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

This past week, I have seen a dozen or so requests made by municipal and Ontario government departments writing to their suppliers and seeking price reductions relating to existing contracts on the basis that savings related to embedded Ontario retail sales tax (ORST) must be passed on to the buyer (government department).  Most of the requests that I have seen suggest that the basis for the request is contained in the harmonized sales tax (HST) laws.

The truth is that the HST laws do not require that suppliers reopen contacts for renegotiation and pass on any savings to the purchasing government department.  The question is whether there is a provision in the contract that requires that any savings relating to tax reform be passed on to the purchasing government department.  So far, I have not seen any contract containing such a provision --- but, some may exist.

The practical reality is that if a supplier to a government purchaser does not make adjustments or open the kimono so to speak and engage in a discussion), then the government purchasing department may not renew a contract or may treat the supplier negatively in the future in a procurement situation.  As a result, even though the contract does not require price adjustments, suppliers may choose to make adjustments in order to keep the customer happy.

I will give you an example that may seem odd to a sales tax lawyer/accountant without full facts.  In one matter, a client provided a photocopier and toner to the government purchaser.  The cost of the photocopier was already a sunk cost.  However, the purchasing government department said they expected a price reduction because the supplier bought toner and the ORST cost of the toner was within the contract pricing.  As a result of HST, the supplier would no longer pay ORST on the toner and would recover the HST on the toner by way of an input tax credit.  The government department wanted a price adjustment to remove the ORST on the toner that would have been considered by the supplier in its initial pricing under the contract. The small price adjustment made sense to keep the purchasing manager happy.

With three of the matters I reviewed this week, due to the nature of the contract, there was no ORST savings to pass on to the government department.  That being said, the purchasing manager needed to be convinced and the client needed to provide detailed information about its pricing in order to prove to the purchasing manager that this was the case.  The dilemma was that in proving that there was no ORST cost embedded in the pricing, the government department needed to be provided with information that could be used in the future to negotiate price reductions.  in other words, the supplier needed to show too much of its internal information and supplier information.

Two clients priced their contract years ago so that some aspects of the contract were loss leaders and some aspects of the contract resulted in a profit.  The contracts as a whole resulted in a profit to the supplier.  In this exercise, the purchasing government department attempted to reduce the profit margins on the profitable aspects of the contract in order to achieve overall savings (to the detriment of the suppliers' bottom lines).

In all cases, the purchasing manager made it clear that he/she expected price adjustments and would communicate internally if no price adjustments were made.  Pressure was exerted and suppliers to the government were discouraged from maintaining the status quo and not "throwing the government a bone".

One reason for the pressure on the government side is that the Ontario government will start to pay HST on goods and services that were not subject to GST and/or ORST in the past.  Municipal governments do not receive all of the Ontario HST component back by way of a rebate (previously and under HST, 100% of the GST payable was refundable).

I would be pleased to discuss these issue that I am seeing with anyone in this situation.

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On June 30, 2010, the Ontario Ministry of Revenue released Tax Tip #15 "Vendor Permits" and informed all persons with vendor permits (registrations for Ontario retail sales tax purposes) that their vendor permits were being canceled on June 30, 2010.

The Ministry of Revenue states:

"On June 30, 2010, all current RST vendor accounts will be closed by the Ontario Ministry of Revenue. Vendors should not destroy their permits which should be kept along with other business records as required. For details on how long records should be kept see tax information bulletin Retention/Destruction of Books and Records on [the Ministry] website."

However, certain insurance providers are still in the retail sales tax system.  The Ministry indicates that they must re-register:

On July 1, 2010 all businesses primarily engaged in insurance activities will be automatically re-registered and a new vendor permit number will be issued. Tax return filing frequencies that are currently in place for RST returns will be maintained after June 30, 2010.

A door is closing and a new one is opening - HST.  This is a logistical step in the transition.

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On June 25, 2010, the Canada Revenue Agency released a number of guides that finally help with the calculation of the New Housing Rebates and Transitional Rebates.  The guides include:

* GI-085 Harmonized Sales Tax: Stated Price Net of GST/HST New Housing Rebates in Ontario
* GI-086 Harmonized Sales Tax: Stated Price Net of GST/HST New Housing Rebates in British Columbia
* GI-087 Harmonized Sales Tax: Stated Price Net of GST/HST New Housing Rebate in Nova Scotia
* GI-088 Harmonized Sales Tax: Stated Price Net of GST/HST New Housing Rebates and the Ontario RST Transitional New Housing Rebate
* GI-089 Harmonized Sales Tax: Stated Price Net of GST/HST New Housing Rebates and the Ontario RST Transitional New Housing Rebate

Please note that there are a few typos in the Canada Revenue Agency's information regarding GI-089.

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Tomorrow is June 30, 2010, the last day before the sales tax world in Ontario and British Columbia changes.  Today you should ask yourself, CAN I MAKE A PURCHASE AND SAVE HST.

Consumers will be thinking about saving HST. The question that needs to be asked is what is not subject to Ontario retail sales tax, but will be subject to HST.  I cannot provide an all-inclusive list.  However, here are a few suggestions on what you might buy today:

• land survey (I am doing this today believe it or not)
• landscaping services
• house cleaning services
• painting services
• if you sign an agreement of purchase and sale of a previously lived-in home, you may save the real estate commission
• if you take possession and title of a newly built home before July 1, 2010, you save the HST
• hair dressing/colouring services
• manicure/pedicure
• massage
• dry cleaning
• taking Rover to the vet
• visiting the dentist for teeth whitening (not on my list - sorry Dr Jay)
• ask a lawyer to draft a will or a pre-nuptial agreement
• buy a domain name (is your name taken yet?)
• fill up your home heating fuel tank
• propane for the summer barbeque
• clean the swimming pool
• one last pre-HST Botox injection
• one last work-out at the gym
• energy-efficient home appliances are exempt from ORST
• bicycles are exempt from ORST
• custom computer software is exempt from ORST
• subscription to Cosmo, Oprah, Mike Holmes or any magazine that interests you
• notice in the newspaper about a garage sale, birth notice, death notice, in memoriam, etc.
• ticket to see a play in a small local theater
• ticket to a dinner theater
• pre-paid funeral expenses/deposit on final resting place

What is on your list?

