministry of Revenue will continue to enforce the provisions of the Retail Sales Tax Act after harmonization.  As a result, auditors will be busy little beavers running around auditing vendors under the Retail Sales Tax Act.  The Ministry of Revenue is not going to let go of the mechanism that allows it to pursue purchasers for unpaid retail sales tax liabilities of vendors when the vendors no longer have the assets.

Section 6 of the Retail Sales Tax Act provides:

(1) No person shall dispose of his, her or its stock through a sale in bulk to which the Bulk Sales Act applies without first obtaining a certificate in duplicate from the Minister that all taxes collectible and payable by such person have been paid or that such person has entered into an arrangement satisfactory to the Minister for the payment of such taxes or for securing their payment.

(2) Every person purchasing stock through a sale in bulk to which the Bulk Sales Act applies shall obtain from the person selling such stock the duplicate copy of the certificate furnished under subsection (1), and, if the person who is purchasing the stock fails to do so, that person is responsible for payment to the Minister of all taxes collectible or payable by the person who is disposing of the stock through a sale in bulk.

(3) The issuance of a certificate by the Minister under subsection (1) does not affect any liability under this Act of the person in respect of whom the certificate is issued.

What this means is that asset purchase agreements should continue to include a clause requiring the vendor to obtain the Retail Sales Tax Subsection 6(1) Clearance Certificate.  Since there is no specific limitation period within section 6 of the Retail Sales Tax Act, this contractual provision may be required for some time.

It should be noted that as a practical matter, when a vendor requests a purchase exemption certificate, the request is an invitation to conduct an audit.  The vendor is saying to the Ministry that he/she/it is going to sell his/her/its assets and the Ministry better come in an conduct an audit and find any non-compliance while they have chance.  Audits can often slow down the process of obtaining the clearance certificate (because the issuance of the certificate is delayed until the end of the audit and payment of any taxes owing).  As a result, contractual provisions need  to allow some flexibility relating to the provision of the certificate and vendors need to ask for the certificate well in advance of the closing date.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On May 14, 2010, the Ontario Government released Ontario Tax Tip 7 "Prepare for Ontario's HST: Small Business Transition Support" in which Ontario discusses a payment small business would receive to offset costs of modifying systems in order to transition to harmonized sales tax (HST).  Ontario Tax Tip 7 is intended to help small businesses understand if they are eligible for a small business transition support payment and explain how the support payment will be delivered to them. This support payment has been commonly referred to as the “Small Business Transition Credit”.

In order to qualify for a transition support payment, an eligible business must:

• not be a listed financial institution under the Excise Tax Act (Canada);
• carry on business in Ontario and be a GST/HST registrant on July 1, 2010;
• make GST/HST taxable supplies (including zero-rated supplies) in the course of carrying on business;  and
• have taxable annual revenues of less than $2 million (as announced in the 2010 Ontario Budget, the province will prescribe the 12-month period for calculating the $2 million taxable revenue threshold for purposes of the transition support payment).

If a small business for the transitional support payment, the amount the business will receive will be based on the following:

How is the Ontario Government going to program the computers to identify sole proprietorships and partnerships (joint ventures) and other businesses that are not separate legal entities?  There are many forms of small businesses that are not Ontario incorporated entities.  There are many forms of business that do not file separate tax returns.  A sole proprietor would report business income on his/her personal income tax return.  A partnership is not a legal entity for income tax purposes and the partners report business income and business losses on their respective income tax returns. 

Will the Canada Revenue Agency look at both income tax returns and GST/HST returns?  If the CRA is going to look at GST/HST returns, how will the annual filers be found and their quarterly sales revenues determined?

Are branches of foreign companies going to be treated differently than Ontario corporations?  If so, this approach would not encourage foreign direct investment to Ontario.

Are municipalities, schools, school boards, hospitals and other MUSH sector entities entitled to receive the small business transition credit if their taxable sales fall within the thresholds?

What is the Ontario Government going to do to prevent abuse?  What if a person registered 1000 corporations in June 2010?  Would they receive $30,000 from the Ontario Government even if each reported revenues of $10?

There are a number of questions that need to be answered so that all small businesses are recognized.  Equally as important, questions need to be asked so that cheques are not blindly written to HST-abuse vehicles.

Small businesses will need the financial assistance because it will cost more than $300-$1000 to implement the necessary changes correctly.  The problem is that there are problems with the mechanism.

Finally, I should mention that the small business support is taxable for income tax purposes.  The Department of Finance confirmed this today at the Southern Ontario Commodity Tax Group Meeting at the Toronto Board of Trade.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

Is it a coincidence that today I had a discussion with an accountant who asked about whether a client must start charging GST and HST on July 1, 2010 (or starting on May 1, 2010 if the transition rules apply) and the Ontario Government comes out with Tax Information Notice 6 "HST Notice for Suppliers of Taxable Property and Services to the Ontario Government"?  Probably it was a coincidence.

Tax Information Notice 6 states:

Under the sales tax harmonization agreement between the Government of Ontario and the Government of Canada, the Canada-Ontario Comprehensive Integrated Tax Coordination Agreement (CITCA), Ontario has agreed that, effective July 1, 2010, all Ontario government ministries, agencies, boards, commissions and Crown corporations ("Ontario government entities") will pay Goods and Services Tax (GST) / Harmonized Sales Tax (HST) on their purchases of taxable property and services. Property could be goods, real property or intangible personal property such as trademarks, rights to use a patent, and digitized products downloaded from the Internet.

What this means is that existing contracts where suppliers do not charge goods and services tax (GST) and/or Ontario retail sales tax (ORST) may be subject to GST and HST after May 1, 2010.  It used to be that Ontario Government ministries, departments and crown corporations told suppliers that they are GST-exempt.  This was not the correct term: the Ontario Government ministries, departments and crown corporations were not exempt under a provision of the GST legislation (a.k.a, the Excise Tax Act (Canada)).  The correct term is that the supplies were not taxable (but were not in the non-taxable importations schedule to the GST Legislation).  In simple terms, the federal government could not request that the provincial government pay tax and entered into a reciprocal taxation agreement.

