Tip on Pre-HST Billings
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.
Cyndee Todgham Cherniak is counsel in the International Trade Law, the Business Law and the Tax Law (Commodity Tax and