I will be writing another post tomorrow on the purchases that businesses have been waiting to make in order to save the unrecoverable ORST and recover HST by way of input tax credit.

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One risk-management step that is often over-looked in a time of sales tax reform is selecting "The Chosen One" in accounts payable who is tasked with reviewing all incoming invoices to ensure that suppliers are properly charging sales taxes. 

When auditors arrive with their spreadsheets in hand, they conduct a (1) purchase side audit and (2) a sales side audit. During the purchase side audit, the auditor reviews a sample of incoming invoices to ensure that the business under audit has paid the right amount of sales tax on its business inputs.  Where a supplier to the business does not charge retail sales tax (ORST) or goods and services tax (GST), the auditor will assess the purchaser business - as it is allowed to do under the law.

Businesses can control this assessment risk by assigning the task of reviewing incoming invoices to a trained person - "The Chosen One".  This accounts payable employee will review each incoming invoice and either seek corrections from the supplier or make arrangements to self-assess the tax that is applicable, but not charged.

With the start of harmonized sales tax (HST) in the provinces of Ontario and British Columbia, this is a perfect time to ensure that someone is actively reviewing incoming invoices.  First, you will want to make sure that suppliers are no longer charging ORST on invoices for goods and services provided after June 30, 2010.  If a supplier still shows ORST or PST (provincial sales tax) or RST (retail sales tax) as being charged on the invoice, you will want to follow-up and ask for a revised invoice.  It must be clear that ORST/PST/RST is not being charged.  It may be that HST is being charged, but it must be clear so that an auditor is not confused.

On that point, HST is supposed to be a single combined tax.  The vendor is not supposed to separate the charges into GST and HST on the invoice (except where the supplies are subject to the recaptured ITC rules).  As a result, in Ontario, the invoice should identify 13% HST and no 5% GST and 8% HST separately.

In addition, "The Chosen One" should review incoming invoices to ensure that HST is being charged where applicable.  As a result , you will need to determine when you must pay HST (not just when you must charge HST).  You will have to understand the HST place of supply rules as they apply to purchases.

Businesses outside the HST Zone will also have to have "The Chosen One" selected and briefed on the HST place of supply rules.  You should expect to see some invoices arriving from the HST Zone that will automatically charge HST at the applicable provincial rate of the supplier because that will be the safe default position.  Communication will be important after the implementation of HST to correct these types of errors.  When in doubt regarding the application of HST, the purchaser may obtain an advance ruling from the GST/HST Directorate of the Canada Border Services Agency.

Finally, non-residents of Canada that purchase goods/property and/or services from Canadian businesses also need to have "The Chosen One".  Many Canadian businesses have adjusted their billing systems with the implementation of HST.  There will be situations where previously zero-rated supplies (GST charged at 0%) will default in the computer systems to 12%, 13% or 15% HST depending on the location of the supplier.  A quick call to the supplier to notify them of the change would be in order so that the computer errors can be corrected.

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Today is June 28, 2010 and there are only three more days left in pre-HST Ontario/BC.  Those in the service industry (where files are maintained for clients) should bill for services rendered before July 1, 2010.  Services rendered before July 1, 2010 are not subject to harmonized sales tax ("HST").  In addition, many services are not subject to Ontario retail sales tax ("ORST") - only "taxable services" as defined in the Retail Sales Tax Act (Ontario) are subject to ORST in Ontario.

I offer this advice to help not confuse an auditor - close any dormant files on Monday-Wednesday  (June 28-30, 2010) (pre-HST period).  Send those files to records (and you will not have to pay HST on the service fee of the moving company if the service is performed before July 1).  Hire a temporary worker to provide assistance in the pre-HST period and save the HST.  Both GST and HST are payable of the services provided by temporary employees services.  If your employee (that is, he or she is on your payroll and is not a third party service provider or employed by a third party service provider) provides the assistance in closing the files in the computerized system and putting the files in boxes, then his/her employment related services are not subject to wither GST/HST.

You will both clean your office and save the HST at the same time.  More importantly, you will have documentation to show that the files were closed prior to HST.  You will have additional proof to give an auditor that you took steps to make a clear division for the purposes of the application of the HST transition rules. The easier you make it for the auditor, the easier you make it for yourself.

In addition, if that client comes back and needs more work performed by you post-HST, you can open a new file, gather the new information for your HST decision tree and start fresh (and start charging HST where applicable).

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As many businesses in Ontario know, there was damage in downtown Toronto that resulted from the actions of a few protesters during the week-end of July 26-27.  Here are a few tips about the pre- and post- harmonized sales tax (HST) world.

• If a window is purchased in the pre-HST period at a retailer of glass, then goods and services tax (GST) and Ontario retail sales tax (ORST) will apply.
• If a window is purchased on an installed basis during the pre-HST period, GST will apply, but ORST will not apply.  ORST will be incorporated into the cost of the installed window as it will be a cost of the supplier of the installed window.
• If a window is purchased pre-HST or installed pre-HST, then the ORST cost (whether paid to the retailer or indirectly to the installer), the ORST is not recoverable.
• If the window is purchased or installed post-HST (on or after July 1, 2010), then GST and HST would apply.
• If a clean-up crew is hired to remove painted slogans in the pre-HST period, GST would apply, but ORST will not apply.
• If a clean-up crew is hired to remove painted slogans in the post-HST period, GST and HST will  apply.
• If the retailer is a store and engaged in commercial activities, they would be entitled to claim a full input tax credit to recover any GST/HST.
• If the business is a bank, it is unlikely that the bank may claim an input tax credit and recover GST/HST paid to repair the damage.
• If an insurance company enters into the contract with the window installer, it is unlikely that the insurance company will be entitled to recover the GST/HST because the sale of insurance policies is an exempt financial service. [Note: have the business buy the window and claim the in input tax credit]
• If the Ontario provincial police buy a new car pre-HST, GST may not apply if the OPP are on the list of Ontario government departments (the federal government cannot charge tax of the provincial government).
• If the Ontario provincial police buy a new police car post-HST, they must pay GST and HST.  The current rules do not provide rebates for provincial government departments.
• If the Toronto police buy a new car pre-HST, they must pay GST and ORST, but would get a 100% rebate of the GST portion (not the ORST portion).
• If the Toronto police buy a new car post-HST, they must pay GST and HST and will be entitled to claim the municipal PSB rebate to recover a large portion (not all) of the GST/HST paid.