Tax Information Notice 6 goes on to state:

Ontario government entities that are currently paying GST, as well as those that are currently claiming an exemption from GST (i.e., ministries and other provincial entities listed on Schedule A of the current Canada-Ontario Reciprocal Taxation Agreement (RTA) – see Appendix for list of entities, will pay GST/HST on their purchases of taxable property and services effective July 1, 2010. (Emphasis added)

Suppliers to the Ontario Government need to revisit existing contracts and change their invoicing and record keeping.  More importantly, the suppliers may need to educate their Ontario Government clietns/customers that they need to pay GST and HST. Information Notice 6 contains a warning not to be fooled by Ontario Government clients/customers:

Accordingly, suppliers must generally charge and collect GST/HST on any consideration that becomes due on or after July 1, 2010 in respect of a taxable supply to an Ontario government entity. In these cases, suppliers should not rely on or accept any Crown funds exemption requests or certifications requesting GST/HST relief at the point-of-sale.

Can you imagine the conversation between suppliers and their Ontario Government customers/clients where the Ontario Government customers/clients say they do not have to pay the GST/HST and the supplier must "respectfully disagree"?

I have to warn you about the May 1, 2010 - June 30, 2010 period.  The Ontario Government is telling suppliers in Information Notice 6 that if they currently have to pay GST (because they are not in Appendix A), they have to continue to pay GST.  If they currently are not required to pay GST (because the client/customer is listed in Appendix A), they do not have to pay GST during the May 1, 2010 to June 30, 2010 transition period (but will after July 1, 2010).  If they have to pay HST during the May 1, 2010 to June 30, 2010 transition period (and Appendix A does not apply when one talks about OHST), they must pay such OHST. Thanks for clearing up that up! 

Some suppliers who are not currently registered for GST purposes (because they only make non-taxable supplies to the Ontario Government) will have to get registered for GST/HST purposes.  Some suppliers who are not collecting and GST will have to adjust their record keeping to charge GST and HST on invoices and record such collections in their accounting records.  In addition, such businesses who have not been claiming input tax credits will need to record input tax credits in accounting records in connection with purchases.  Large businesses may be affected by the restricted input tax credits rules and cannot claim all OHST paid on business inputs. Some suppliers will need to file GST/HST returns electronically and be in a position to retrieve information from accounting records with respect to GST/HST collected, GST/HST invoiced and collectible, and input tax credits on purchased inputs. There is a lot more suppliers to the Ontario Government need to do to prepare for HST.

One last word of warning is that suppliers to the Ontario Government should prepare to be audited after implementation of HST.  They will be "low hanging fruit" for Canada Revenue Agency auditor as some will be making mistakes.  These changes are big changes.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

On May 12, 2010, the Globe and Mail ran a print article entitled "Tips for cheating the harmonized sales taxman".  Some of the tips provided in the origin version were incorrect and have been removed in the online version.

Printed Version:

Tip 1 "Buy Now, Use Later

Even if you prepay, you still pay HST on services used after July 1.  But products aren't subject to that rule.  So if you know the purchase of some durable product (e.g. washing machine, fall wardrobe, camping gear) is in your near future, buy it before July 1, even if it sits unused.  In fact, since HST adds 8 per cent and you can borrow money at a much lower rate, do this even if you save to take a short term loan to do so."

This advice is INCORRECT.  First, durable goods, including washing machines, fall wardrobes and camping equipment, are subject to Ontario retail sales tax (ORST) at the rate of 8%.  So, if a consumer buys goods before July 1, 2010, they will be paying a combined sales tax rates (GST and ORST) of 13%. Second, the transition rule applies to services and goods.  If you buy a good to be delivered before July 1, 2010, ORST and GST are payable.  If you buy a good before July 1, 2010 and the good is delivered after July 1, 2010, the good will be subject to GST and HST.

Printed Version:

Tip 2 "Get to Know the Internet

Look for retailers in Alberta and other "tax havens". They won't charge you HST or even PST if you have an out-of-their province shipping address.  Even after paying shipping and handling, you'll save money."

This advice is also INCORRECT.  Due to the HST place of supply rules for goods (also known as tangible personal property), a GST registrant in Alberta would be required to charge, collect and remit HST if the goods are shipped to an address in the HST Zone (Ontario, British Columbia, Nova Scotia, New Brunswick or Newfoundland/Labrador).  if you buy goods in Alberta and pay for shipping to Manitoba, you will not be required to pay HST.  However, if you live in Ontario, you will have to pay for someone to ship the goods from Manitoba to Ontario.  This second shipping may wipe out any HST savings.  Further, the transshipment may add risk of loss or damage to the transaction.

Printed Version:

Tip 5 "Get on the Internet

The government has a rebate program and the exempted products and services are many and varied.  You can't adjust your spending until you know where the tax applies and doesn't"

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

Businesses in the HST Zone (Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador) will have to use the newly released harmonized sales tax (HST) place of supply rules, some of which are different from the existing place of supply rules (for Nova Scotia, New Brunswick and Newfoundland/Labrador). The applicable HST rates are:

• Ontario: 13% (5% GST and 8% provincial HST component)
• British Columbia: 12% (5% GST and 7% provincial HST component)
• Nova Scotia: 15% (5% GST and 10% provincial HST component starting July 1)
• New Brunswick: 13% (5% GST and 8% provincial HST component)
• Newfoundland/Labrador: 13% (5% GST and 8% provincial HST component)

In addition, some businesses outside the HST Zone will be required to charge, collect, and remit HST to Canada’s federal government in accordance with the place of supply rules when the place of supply is within the HST Zone.

