June Transactions May Limit Unrecoverable Sales Taxes
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.
Cyndee Todgham Cherniak is the founding lawyer of LexSage, a boutique international trade law and sales tax firm in Toronto,