I do not intend to suggest that businesses should wait. I am merely highlighting the different results caused by the tax reform.

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There are many types of service providers who make presentations to audiences.  Sometimes the audience is the public (e.g., business people who want to learn how to benefit from Facebook). Sometimes the audience is employees a a particular company (e.g., a law firm brings in a marketing guru t talk about business and sales plans, a nursing home operator brings in service providers to lecture bout ways to improve delivery of services, a bank brings in a security expert to talk to employees in a lecture hall, etc.).

The general HST place of supply rules may not apply to these types of transactions.  There is a special HST place of supply rule for services in connection with a location specific event. 

Section 28 of the New Harmonized Value-added Tax System Regulations provides:

"A supply of a service in relation to a performance, athletic or competitive event, festival, ceremony, conference, or similar event is made  in a province if the service is to be performed primarily at the location of the event in the province."

This means that if a service provider makes supplies of such services, they would charge HST at the rate of 13% if the event is held in Ontario (assuming the  50%"primarily" test is satisfied). if a service provider makes supplies of such services, they would charge HST at the rate of 12% if the event is held in British Columbia (assuming the  50%"primarily" test is satisfied). Similarly, if a service provider makes supplies of such services, they would not charge HST (but would charge GST) if the event is held in Alberta, Quebec, Saskatchewan, Manitoba or PEI.

The "primarily" test would be most often applicable if the person providing the service is from a different province than the province in which the event occurs.  If an Alberta-based marketing guru gives a presentation in Ontario, it is possible that HST would not apply to his/her speakers fee.  Based on my own experience giving presentations, it takes a significant amount of time to prepare the presentation and a short amount of time to deliver a presentation.  Based on my experience, out-of-HST province service providers may be able to demonstrate that HST is not applicable on a case-by-case basis.  that being said, if a service provider does not charge HST in relation to services provided in an HST province, they should maintain documentation regarding that decision.

I will predict that border cities (that is, cities on the border between an HST province and a non-HST province) will see a decrease in conferences.  Many conferences previously held in places like Ottawa will move to alternatives, such as Gatineau, Quebec.

Finally, MUSH sector and exempt businesses will consider venues for corporate events and internal training.  if an entity cannot claim full input tax credits and recover HST, if may be less expensive to hold events outside HST provinces.  That being said, the travel costs and costs associated with being away from the office might outweigh the HST costs.  That being said, if Paradise Island, Nassau, Bahamas offers great deals, we may see more winter/spring events outside HST provinces.  That being said, the Canada Revenue Agency might take a close look at taxable employee benefits.

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The Canada Border Services Agency has published a Fact Sheet entitled "The Canada Border Services Agency's Implementation of the Ontario and British Columbia Harmonized Sales Tax" (June 2010), which sets out some of information importers should know about HST.

In short, HST will be applied in respect of non-commercial goods (a.k.a things individuals import for personal use).  The "official definition of a "non-commercial good" is: "Non-commercial goods" means "all goods, other than goods imported into Canada for sale, or for any commercial, industrial, occupational, institutional, or other like use."

Beginning July 1, 2010, the importation into Canada of non-commercial goods by or for a consumer that is a resident of Ontario or British Columbia, will be subject to the HST. The HST will apply to non-commercial goods destined for Ontario and British Columbia, regardless of where the goods enter into Canada. NOTE: Goods destined for Nova Scotia, New Brunswick, and Newfoundland/Labrador are also subject to HST.

MORE IMPORTANTLY - As is the case today, the provincial component of the HST will not generally apply to commercial goods that are imported by an HST registrant for consumption, use or supply exclusively in the course of the commercial activities of the registrant.

For more information, please see the Fact Sheet.

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Many service providers (such as lawyers, accountants, marketing gurus, consultants, advisors, custom computer  software programmers, certain graphic designers, etc.) do not currently charge Ontario retail sales tax (ORST) on their services.  Starting on July 1, 2010, these service providers must charge harmonized sales tax (HST).

The HST transition rules provide that if services are commenced prior to July 1, 2010 and continue after July 1, 2010, the supplier will be required to allocate between the pre-HST period and post-HST period and not charge HST on the pre-HST period and charge HST on the post-HST period. An allocation is required (except if 90% or more of the services are provided prior to July 1, 2010).

Suppliers need to maintain evidence to provide to Canada Revenue Agency auditors.  While it is incorrect to say that all auditors are difficult idiots, I often tell clients to assume that such an auditor will show up on their doorstep in the future to conduct an audit.  What evidence and documentation are you going to have to prove your point to the auditor?  With respect to not charging HST on pre-July 1, 2010 supplies of services, what evidence are you going to be able to present?

Good documentation will include docket entries, time sheets, employee punch cards, etc.  What will also be helpful are invoices issued in June 2010 billing the client for pre-July 1, 2010 services that have been performed.  I often refer to this as "blowing out your WIP (work in progress).  If you issue a bill and it is recorded in your computer system prior to July 1, 2010, it must be that the the services recorded as being provided before July 1, 2010 were actually provided. Note that if you are billing in May/June 2010 for services to be rendered on or after July 1, 2010, HST will be applicable.

I have one caveat that I have to highlight - you need to ask whether it is likely your client will pay the invoice. If a supplier issues an invoice prior to July 1, 2010 and must charge GST (that is, the supply is not zero-rated or exempt), the supplier will be required to remit the GST to the Receiver General of Canada with the GST/HST return for the reporting period in which the invoice is issued (e.g., June 2010).  If the recipient does not pay the GST by the GST/HST return filing deadline, the supplier still must remit the GST.  As a result, there can be a cash flow issue.