On February 25, 2010, Canada's Department of Finance released an administrative document containing its proposed 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. The Canada Revenue Agency subsequently issued, 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 HST place of supply rules for services have evolved from the existing rules to reflect the addition of the larger economic provinces of Ontario and British Columbia to the HST Zone.
The first question to ask when applying the HST place of supply rules is: What is being supplied or sold? Is it property (tangible personal property, real property or intangible property) or a service? If the supplier is supplying or providing a service, then the HST place of supply rules for services should be used.

On April 30, 2010, the Department of Finance released Draft Regulations in relation to Place of Supply for Property and Services.

The next question is whether one of the specific place of supply rules applies or the general place of supply rules for services. Determine whether any of the following types of services are being provided and, if so, go to the specific place of supply rule:

• personal services (e.g., a hair cut)
• services in relation to real property (e.g., constructing a house);
• services in relation to intangible property (e.g., designing a trade mark)
• computer-related services and Internet access;
• telecommunication services;
• premium rate telephone services;
• services in relation to a location specific event (e.g., participation in a conference);
• passenger transportation services;
• services supplied on board conveyances;
• baggage charges;
• services of child supervision;
• services related to a ticket, voucher or reservation;
• freight transportation services;
• postage and delivery services;
• customs brokerage services;
• air navigation services;
• repairs, maintenance, cleaning, alterations and other services relating to goods;
• service of a trustee in respect of a trust governed by an RRSP, RRIF or RESP.

If the supplier is not providing any of the above listed specific services (and note the devil may be in the details), then the general place of supply rules for services will apply. There are 5 general place of supply rules for services, which must be applied in the following order. Rule 1, 2 and 5 are the fundamental rules. Rules 3 and Rule 4 are tie-breaker rules
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

CTV Ottawa is reporting that Ontario P.C. MPP Lisa MacLeod has put forward an Opposition motion (which will be heard on Wednesday May 19th) to delay implementation of the harmonized sales tax (HST) on July 1, 2010.  Ontario's Progressive Conservatives have managed to set up a vote in the Ontario Legislature next week on the looming HST. The motion that would postpone the HST's scheduled July 1 implementation until after "the Liberals have a mandate from the people," which would mean at least until the October 2011 provincial election.

In the end, the motion is non-binding.  This means that McGuinty can ignore the result if the motion passes with the help of some of his own MPPs.

This is an opportunity for the McGuinty Government to claim that the feds are not ready and a delay is the appropriate thing for Ontario to do. 

I acknowledge that all of this is very unlikely.  But I give a big kudos to Ms. MacLeod for the effort.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

The Government of British Columbia has published a 12 page document listing many items that are subject to harmonized sales tax (HST) after July 1, 2010 and what will not be subject to HST.  I hope this helps friends in B.C.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

On February 25, 2010, the Department of Finance released a News Release summarizing the proposed harmonized sales tax (“HST”) place of supply rules and shortly thereafter the Canada Revenue Agency released a GST/HST Technical Information Bulletin setting out its administrative position. On April 30, 2010, the Department of Finance released “Draft Regulations in respect of the Place of Supply of Property and Services” (the “Draft Regulations”). There is a separate HST place of supply rule for customs brokerage services.

Section 24 of the Draft Regulations sets out the HST place of supply rules for customs brokerage services:

24.(1) Where a supply of a service is made in respect of the importation of goods and the service is the arranging for their release (as defined in subsection 2(1) of the Customs Act) or the fulfilling, in respect of the importation, of any requirement under that Act or the Customs Tariff to account for the goods, to report, to provide information or to remit any amount,

(a) if the goods are accounted for as commercial goods (as defined in subsection 212.1(1) of the Act) under section 32 of the Customs Act, the supply is made in the province in which the goods are situated at the time of their release;
(b) if paragraph (a) does not apply and tax, calculated at the tax rate for a participating province, is imposed under subsection 212.1(2) of the Act, or would be so imposed if subsections 212.1(3) and (4) and section 213 of the Act did not apply, in respect of the importation, the supply is made in that participating province; and
(c) in any other case, the supply is made in a non-participating province.

(2) Subsection (1) does not apply to the supply of any service provided in relation to an objection, appeal, redetermination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing.

This means that:

Rule 1: If commercial goods are imported into Canada, the place of supply of the customs brokerage and related services is in the province in which the goods are released. Therefore, if the goods are released at Toronto Pearson International Airport, the Ontario HST (13%) would apply. If the goods are released at the Vancouver Port, then British Columbia HST (12%) will apply. If the goods are released at the Halifax Port, the Nova Scotia HST (15%) will apply after July 1, 2010.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

Robert Benzie of the Toronto Star has written a good article "HST will lower tax on booze, but the price is going up" about the decrease in sales tax on alcohol that will accompany the implementation of harmonized sales tax (HST) on July 1, 2010 and the counter-balancing increase in fees that result in net price increases.  He makes a number of important points:

• The current Ontario retail sales tax on alcohol is 12% or 10%
• The HST rate will be 8% (a decrease of 4% or 2%)
•  The LCBO has quietly increased its mark-up by 7.5 per cent. On imported wines the mark-up has soared to 71.5 per cent from 64 per cent, and on domestic wines it has risen to 65.5 per cent from 58 per cent.
• The LCBO has a policy of “social responsibility” which prevents them from bringing prices down to a level which would encourage alcohol abuse

The LCBO mark-ups are government mark-ups because the LCBO is owned by the Ontario government.  As a result, there is tax on tax --- and this is the problem.

The LCBO mark-ups are a tax.  HST on alcohol would be applicable on the portion that is the LCBO fee.  This is tax on tax.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

I have been contacted by an old friend (an Ottawa lawyer that I know and respect from my days at Goodmans LLP) who asked whether residential real estate commissions are subject to harmonized sales tax (HST) if the fees are in respect to activities performed by a real estate agent before July 1, 2010 and where the agreement of purchase of sale was signed before July 1, 2010, but the actual transfer of the residential real estate to the purchaser(s) occurred after July 1, 2010.  Obviously, the real estate at issue is located in Ontario.

What was explained to me was that all or substantially all of the real estate agent's services are performed prior to the conclusion of an agreement of purchase and sale by the vendor and purchaser.  Based on my personal experience buying a new home and selling an old home is that most of the services of the real estate agent are provided before the agreement is signed.  The vendor's real estate agent makes the house or condominium unit pretty and takes pictures.  Then they make a promotional brochure.  Then they advertise the property.  Then they take appointments for showings and sometimes attend the showings.  They sometimes host open houses.  The vendor's agent works to bring together a group of persons who would be interested in the property and often aims to create the environment of a bidding war between potential buyers.  The vendor's real estate agent then receives the offer(s) to purchase and forwards the offer(s) to the homeowners.  The negotiation process proceeds and eventually the vendor accept an offer an the paperwork is drawn up and signed.  Very little in the way of services is required from the vendor's real estate agent after the agreement of purchase and sale is signed and sent to the lawyers.

The purchaser's real estate agent performs services of identifying properties that meet the purchaser's requirements, setting up appointments with other agents for listed properties and takes the purchasers to the various appointments.  These services can take place over a number of months.  Eventually the perfect property is located and the purchaser's agent assists the purchaser in arranging financing and drafting an offer.  The purchaser's agent assists the purchaser with the negotiation of the deal and the final step is the agreement of purchase and sale.  It is possible that the offer/negotiation stage may transpire on many homes until the purchaser concludes a contract with a vendor.  In my experience, the purchaser's agent may also assist the purchaser find a lawyer and an inspector. Very little in the way of services is required from the purchaser's real estate agent after the agreement of purchase and sale is signed and sent to the lawyers.

That being said, after the date the agreement of purchase and sale is signed, there may be conditions in the agreement that must be satisfied (e.g. arranging financing, a home inspection, selling an existing home, etc.) before the contract is perfected. As a result, the important date is either the date of signing the agreement of purchase and sale or the date that the conditions are satisfied or expire. 

The question is whether under the transition rules, the real estate agent must charge HST.  The transition rule for services is that HST would generally apply to the supply of a service to the extent that the service is performed on or after July 1, 2010.  HST would generally not apply to a supply of a service if all or substantially all (90 per cent or more) of the service is performed before July 2010.  Consideration due or paid on or after July 1, 2010 would be subject to HST to the extent that  the consideration is for the part of a service that is performed on or after July 1, 2010 (See Ontario Ministry of Revenue Information Notice #3 "General Transition Rules for Ontario HST")

Based on the transition rules:

1) With respect to residential real estate deals signed before July 1, 2010 and all conditions are satisfied before July 1, 2010, it should be that HST is not payable if all or substantially all of the real estate agent's services are performed before July 1, 2010.  If the agreement of purchase and sale is signed and the conditions expire before July 1, 2010, it should be that all or substantially all of the services are considered to be performed before July 2010 and, therefore HST should not be payable. 

That being said, it would be useful for the Canada Revenue Agency (CRA) to issue an administrative statement that they agree with the timing of the services.  I cannot imagine what basis the CRA would give that 10% or more of the services are performed after the satisfaction of all conditions.

Real estate agents should help themselves by taking detailed records of when they performed services for clients so that they can do the math for the auditors.

2) With respect to residential real estate deals that are signed before July 1, 2010 and some of the conditions expire after July 1, 2010, the facts and the HST status of the supply will have to be considered on a case-by-case basis.  It is possible that more than 10% of the services will be performed after July 1, 2010 if the conditions create particular complications or if the buyer picked the first home they saw and the real estate agent's time was required to keep a deal together.

3) With respect to residential real estate deals that are signed before July 1, 2010 and fall apart after July 1, 2010, the facts and HST status of the supply will have to be considered on a case-by-case basis with respect to amounts received by real estate agents from the deposits.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

One of the benefits of The HST Blog is that I receive information from followers and can share their real life stories about living with harmonized sales tax (HST) and the negative effects of HST.

I have received an email from a follower, B, about her mother being asked to leave a rented condominium unit by a landlord.  B has informed (and I have changed a few details to protect B [look for brackets]):

My mother has rented a condo for the last 3 1/2 years in [Ontario]. She does not have a lease but merely an agreement with the landlord to pay monthly [rent]. The landlord showed up for the rent check on Sat May 1, 2010. At that time he informed her that [the landlord's] family would be moving into the condo and he gave her a brief letter and he signed it. He gave her 2 months notice that she has to be out by (coincidentally) June 30, 2010.

I have heard that landlords can only increase rent by a certain percent (2.1% ?) but this is how some landlords can get around that. I started looking for some rentals in [Ontario] online as soon as my mother informed me about this [meeting with her landlord]. I did phone one person that was advertising a sublease for 3 months for $1100.00 per month. He informed me that after the sublease the rent was being increased to $1270.00 per month.

What this real life story tells us is that HST is affecting the decisions of landlords and negatively impacting tenants (already).  Rentals of residential real property are not subject to Ontario retail sales tax (ORST) or British Columbia social services tax (BCSST). Rentals of residential real property are exempt for goods and services tax (GST)/HST purposes. This means that landlords are not entitled to claim input tax credits and cannot recover GST/HST paid on purchases.  HST (and GST) would be payable on landlord's costs such as electricity, heating fuel, landscaping, snow removal, repairs, management fees (paid to third parties), security, supply and install fixtures (carpets, paint, cabinets, etc.), etc.