If a supplier cannot issue an invoice, we are recommending a "WIP freeze".  This means that the supplier would generate a document that would evidence the pre-July 1, 2010 work in progress.  Depending on the circumstances, the document may evidence the number of hours worked and/or the value of the services rendered prior to July 1, 2010.  The document will need to be supported by some verifiable data (e.g. a date stamped printout of computerized records). The method must be able to withstand scrutiny and be reasonable in the circumstances.  What is communicated (and the words used) may be important as auditors assessment radar is often triggered by the words taxpayers use.

I would be pleased to provide services to help you generate evidence of the provision of pre-HST services.

I should also mention that it is better to do generate the evidence now as an employee may not be available at the time the auditor arrives. In other words, it is sometimes difficult to substantiate facts at a later point in time.

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I was speaking with a service provider (marketing advisory services) in Ontario the other day about her June 2010 billings.  She said that she will be sending out invoices on June 15, 2010 in respect of services to be provided between July 1, 2010 - July 31, 2010.  She does not currently charge Ontario retail sales tax on her advisory services.  She asked me whether she is required to charge Ontario harmonized sales tax (HST).

The answer is yes (assuming the client being billed is located in the province of Ontario).  ABC Co. would charge GST on her marketing advisory services.  She would remit the GST with her GST return for the period June 1, 2010-June 30, 2010 (she is a monthly filer).

She would also add HST to the invoices.  However, she would remit the HST collected with the GST/HST return for the post-HST implementation period being her July 1-July 31, 2010 GST/HST return, which is due at the end of August 2010. She does not include the HST in the GST/HST return that she files in July even though the HST was invoiced in June 2010.

Yes, there is an unusual delay in the remittance of the HST.  This is because the HST must go into the HST pot so that it can be properly allocated to the HST Zone provinces (including Ontario).  If the HST is remitted to the Government of Canada in July, Premier McGuinty does not get any of the money.  Also, the supplier would be making a mistake and may be penalized at the time of an audit.

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The June 9, 2010 Canada Gazette (Part II,  Vol 144, No. 12) contained the New Harmonized Value-Added Tax System Regulations SOR/2010-117. Part 2 (section 34-37 contain the HST anti-avoidance rules.  These rules are in addition to the general anti-avoidance rule in section 274 of the Excise Tax Act (Canada) and the Ministerial discretion in subsection 2(18) and section 6 of the Retail Sales Tax Act (Ontario).

In short, related parties (parties operating at non-arms length) may see their tax planning challenged by the Canada Revenue Agency and additional assessments of harmonized sales tax (HST) levied where the Minister believes there is a tax benefit flowing from a transaction with no bona fide business purpose.  The HST anti-avoidance rules do not appear to apply to arm's length parties.

First, the time frames - the HST anti-avoidance rules apply to transactions that occurred after March 26, 2009 (the date of Ontario's HST budget announcement). In particular, Part 5 of the Regulations provide:

• Section 35 applies to any agreement varied,
  altered or terminated on or after March 26,
  2009 and to any new agreement entered into on
  or after that day.
• Section 36 applies to any agreement varied,
  altered or terminated on or after April 6,
  2010 and to any new agreement entered into on
  or after that day.
• Section 37 applies to any transaction made
  on or after March 26, 2009.

My first reaction is - poor souls in British Columbia.  The drafters of the Regulations are mistaken and must believe that the B.C. HST announcement occurred at the same time as Ontario and not on July 23, 2009.

Next, what appears to be covered:

• Non-arm's length transactions entered into between March 26, 2009 and July 1, 2010 that are altered or varied or terminated
• Non-arm's length transactions entered into after a tax rate change announcement that are altered or varied or terminated
• Non-arm's length transactions or series of transactions would in the absence of this section result, directly or indirectly, in a tax benefit to one or more of the persons involved in the transaction or series of transactions it may not reasonably be considered that the transaction, or the series of transactions, has been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit, arising from a harmonization event, for one or more of the persons involved in the transaction or series of transactions.

I would like to highlight something that is written in the Regulatory Impact Statement (at the end of the Regulation) after reading the part under "Consultations"

The Regulations are designed to reflect previous HST announcements of proposed rules by Ontario and British Columbia on October 14, 2009 and by the Government of Canada on February 25, 2010.

I must have missed the anti-avoidance rules announcement.

Finally, after re-reading the Regulatory Impact Statement regarding the anti-avoidance provisions, businesses that have expanded into another province after March 26, 2009 may find their business activities under a CRA microscope and will have to prove their legitimate business purpose to an auditor:

The Regulations also set out rules to prevent persons from improperly taking advantage of a change in the new harmonized value-added tax system under the Excise Tax Act. Such changes include the addition of a province to the system, a change to the tax rate of a participating province or a change to a rebate of the provincial component of the HST.

The anti-avoidance rules in these Regulations apply where persons not dealing at arm’s length with each other enter into transactions to obtain a tax benefit as a result of a change in the new harmonized value-added tax system and not primarily for bona fide purposes other than to obtain the tax benefit. In these circumstances, the Regulations allow the Minister of National Revenue to assess the participants in the transactions in order to deny the tax benefit. Generally, the aim of the harmonization anti avoidance rules is to prevent persons not dealing at arm’s length from attempting to avoid the HST simply to obtain a tax benefit and for no bona fide purpose.

Here are the HST anti-avoidance rules (which are long and difficult to read):

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In the June 9, 2010 Canada Gazette, the final HST place of supply regulations are published as SOR/2010-117 - now called "New Harmonized Value-added Tax System Regulations". Also included in the regulations are the HST anti-avoidance rules (Part 2), the HST transition rules (part 3), repeal of Place of Supply (GST/HST Regulations (Part 4) and application rules (Part 5).

It is about time that the nuts and bolts of the HST law is being made available to businesses in harmonized provinces. However, much is still missing, such as the real property rules and transition rules for builders of residential complexes. 

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The Winnipeg Press Press (an unlikely resource for HST information) reports in an article entitled "B.C. massage therapists will have to charge HST on chronic disease patients" that massage therapists must charge HST on massage services to chronic pain patients, even if they have a doctor's note and the services are medically necessary. There are many human conditions that require massage therapy as a medical treatment.

The article states:

The NDP says people in B.C. who suffer from chronic diseases and need massage therapy are the latest to be hit by the harmonized sales tax.

Health critic Adrian Dix says massage therapists who treat people with diseases such as multiple sclerosis will have to charge their patients the HST, pushing treatment costs toward $100 an hour.

He says the government is imposing the tax despite warnings from patients and health care professionals that it hurt those needing the treatment for chronic illness.

However, Finance Minister Colin Hansen says a health profession can't be exempted from federal tax unless it's regulated in at least five provinces, and massage therapists are only regulated in three — Ontario, Newfoundland and British Columbia.

He says the government is providing a HST credit for low and modest income people as well as increasing the basic personal amount tax credit.

Meanwhile, organizers of an anti-HST petition say they've now signed up 15 per cent of registered voters in all but five of B.C.'s 85 ridings, five per cent more than the minimum needed for the petition to succeed in getting either a vote in the legislature or a referendum.

This gap in the tax system will cost insurance companies and individuals.  If you have a doctor's note, you may be reimbursed under some health insurance policies for the massage services (but, then again, doctor's may charge you for a note to provide to your insurance company (also subject to HST).  If you do not have insurance coverage for the massage services, then it is a taxable health care costs to individuals (on top of employer health taxes, fair share health levies, insurance premiums, taxes on insurance premiums, etc.).

The good news is that if the massage therapy is provided by a registered nurse, a registered nursing assistant, a licensed or registered practical nurse, it will be exempt from HST.

It is also important to distinguish between massage (which is taxable) and chiropractic services (exempt) and physiotherapy  services (exempt). So, it may be a characterization problem for some chronic pain patients.

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Kevin Marron has written a helpful article about harmonized sales tax in "The Canadian Lawyer" magazine entitled "The HST is Coming, The HST is Coming".  I am not just saying it is a good article because I am quoted in the article.  My good friend, Terry Barnett, is also quoted.

Please note that I will be giving a presentation on HST for lawyers with David Schlessinger of KPMG LLP on June 23, 2010, which is being presented by the Law Society of Upper Canada.  Last I heard, over 283 people have signed up to listen.

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On June 4, 2010, the Ontario Ministry of Revenue published a notice for taxpayers telling of the silly Ontario retail sales tax results that Minister Duncan/Premier McGuinty would not fix in the past.  The June 4th document is being used by the Ontario government as a justification for the harmonized sales tax.  I find that very funny.  As a sales tax lawyer, I know about the absurd positions taken by auditors.  I sometimes want to shout at auditors to use their discretion reasonably. I sometimes want to say more.  Anyway, here is the list of absurd results under the Ontario retail sales tax regime that were not fixed in the past that are the given as the Ontario government's justification for HST (start laughing now):

• A restaurant could claim an exemption on after dinner mints served at the table, but not left by the cash register.
• A business that supplies security systems could claim an exemption on surveillance cameras, but not on the brackets that hold the cameras.
• A business could claim an exemption on a forklift used in the production line but not in the warehouse.
• A business could claim an exemption on a computer used in manufacturing, but not for payroll.
• Universities could claim an exemption on equipment used for research, but not in the classroom.
• Hospitals could claim an exemption on toilet paper used in a patient's washroom, but not a public washroom.

 The list is actually longer and I have seen very strange decisions by auditors. Do you have examples to share?

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I enjoy reading Seth Godin's blog.  I had to share today's post since the deadline for HST readiness/preparedness is only 24 days away. Goods and services tax (GST)-registered businesses must be ready on July 1, 2010.

Here are two of Seth Godin's "Six Things about deadlines":

1. People don't like deadlines.  They mean decision, shipping and risk.  They force us to decide.

2. Deadlines work. Products that re about to disappear, auctions that are about to end, tickets that are about to sell out -- they create forward motion.

4.  Deadlines give you the opportunity to beat the rush.

For the remaining 3 things about deadlines, please read Seth Godin's post.

When one talks about the looming HST deadline, I would say - "Six Things about the HST Deadline"

1. Consumers do not like the HST deadline, but it is coming anyway thanks to Premiers McGuinty and Campbell - the deadline is July 1, 2010.  How are your tax dollars being spent? Finding new methods of taxation.

2. This HST deadline means change is coming.  Businesses must spend money to alter their systems and accounting record-keeping in order to ensure compliance with HST.  The deadline is July 1, 2010  - do not put off the expenditure any longer.

3. This HST deadline means that a window of opportunity is closing. The closer you are to the deadline, the less likely you will be able to get the advice you need to meet the deadline - others are beating the rush and the few sales tax advisors in Canada are busy serving other clients.

4. This HST deadline may have a cliff after the deadline.  Many businesses will pay more for their purchases after the HST deadline.  Do not ignore the deadline and find yourself short on cash or financing --- go visit your banker for a line of credit (or increase) before you have financial difficulties.

5. Associate the deadline with punishment by an auditor.  If you do not meet the deadline, the biggest, meanest, more unforgiving Canada Revenue Agency auditor will come and assess you.  He will hold you upside down and shake you until all the money falls out of your pockets.  If you do not want this to happen, act now and get ready for the HST.

6. The HST deadline will follow the G20 meeting in Toronto and occurs on a national holiday in Canada.  Act as if the HST preparation deadline is actually June 25, 2010.  You can control your own actions and succeed in meeting the deadline if Murphy works overtime in June. You will feel like you just ran a marathon or participated in an iron man competition if you cross the finish line early.

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Graphic Designers have experienced Ontario retail sales tax issues for the last 4-5 years as auditors have taken the position that their services are actually "taxable services".  As a result of the confusion, the Association of Registered Graphic Designers (Ontario) consulted with the Ontario Ministry of Finance and prepared materials for members.  A number of charts/continuums were prepared by the Association to provide to the Ontario Ministry of Finance to demonstrate that there are many different types of graphic design services.  The Association's tools set out information for 8 categories of graphic designers (categories for the purposes of communication with Ontario):

• exhibit graphic design
• environmental/architecture graphic design
• editorial graphic design
• identity graphic design/branding
• web design/new media
• package graphic design
• advertising graphic design
• corporate communication/promotional material graphic design

After the creation of these documents, the Ontario Ministry of Revenue released RST Guide 520 "Graphic Designers", in which Ontario recognized and provided guidance regarding the Ontario retail sales tax consequences for various categories of graphic design services.