As a result, if a landlord's costs of operating the property increase due to HST, then the landlord will want to pass those increased costs on to the tenants.  However, the landlords may not be able to pass on the costs to existing tenants (under the landlord-tenant laws).  Some landlords are asking the existing tenants to leave so that they may charge new tenants a higher amount of rent.  Under the law, landlords are limited in the reasons for asking a tenant to leave.  One of the acceptable reasons for asking a tenant to leave is that the landlord is moving into the residential real property unit.

What we are learning is that HST may result in homelessness of individuals as landlords ask tenants to leave.  HST is negatively affecting some seniors on fixed incomes who have been asked to leave their rented homes.  It may not be easy for individuals to find new affordable housing.  In addition, moving ones possessions requires friends/family or a moving company (which costs money).

What we might see is landlords increasing rents and tenants having to accept the higher costs (if they can afford the higher rent) even if the rent increase is contrary to the law.

These negative effects cannot be solved by a one-time cheque.

• Email This
• Print
• Comments (3)
• Trackbacks
• Share Link

The Globe and Mail newspaper is reporting in an article entitled "B.C. alters health structure to avoid $3.5 million HST bill" published on May 7, 2010 that the British Columbia is undergoing a restructuring. The B.C. Ministry of Health Services and the CEOs of the provincial health authorities have agreed to tuck the Shared Services Organization, which provides services such as computer support and bulk purchasing for the health sector, under one of the health departments / crown entities.

The reason for the reorganization is that the Shared Services Organization would otherwise be required to charge HST on supplies made to the Government of British Columbia and other provincial health entities AND cannot recover all of the HST by way of input tax credits or public service bodies rebates.  Hopefully we will get more detailed about the reorganization to learn whether the changes create exempt supplies (instead of taxable supplies) or non-taxable labour.  This will help us identify other HST savings opportunities.

The question that taxpayers should be asking is whether the Ontario Government and the B.C Government have undertaken a complete analysis of their internal operations in order to address all situations where the provincial government must pay #HST (and GST) on supplies made in the province (or to businesses in HST provinces) that is not recoverable.  We should be asking if HST is going to cause provincial budgets to balloon.  We should be asking whether those who are implementing HST recognize the cost effects associated with HST.  Proof of understanding the cost effects is the government itself taking steps to minimize the negative effects within the government spending structure.

I would guess that the Ontario Government has not asked each and every government employee and manager and Deputy Minister to go over their budgets to identify unrecoverable HST costs within Ministry, department and Crown entity budgets.  Let's wait for the NDP and Conservative opposition parties to find what the governing HST Liberals have overlooked.  I will predict a few big budget line items increasing due to unrecoverable HST.  This will be a topic for discussion and accountability into the future (after HST implementation).  I wonder if the Ontario Ombudsman is going to be busy looking at HST issues.

The other side to this story is that if the BC and Ontario governments must reorganize due to HST,: what about businesses?  Both Ontario and British Columbia have said that HST will reduce administrative costs for business.  Well, here is an example within the BC Government that shows an INCREASE in administrative costs resulting from the implementation of HST.  The reality is that HST will increase administrative costs for certain businesses (especially where amounts are paid for services and other goods and services not subject to provincial sales tax).

The tax officials' counter-argument is that businesses (like the BC Government) can reorganize to avoid increased HST administrative costs.  That is correct.  Steps may, in certain cases, be made to minimize HST costs.  However, the restructuring of business organizations will cost businesses money - legal fees, accounting fees, advisors fees, etc.  So, businesses must spend money during the worst economic recession in recent years in order to save HST in the future.  In addition, any business that reorganizes will have to ask questions whether their restructuring may be challenged by the Canada Revenue Agency using the GST/HST general anti-avoidance rule.  It may not be so simple.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Sudbury Star has posted an article that harmonized sales tax will cost the City of Sudbury $450,000 per year.  This will mean a budget shortfall and potentially higher municipal taxes. 

Under the federal Excise Tax Act (Canada), where a municipality makes exempt supplies (and cannot recover the amounts paid as GST as input tax credits), the municipality may claim a rebate of 100% of the GST.  So, under the GST regime, municipalities are tax neutral.  This will continue for the 5% GST portion of expenditure by municipalities.

However, under the HST, the 8% provincial component in Ontario is not fully recoverable.  There are two scenarios.  First, if the HST paid by the municipality matches with a exempt supply by the municipality, the rebate is 78% of the 8% provincial HST component.  For example, if a municipality paid $100,000 for third party snow removal services, the municipality would pay $5,000 GST (that is fully recoverable) and $8,000 OHST.  Only 82% of the $8,000 is recoverable by the municipality by way of a rebate.  The remaining 22% is an unrecoverable cost to the municipality.

Second, the municipality may be caught by the restricted input tax credit rules if the municipality sells more than $10 million in taxable supplies in a year.  I would expect that the City of Sudbury would fit into this category.  Under the restricted input tax credit rules, the OHST component of purchases of energy, certain telecommunications, certain vehicles and fuel and meals and entertainment are not recoverable for a number of years after implementation of HST.  For example, if the municipality purchases electricity that is allocable to taxable activities (e.g., the municipal skating rink, swimming pools, etc.) and the cost over a year is $1,000,000, the $80,000 in HST is unrecoverable if incurred in after July 1, 2010 to June 30, 2013.