British Columbia issued SST Bulletin 128 for graphic designers in British Columbia (before the Ontario Guide).

With harmonized sales tax (HST), graphic designers will continue to have serious characterization issues.  The HST place of supply rules are based upon (divided into categories) based on the characterization of the supply.  FOR HST PURPOSES, THERE ARE MANY DIFFERENT PLACE OF SUPPLY RULES THAT MAY APPLY FOR GRAPHIC DESIGNERS BASED ON WHAT TYPE OF GRAPHIC DESIGNER SERVICES/DELIVERABLES THEY PROVIDE.

Some graphic designers would apply the general HST place of supply rules for services.  Some graphic designers would apply the HST place of supply rules for services in respect of real property.  Some graphic designers would apply the HST place of supply rules for services in respect of tangible personal property. Some graphic designers would apply the HST place of supply rules for services in respect of photographic -related goods.  Some graphic designers would apply the HST place of supply rules for computer-related services.  Some graphic designers would apply the HST place of supply rules for intangible property. Some graphic designers would apply the HST place of supply rules for intangible property in respect of real property. Some graphic designers would apply the HST place of supply rules for intangible property in respect of tangible personal property. Some graphic designers may apply a combination of HST place of supply rules.

Any graphic designer in Ontario who does not charge the 13% HST rate in Ontario will have to justify not charging the 8% HST portion.  The same holds true for graphic designers in British Columbia if they do not charge the 7% HST portion.  Yes, both graphic designers in Ontario and British Colombia may compete with U.S.-based graphic designers who are not charging HST. That is another issue altogether. 

Graphic designers who sell only to businesses/clients/consumers in their province will not have place of supply issues as they will charge their provincial are on all invoices.  The graphic designers who have businesses/clients/consumers in more than one province will have to characterize their services/deliverables and apply the correct place of supply rule.  I would be pleased to help.

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I have been watching the Department of Finance web-site and, to date, the final version of the HST Place of Supply Rules Regulations have not been promulgated.  We are 25 days away from the implementation date for HST in Ontario and British Columbia and we do not have the final version of the applicable rules.  How is this easier for businesses?  Businesses are the ones who will be assessed by Canada Revenue Agency auditors for mistakes.  It will be an penalty on businesses.

On April 30, 2010, the Department of Finance issued draft Regulations in Respect of the Place of Supply of Property and Services for public comment.

On June 3, 2010, the Canada Revenue Agency reissued its Technical Information Bulletin 103 (June 2010) on "Place of Supply Rules for Determining Whether a Supply is Made in a Province".

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On June 3, 2010, the Canada Revenue Agency reissued a revised version of Technical Information Bulletin 103 "Place of Supply Rules for Determining Whether a Supply is Made in a Province".

This Technical Information Bulletin is 53 pages in length.  It has been updated to reflect changes to the HST place of supply rules in the draft regulations (drafted after the first release of the HST place of supply rules in February 2010). It contains 127 examples to assist businesses.  Some of the examples are helpful and others do not reflect common situations that businesses will experience.  That being said, the Canada Revenue Agency has released a document that all businesses should read as soon as possible.  If a business cannot find the answer in the Technical Information Bulletin, they should seek a ruling from the Canada Revenue Agency.

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I want to share with you the list I made for myself to save HST:

• book an appointment with Jie to save the HST on a hair cut (call beginning of June for late June appointment - also book summer highlights)
• Late Spring Cleaning - take clothes to dry cleaners in June to save HST
• Take dog to vet (save HST)
• Call Electrician
• Repair facets (save HST)
• Arrange for Structural Engineer to take another set of readings (don't get me started on this one)
• Ask husband to vacuum (okay, I am already saving the HST on this one).

What is on your list?

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Yesterday, I was asked a question about gift certificates.  A vendor is selling gift certificates in June for use in June 2010 or on or after July 1, 2010.  The question is what happens for GST/HST/ORST purposes when one sells the gift certificate and when one redeems the gift certificate for goods/services.

Before I go too far, it is important to pin-point what I mean when I say "gift certificates" (or rather what the Canada Revenue Agency (CRA) thinks is a gift certificate).  In CRA Policy Statement P-202 "Gift Certificates", the CRA states:

A gift certificate is a "device" (e.g. voucher, receipt, ticket) which,

1) has a stated monetary value,

2) can be redeemed on the purchase of property or a service from a particular supplier; that is, the supplier agrees to accept the device as consideration, or a part hereof, in respect of the purchase of property or a service,

3) for which consideration is given in the amount of the stated value, and

4) which has no intrinsic value.

The determination of whether property, which otherwise would qualify as a gift certificate, has an intrinsic value will require a certain degree of judgment on the part of departmental officials applying this policy. Generally, the value inherent in the property will be evident from the circumstances surrounding its sale. If the purchase of the property is promoted as something more than a device which may be used as a partial payment towards a future purchase, the possibility that the property has value in itself, should be examined.

Pursuant to section 181.2 of the Excise Tax Act (Canada) (the "GST/HST Legislation), the issuance or sale of a gift certificate for consideration (e.g., money) shall be deemed not to be a supply and, when given as consideration for a supply of property or a service, the gift certificate shall be deemed to be money. 

This means that when a vendor sells or issues a gift certificate, no GST or HST is payable because the GST/HST Legislation says no supply has occurred.  If there is no supply, there is no event that results in the application of GST/HST. 

HOWEVER, when a person uses that gift certificate to purchase goods and/or services, the gift certificate is money. The redemption of the gift card for goods or services is a supply for GST/HST purposes.  If the supply (e.g., a DVD) is a taxable supply and, therefore GST/HST is collectible, then the gift certificate should be used to pay the purchase price plus GST/HST.  In other words, a the time of the supply that is a purchase of goods and/or services is the moment when the vendor needs to ask about GST/HST consequences and charge the correct amount of GST/HST/

This is important because I also saw a flyer yesterday for the sale of gift cards in June 2010 to save HST.  This flyer was wrong in the context of what was being sold and when. A vendor would collect (let's say $100 in cash) for a $100 gift certificate in June 2010.  When the consumer redeems the gift card for services (or property), the vendor will determine whether to charge GST and/or HST on what is purchased.  If the gift card is redeemed in June 2010, then the vendor would collect GST (and possibly ORST) in respect of the purchase if the supply is in Ontario.  If the gift card is redeemed on or after July 1, 2010, then the vendor would collect GST and HST if the supply in in an HST province.

For example, if the gift card is for a spa treatment (e.g., a manicure), if the services take place in June 2010, the vendor would charge for the manicure ($20) and charge GST ($1).  If the gift card was for $25, the vendor would apply $21 against the gift card and the person could keep the $4 credit for the next visit or could take the cash.

If the manicure takes place in July 2010, then the vendor would charge $20 for the manicure, $1 GST and $1.60 HST (assuming the manicure services were provided to an individual in Ontario).  In July 2010, the vendor would apply the $22.60 against the gift card and the individual would have $2.40 remaining.

Even though there isn't a similar explicit rule for Ontario retail sales tax purposes, Ontario has the following statement on an official web-site:

Consumer Alert – Gift Cards - Retailers Charging Sales Taxes

Retailers must not charge consumers provincial Retail Sales Tax (RST) and/or federal Goods and Services Tax (GST) when buying gift cards.

The Ministry of Consumer Services advises consumers to check their gift card receipts to ensure they are not charged sales taxes when buying gift cards.

Sales taxes should only be applied on goods or services when purchased using the gift card as the payment option.

Based on this official statement, it appears that the position of the province of Ontario is that Ontario retail sales tax is not collectible at the time of a sale or issuance of a gift certificate/gift card.

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On June 1, 2010, Leader of the Opposition, Tim Hudak and Joyce Savoline, MPP continued to question the McGuinty Liberal Government about HST.  Their focus was senior citizens and condo owners.

Here are some of the excerpts from the questions and the answers (which, in my view, do not respond to the questions asked):

Question:

Mr. Tim Hudak: Back to the Acting Premier: Not only are people in the Yellow Shirt Brigade and other seniors across the province losing access to key ER services like in Fort Erie and Port Colborne, they're worried about the impact of the HST in one month's time. The HST greedy tax grab kicks in on Canada Day. Today marks the beginning of Seniors' Month, and how is Dalton McGuinty celebrating? Well, not in the Legislature today. He's interested in punishing seniors. The Premier is putting a new tax on mutual funds, which means less income in retirement. He's putting a new tax on condo fees, 8% on gas for their cars, snow removal, lawn care, home repairs, Internet, entertainment etc.

Why is the Premier closing down ER services and also raising the taxes on seniors in their retirement?

Hon. Kathleen O. Wynne: I know my colleague is going to want to comment on the HST.

I want to just make a comment, first of all, about what we have done for seniors, because the member opposite is saying that this government has not paid attention to the needs of seniors, and that is not true.

The most recent example that this party is not supportive of the initiatives we've put in place to help seniors is that they are in opposition to reducing the price of generic drugs. We are working very hard to make sure that seniors get the medications they need at a price that's reasonable, and the party opposite is not supportive of that.

On top of creating 8,000 new long-term-care beds, creating a new Ontario sales tax for seniors, doubling the Ontario home property tax for seniors, we have got a basket of measures to support seniors. The party opposite has not supported any one of those.

Question:

Mr. Tim Hudak: The minister asks what you've done to seniors. Well, Minister, you've closed the ERs for seniors in Niagara. You're bent on closing down community pharmacies and interrupting that dependent relationship between seniors and their community pharmacists. Now you're putting in smart meters that say to seniors, who have fought in the wars, who helped us through the Depression, who have built this great province, "Well, too bad. Wash your clothes at 11 p.m. Do your dishes at 10 p.m. We don't care."

The PC Party does not share that view, and we will continue to stand up and fight for seniors in this province.

What happens on Canada Day? A new tax on home heating, energy conservation retrofits, taking the dog or cat to the vet, cable, haircuts, vitamins. How much more can seniors take in Dalton McGuinty's Ontario? Won't the minister please stand up and say you're not going to go through with this massive tax-

Answer:

Hon. John Wilkinson: Millions of seniors and millions of Ontarians are going to receive billions of dollars over the next year courtesy of our agreement with the federal government. The PC Party voted against that. On July 1, seniors will receive their enhanced property tax credit. We're doubling that credit, a credit that you voted against in the first place, and you voted against the doubling. That is for seniors. And then there are many seniors who, in August, will start to qualify for the new Ontario HST rebate that your party voted against.

Let's make sure the seniors know the whole story on this file. Yes, indeed, we are reforming our tax system. This side of the House has a plan to create 600,000 more jobs in this province, and your side of the House doesn't. Seniors rely on their public services. It requires a vibrant economy, an economy like Ontario leading Canada and leading in the world-

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On Monday, May 31, 2010, Lisa MacLeod, MPP invited me to attend Question Period at the Ontario Legislature.  I had the opportunity to hear the questions being asked by the Leader of the Opposition, Tim Hudak and Lisa MacLeod, MPP and the Revenue Critic for the Progressive Conservative Caucus at Queen's Park and other Conservative MPPs (and Minister of Finance Dwight Duncan's responses)

Here are some excerpts of the exchanges (the heckling is cut out of this transcript):

Question:

Mr. Tim Hudak:  A question to the Acting Premier: As you know, Dalton McGuinty is going to force Ontario families to celebrate Canada Day with a massive new HST hike on everything. Families will also remember, as they're paying Dalton McGuinty's new greedy tax grab, that back in 2003 Dalton McGuinty was so eager to convince people he was not another tax-and-spend Liberal that he staged a photo op where he signed a promise not to raise taxes on families without their explicit consent, but then he increased taxes across the board anyway, including his massive health tax hike. I ask you, Acting Premier, why did Dalton McGuinty tell families something that he definitely is not?