HST also means that consumers will pay more for certain property and services acquired from the City.  The article provides the following examples:

* A one-year adult membership at Howard Armstrong Recreational Centre will jump from $218.25 to $235;

* A three-month child, youth or senior pass to city swimming pool will jump from $59.50 to $64;

* The 25-week Walk Your Way to Wellness Program for seniors will jump from $92 to $99;

* Ice rental for the Walden Oldtimers Hockey Tournament will go from $209 to $260;

* A plot in the city's Veteran's cemetery will go from $954 to $1,027;

* Adult athletic field rates will go from $57.50 per game to $62 per game. The cost of lights, if needed, will go from $17.75 an hour to $19 an hour;

* Renting the chalets at Adanac or Fielding Park for a Saturday night will jump from $174.75 to $188;

* Use of weigh scales at city landfill sites will jump from $16.25 to $17.50.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Ottawa Citizen has a useful HST web-site that I would like to share with you.  They have posted a number of segments of an interview with Premier McGuinty.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The British Columbia New Democrats have posted an HST calculator and so has the Ottawa Citizen.   I think that this is a good idea and allows individuals to calculate what the implementation of a harmonized sales tax (HST) will mean to their family.  This very useful tool may be used by families in British Columbia and Ontario.

The areas covered by the HST calculators are:

• gas for automobiles
• electricity
• natural gas/heating oil
• home renovations/repairs
• Internet services
• Children's sports activities
• air, train and inter-city bus fees
• professional fees (lawyers, accountants, real estate, etc.)
• landscaping/snowplowing
• membership fees (gym, golf, tennis, yoga, pilates, etc.)
• veterinary care
• green fees/lift tickets
• haircuts/manicures/spa
• restaurant meals/takeout
• tax preparation services
• movie/theater tickets
• newspapers/magazines
• taxi fare
• home telephone and cable
• dry cleaning
• bicycles
• other

It is important to note that newspapers will be subject to a point of sale rebate in Ontario and certain telephone and telecommunications services and restaurant meals were subject to Ontario retail sales tax (ORST).  It is also important to note that lawyers services are subject to British Columbia social service tax (BCSST).

In order to expand the list of items, it is important to remember that provincial sales tax is payable on most goods (unless an exemption exists) and a limited number of services (has to be in the definition of "taxable service").  As a general rule, provincial sales tax is not payable on real property and intangible property.

In order to calculate what HST will mean to your family budget, you will need to focus on items that were not subject to provincial sales tax and, after July 1, 2010, will be subject to HST.

A good starting point is your invoices/bills for the January - April 2010 period.  Take the invoices out of the files, drawers, purses, wallets and wherever else they may be.  Look at the invoices to see what was subject to goods and services tax (GST), but not provincial sales tax.  Make a list of these items and the amounts you paid.

Then cross off that list any items that will be subject to a point of sale exemption (books, newspapers, prepared food under $4.00, children's clothing, etc.)

Then add to the list expenditures that occur in the year that did not happen in January - April (e.g., a vacation, travel for Christmas or Thanksgiving holidays, summer theater tickets, propane for the barbeque, landscaping, renovations, etc.)  If you need to look at a short list of items that were previously not subject to ORST and will be subject to HST, go to the recently released Ontario Government publication on what is taxable and what is not taxable.

After undertaking this exercise using the HST calculator, how mush over/under the Statistics Canada average of $792 per family per year?  We are searching for a copy of the Statistics Canada report and are currently are relying on new reports of its existence.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

If you would like to successfully judicially review the Canada Revenue Agency (CRA) in regards to a fairness decision, the Federal Court, Trial Division in Spence v. the Canada Revenue Agency is worth reading.

In this case, Ian Spence, the applicant in a judicial review was successful.  A judicial review is filed pursuant to Rule 18.1 of the Federal Courts Act.  A judicial review must be filed within 30 days of the decision under review (in this case the refusal of the CRA to grant the fairness application).  The deadline cannot be extended.

The judge granted the judicial review and ordered that (1) the CRA decision be set aside and the matter be referred to a different CRA official for redetermination, and (2) the applicant receive costs in respect of the application for judicial review (in other words the CRA must pay Mr. Spence an amount in respect of his legal fees in pursuing the judicial review).

The judge determined that there was no basis for the CRA representative to claim that there was no basis for granting fairness relief.  Under the legislation, the CRA has broad discretion to grant the relief requested.  While the CRA has issued guidelines relating to the fairness process, those guidelines do not impede the statutory discretion.

In short, this decision may open the door to a more flexible fairness process.  A taxpayer may file a fairness relief application if a liability has been determined and the taxpayer is seeking relief on the basis of fairness.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The harmonized sales tax (HST) place of supply rules include a specific rules for "services rendered in connection with litigation". These rules apply to lawyers, process servers, transcription service providers, those who provide expert opinions in connection with litigation, etc.

Section 26 of the Draft Regulations in respect of Place of Supply for Property and Services released on April 30, 2010 sets out the proposed specific place of supply rules for services in relation to litigation:

"A supply of a service rendered in connection with criminal, civil or administrative litigation (other than a service rendered before the commencement of such litigation) that is under the jurisdiction of a court or other tribunal established under the laws of a province, or in the nature of an appeal from a decision of a court or other tribunal established under the laws of a province, is made in that province."

More simply put, the rules are:

Rule #1: The general place of supply rules for services will apply to criminal, civil or administrative litigation services provided prior to the commencement of such litigation.
For example, if a person hires a lawyer to discuss whether the facts warrant litigation, the general rules apply. If a person hires a lawyer to sue an opponent and discussions lead to a settlement before a statement of claim is filed with the Court, the general place of supply rules would apply.
 

Rule #2: The general place of supply rules will apply to services in connection with litigation that is under the jurisdiction of a Court or other Tribunal established under the laws of Canada (rather than the laws of a province).

Rule #3: The general rules for services will not apply to litigation services rendered after the commencement of litigation. If the services are in connection with litigation that is under the jurisdiction of a court in an HST province (Ontario, British Columbia, Nova Scotia, New Brunswick or Newfoundland/Labrador) or is in the nature of an appeal from a decision of a court or other Tribunal established under the laws of an HST province, then HST applies.

If litigation has commenced (e.g., there is an initiating document such as a statement of claim) and Rule 3 applies, a supply of a service rendered in connection with criminal, civil or administrative litigation in an HST province, the supply will be regarded as being made in that HST province. In other words, if the litigation is in the Ontario Superior Court of Justice and you have a court file number assigned, HST at the rate of 13% applies.

Rule #4: If litigation has commenced (e.g., there is an initiating document such as a statement of claim), a supply of a service rendered in connection with criminal, civil or administrative litigation filed with a court under the laws of a non-HST province (e.g., Alberta), the supply will be regarded as being made in that non-HST province. In other words, if the litigation is in Alberta and you have a court file number assigned, HST will not be applicable to the services in connection with the litigation (however GST will be applicable).

Rule #5: If a supply of services in respect of litigation is supplied to a non-resident of Canada, the zero-rating provisions may apply to both the GST and HST component. The HST place of supply rules do not override the zero-rating provisions for exported services and professional services.
 

An unanswered question is whether an arbitration is "litigation" under the place of supply rules and, therefore, subject to the specific place of supply rule discussed above. If the Canada Revenue Agency takes the position that an arbitration is caught by the rules, arbitration centres in the HST Zone may not be popular with Canadian parties. Also, business law lawyers and in-house counsel may have to reconsider contractually stipulating that Ontario or British Columbia as the place of arbitration in contracts.

Lawyers should consider whether their clients can save HST based on the place of filing and should start asking the questions as part of their litigation strategy now --- given that litigation filed today will likely continue after HST implementation.

Lawyers and service providers should also recognize that the place of supply rule for pre-filing services is different than post-filing litigation services. Therefore, one file might involve a change in the HST rate. When this happens, it is best to open a new file at the time of the filing of the initiating document
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Canada Revenue Agency has released a new Web Cast on harmonized sales tax transition rules for intangible personal property, admissions to places of amusement and transportation passes - some of the hot topics on April 29 & 30th.

Under the Ontario retail sales tax (ORST) regime, intangible personal property and transportation passes are not subject to ORST.  However, admissions to places of amusement are subject to ORST unless exempted (e.g. theaters with less than 3200 seats).  As a result of HST, previously non-taxable tickets are subject to 13% (5+8) tax.

Passenger transportation passes, memberships, and admissions have special transitional rules.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On April 30, 2010, Canada's Department of Finance released "Draft Regulations in respect of the Place of Supply of Property and Services".  Section 33 states that the Place of Supply (GST/HST) Regulations are to be repealed and replaced by the Regulations in respect of the Place of Supply of Property and Services.  Even though these regulations have been released in draft form, the will apply to supplies made (a) on or after May 1, 2010 and (b) after February 25, 2010 and before May 1, 2010 unless any part of the consideration for the supply becomes due or is paid before May 1, 2010.

It is very important to note that the place of supply rules have changed slightly in certain cases.  For example. the place of supply rules for services in connection with litigation have changed from:

February 25, 2010 version: "A supply of a service rendered in connection with criminal. civil or administrative litigation in a particular province will be regarded as being made in that province.

to:

April 30, 2010 version: A supply of a service rendered in connection with criminal, civil or administrative litigation (other than a service rendered before the commencement of such litigation) that is under the jurisdiction of a court or other tribunal established under the laws of a province or in the nature of an appeal from a decision of a court of other tribunal established under the laws of a province, is made in that province.

The HST Blog raised concerns about the draft place of supply rule for litigation services and may have influenced the change.

There are other changes to the draft regulations that will be discussed in future blog posts. Please note that draft regulations trump administrative announcements.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Canada Revenue Agency has released an important new Web Cast on transition rules for reporting, collecting and self-assessing the harmonized sales tax (HST) during the May 1, 2010 - July 1, 2010 transition period. The purpose of this Web Cast is to provide information on how to report the HST where amounts become due, or are paid without having become due, on or after May 1, 2010 and before July 2010, for taxable property and services supplied on or after July 1, 2010.  The Web Cast also provides information to  certain businesses and public service bodies which are required under the HST transition rules to self-assess the provincial part of the HST on any amount that becomes due, or is paid without having become due, after October 14, 2009 and before May 2010, for taxable property or services supplied on or after July 1, 2010.

As we have been discussing, there will be situations under the transition rules where May 1, 2010 is the key date and where the HST is applicable prior to July 1, 2010. In these situations, the supplier of the property or service would be required to (1) charge the provincial part of the HST from the purchaser, and (2) account for that tax in the GST/HST reporting period that includes July 1, 2010.  That being said, the supplier would be required to account for the GST on time and in the GST/HST return in the period in which the supply occurred.

This Web Cast provides suppliers with the necessary instructions so that they can comply with the new reporting rules (which are counter-intuitive to a certain degree).  This is one of the more complex aspects of the HST transition rules.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The harmonized sales tax (HST) transition rules and HST place of supply rules set out general and specific rules for tangible personal property, real property, intangible property and services.  What is important and glaringly missing is guidance on how the Canada Revenue Agency divides up the categories.

Subsection 123(1) of the Excise Tax Act (Canada) defines "service" to mean:

"anything other than
(a) property,
(b) money, and
(c) anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person"

This means that the catch-all basket is the services basket.  It also means that you must determine if the supply at issue fits in another basket and whether it is property, money or supplied in the context of an employer-employee relationship.

I will focus on the more difficult concept - property. Subsection 123(1) of the Excise Tax Act (Canada) defines "property" to mean:

"any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money."

"Personal property" is defined to mean "property that is not real property".  So, you must ask if the supply is real property.