Answer:
Hon. Dwight Duncan: This government has made strategic investments in health care and education and was re-elected in 2007 on the basis of those kinds of undertakings. Unlike the member opposite, we don't think the status quo is good enough. We are taking a tax change that will not raise taxes but overall will reduce taxes for some 93% of Ontarians. That's why Jack Mintz, that leader's expert witness at last year's budget hearings, says it's absolutely the best thing we could have done. That leader and his party supported it. That leader and his federal counterparts, Mr. Flaherty, Mr. Baird, Mr. Clement-all of them support this. They recognize, as that member used to recognize, that-
 

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Yesterday, I was speaking with a friend who manufactures custom designed jewelry for customers/clients.  She is in the process of updating her computer system to charge the appropriate amount of Canadian sales taxes (as at July 1, 2010).  The applicable rates in Canada (as at July 1, 2010) are:

It is important to note that the tax rates can change (often in the Spring at the time budgets are tabled).

If a supplier is registered for GST purposes, they will have to charge (1) GST in respect  of taxable sales in Canada and (2) HST at the applicable HST rate if the HST place of supply rules deem a supply to be made in a participating province.

The rules may be different on when a vendor must register for provincial sales tax purposes and charge provincial sales tax on a sale of goods in a province or on services in respect of tangible personal property.

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In Question Period in the Ontario Legislature on May 31, 2010 (I was in attendance), a liberal MPP threw a soft-ball question to a colleague about the harmonized sales tax (HST) point of sale rebate for aboriginal peoples of Ontario. The Minister responded that on May 27, 2010 (not sure this is the correct date), a Memorandum of Understanding was signed by the McGuinty Government and certain aboriginal peoples.

The answer provided during Question Period suggested that Ontario was waiting for a response from Ottawa.  However, one must look at the Comprehensive Integrated Tax Coordination Agreement (CITCA) to see that Ontario is responsible for point of sale rebates/exemptions. In other words, the McGuinty Government has the right under the CITCA Agreement to say that they want certain point of sale rebates (presumably for tax policy reasons).

Here are the provisions in the CITCA relating to point of sale rebates:

Annex “B”

Provincial Flexibility in respect of Rebates

Definitions

1. Unless otherwise defined in this Annex, terms used in this Annex have the same meaning as in the Agreement to which this Annex is attached. For the purposes of this Annex, the following terms have the following meanings:

   “GST Base” in respect of the Province for a calendar year means the estimated tax base under the harmonized sales taxes for the Province in the calendar year, as determined by Finance (Canada) pursuant to Formula D of Annex “A” (referred to in that Annex as “PROVBASEt”).

   “PVAT-POS Rebate”, in respect of a province, and in relation to a taxable supply of property or a service made in the province, means the provincial rebate under an Act of the Legislature of the province paid to, or credited at the time of supply in favour of, the recipient of the taxable supply, the amount of which the supplier is permitted to deduct in computing the supplier’s net tax under Part IX of the Excise Tax Act.

Provincial Point-of-Sale Rebates

2. The Parties agree that a supply of property or a service may be eligible for a PVAT-POS Rebate in respect of the Province if:
   • (a)   subject to the reasonable capacity of the Minister of National Revenue to administer and enforce such a PVAT-POS Rebate and subject to the reasonable capacity of businesses to comply with such a PVAT-POS Rebate, the definition of the property or service is used in the Canadian System of National Accounts and sufficient data is available from that system to determine the amount of expenditure in the Province attributable to the supply of that property or service; or
   • (b)    other data sources, definitions and methodologies mutually agreed upon between the Parties can be used to determine the amount of expenditure in the Province attributable to the supply of that property or service.
3. Where the Province advises Canada of its desire to designate particular property or services as items eligible for a PVAT-POS Rebate in respect of the Province effective on and from a particular day, the Parties agree that the Province will be permitted to designate those property and services as such items if the total value, as determined by Finance (Canada) in consultation with the Province, of all such items that would be eligible for a PVAT-POS Rebate in respect of the Province immediately after the particular day (including the particular property or services) and that were supplied in the Province during the last calendar year for which the GST Base in respect of the Province has been determined, in accordance with Annex “A”, does not exceed 5% of that GST Base.
4. If a condition under clause 2 in respect of data or definitions is not met, any cost involved in obtaining or establishing such data or definitions for the purpose of achieving the mutual agreement of the Parties referred to in that clause will be the sole responsibility of the Province. If obtaining or establishing such data or definitions benefits the Province and another participating province, the Province may enter into a separate agreement with the other participating province in respect of sharing, between the Province and the other participating province, the cost involved in obtaining or establishing such data or definitions.
5. On and from the Implementation Date, subject to the definitions mutually agreed upon between the Parties, the Parties agree that in general terms the items eligible for a PVAT-POS Rebate in respect of the Province will be, unless such items are removed in accordance with the Agreement:
   • (a)   books;
   • (b)   children’s clothing and footwear;
   • (c)   children’s diapers;
   • (d)   children’s car seats and car booster seats;
   • (e)   feminine hygiene products;
   • (f)   printed newspapers;
   • (g)   prepared food and beverages sold for a total consideration of $4 or less; and
   • (h)   other property or service proposed from time to time by the Province that may, in accordance with the Agreement, become property or service eligible for a PVAT-POS Rebate in respect of the Province.
6. Unless otherwise mutually agreed upon between the Parties, where an item that the Province proposes to be eligible for a PVAT-POS Rebate in respect of the Province is of the same class or kind as an existing item that is subject to an existing PVAT-POS Rebate in respect of another province, the Province agrees that the proposed item will have the same definition as the existing definition in respect of the existing item.

****

If under the Indian Act (Canada) and signed treaties with aboriginal peoples in Ontario, aboriginal peoples do not pay sales taxes (and other forms of taxes), then the point of sale rebate should not be factored into the 5% threshold.

This should be a non-issue for Ontario.  If the point of sale rebate is not granted for aboriginal off-reserve purchases (to be used on the reserve), then it would be McGuinty's lack of commitment to this point of sale exemption.

Are Ontario aboriginal peoples closer to a point of sale rebate - yes and no.

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