"Real property" is defined to include:
 

(a) in respect of property in the Province of Quebec, immovable property and every lease thereof,
(b) in respect of property in any other place in Canada, messuages, lands and tenements of every nature and description and every estate or interest in real property, whether legal or equitable, and
(c) a mobile home, a floating home and any leasehold or proprietary interest therein;

If your situation falls between the lines in the grey area, please seek the advice of a specialist.  For example, the Canada Revenue Agency is going to have difficulties with computer programs.  Over-the-shelf software will likely be considered to be tangible personal property.  Custom computer software may be considered to be tangible if provided on a disk/CD-Rom or a service if custom or intangible personal property if the contract sets out license rights.  Whether a computer software maintenance contract is a contract for services or intangible property is an open question that the Canada Revenue Agency is considering.  If it is possible that no maintenance would be required in a given period, the Canada Revenue Agency may consider the contract to be in respect of intangible personal property.  The same issue arises for warranties and help desk contracts.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

The Canada Revenue Agency has released a WebCast on harmonized sales tax (HST) transition rules for supply and install contracts that straddle the July 1, 2010 HST implementation date.  This WebCast is intended to help supply and install businesses in Ontario and British Columbia.

An example in the WebCast relates to the installation of a home theatre system.  However, the example presumes that the equipment is delivered to the home on June 30, 2010 and installed on July 2, 2010.  This is not a typical scenario supply & install contract.

Another example relates to the provision of a computer program on June 15th and training is supplied in July 2010.  Again, not a typical supply and install situation in an Ontario retail sales tax context.

Under the ORST regime, some businesses in Ontario and British Columbia currently do not charge ORST or BCSST because in their business tangible personal property becomes real property upon installation.  A carpet installer would supply installed carpet and no ORST is payable (but the installer pays ORST on its purchases and builds it into the price of the installed carpet).  A kitchen design store/contractor may supply installed kitchen cabinets, kitchen counters, a sink, tiles and appliances and not charge ORST to the homeowner (but the supplier pays ORST on its purchases and builds it into the price of the installed kitchen).  These scenarios are not adequately addressed in the WebCast.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

At 5:02AM this morning I received an email alert from the Ontario Ministry of Revenue about harmonized sales tax obligations starting today.  First, I must say "Thank you for the notice".

Here is the contents of the emailed "Revenue Alert:

Reminder: Helping Businesses Transition To The Harmonized Sales Tax

What You Need To Know For May 1
On July 1, 2010, the retail sales tax will be replaced with a more modern, value-added tax that will be combined with the federal GST to create a harmonized sales tax for Ontario.
To help ease the transition to the HST, Ontario released general transitional rules in October 2009. Some of these rules take effect May 1.

What You Need to Know
 

• As of May 1, the HST will generally apply on pre-payments for products and services that are going to be provided or performed on or after July 1.
• The HST should not be charged for any goods received or services performed before July 1.

These transition rules are consistent with the approach used in the Atlantic provinces and Quebec. They are also similar to the transition rules that were used for the GST. BC has also largely adopted these transition rules.
The HST and cuts to business taxes will cut Ontario's marginal effective tax rate on new investment in half. Ontario will be providing $4.6 billion in tax relief over three years, including Corporate Income Tax cuts starting July 1, 2010.

• Find out more about the General Transitional Rules for Ontario HST
• Read about the Canada Revenue Agency's HST transitional rules
• Read more about What You Need to Know to prepare for the HST
• Get the list of Important Dates to Remember
 

Not the most helpful.  There were no attachments (but there were the four links that I am able to click on).

The Ontario Ministry of Revenue is not asking the most important question "How can the Government of Ontario help businesses comply with the HST rules that result from our tax reform decisions?"  The Ontario Government should do more to make it as easy as possible for Ontario businesses and businesses selling to people in Ontario to be able to comply with the new HST rules.

The fact that this is a similar approach to the approach in Nova Scotia, New Brunswick, Newfoundland and Labrador is irrelevant to the business owner who is struggling in the current economic climate.  The fact that marginal rate rates may be lower and may encourage new businesses to come to Ontario is also not important to the existing businesses.

Business owner wants someone to help them understand what they have to do to keep auditors happy.  No business owner wants auditors to find mistakes.  No Ontario business owner wants to be assessed in 1-2-3-or 4 or more years.

What is glaringly missing from today's email is basic instructions.

1) If you take on order after April 30, 2010 to sell a good AND will deliver the good after June 30, 2010, HST is collectible.  if you take an order after April 30, 2010 to sell a good AND deliver the good before July 1, 2010, HST is not collectible.

2) If you enter into a lease after April 30, 2010 to lease a good AND the lease term extends beyond June 30, 2010, HST is collectible on the part of the lease that takes place after June 30, 2010, but not the part before July 1, 2010).

3) If you enter into a verbal or written contract after April 30, 2010 to provide services AND the services are to be performed in whole or in part after June 30, 2010, HST is collectible in respect of services to be performed after June 30, 2010 (unless 90% of the services are performed before July 1, 2010 and certain other conditions are satisfied).  if you enter into a contract after April 30, 2010 to provide services and the services are performed in whole before July 1, 2010, HST is not collectible.

4)  If you entered into a written agreement of purchase and sale for residential real property in Ontario into after June 18, 2009, AND both ownership and possession are transferred after June 2010, HST is collectible.

5) If you sell a subscription to a magazine or periodical or newspaper and receive payment for the subscription in full before July 1, 2010, then HST is not collectible. If you sell a subscription to a magazine or periodical or newspaper and receive payment for the subscription in full after June 30, 2010, then HST is collectible.

6) I you collect HST before July 1, 2010, DO NOT add it to your GST/HST return until after July 1, 2010.  DO NOT include the HST in tax collected on your GST/HST filed in May or June 2010.  Include the HST in GST/HST return after July 1, 2010.

7) If your situation is not covered by the above rules because your business activity straddles the pre-July and post-HST periods, consult with an expert or the Ontario Ministry of Revenue (and take notes of who you spoke with and the advice they gave in case you need a due diligence defence in the future).

• Email This
• Print
• Comments
• Trackbacks
• Share Link