Why Are There So Many Tax Changes Coming Into Effect April 1?

There are many tax changes coming into effect on April 1 of each year.  Is it an April Fool's joke? No - the Government of Canada's year end is March 31 (the fiscal year runs April 1 - March 31).  The same holds true for the provinces. Tax changes are often implemented to start at the beginning of the government's new fiscal year.

This is why British Columbia de-harmonization occurs on April 1, 2013 and it is no longer an HST participating province.  Prince Edward Island becomes an HST participating province on April 1, 2013. The Government of Quebec must start to pay HST on its purchases starting on April 1, 2013 (did not start on the January 1, 2013 harmonization date). Many of the measures in the 2013 Budget take effect either budget day or April 1.

This is why so many government budgets are released in the month of March every year. Even the provinces implement many changes to taxes on April 1.  For example, the government of Ontario (via Ontario Tire Stewardship) is implementing increases (and decreases) on April 1, 2013. Ontario Electronics Stewardship Fees change on May 1, 2013 (for something a little different).

Farmers Receive Guidance From British Columbia on New PST Regime

On March 22, 2013 (a week before the re-implementation of provincial sales tax in British Columbia), the Ministry of Finance issued PST Bulletin 101 "Farmers".  Old MacDonald has some guidance, but is it helpful enough?

The good news for farmers is that they have a bulletin.  The bad news is it is 19 pages to read, digest, synthesize and implement in one week,  The good news is that half of the pages are lists of exempt sales and taxable sales.  The bad news is that March 21 is a date many farmers start to prepare fields, orchards and farms for spring planting and start the business cycle - they do not have a lot of extra time like they did after harvest ended in Fall 2012.

As for content, PST bulletins are helpful.  PST Bulletin 101 "Farmers" does contain good lists and some thought and effort went into the preparation of the lists.  However, there is not much guidance on when the BC auditors will deny the exemption on the basis that the purchase is not "solely for farm purposes".

Not all the answers farmers require are contained in PST Bulletin 101 "Farmers".  Farmers may have to review other Bulletins, such as PST Bulletin 002 "Charging, Collecting and Remitting PST"PST Bulletin 301 "Related Services",  PST Bulletin 103 "Aquaculturists" (which is currently not released), Bulletin PST 110 "Production Equipment and Machinery Exemption" (which is currently not released), Bulletin PST 305 "Containers, Labels and Packaging Materials" (which is currently not released), and PST Bulletin 314 'Exemptions for First Nations" (which is currently not released) to name a few (not all).

Farmers may apply for an exemption card to show at the time of a purchase of exempt goods and/or services.  Farmers must apply for the exemption card using Certificate of Exemption - Farmers Form (FIN 458) (however, it is currently not released). In the meantime (and after re-implementation), farmers may use their BC Farmer Identity Card. Farmers who do not have a BC Farmer Identify Card may apply for one from the Ministry of Agriculture Council.  In light of the fact that PST re-implementation is April 1, 2013 and only one week away, it is unlikely that a farmer without a card will be able to receive one before April 1.  This is unfortunate in light of the fact that re-implementation coincides with the planting season.

That being said, the supplier is able to provide a refund of the PST paid within 180 days of the purchase if the documentation is subsequently provided.  However, retailers will need to have the ability to document refunds and expose themselves to assessments for making errors.  This is not an ideal situation for retailers.

Farmers may also seek from the BC Ministry of Finance refunds of PST paid in error or paid due to inadequate documentation to support a point of sale exemption. There will be a form (FIN 355/FAF), but it is currently not yet released.

British Columbia Residents and Businesses May Have to Self-Assess BC PST on Goods Brought Into the Province

In November 2012, the British Columbia Ministry of Finance issued Bulletin PST-013 "Tangible Personal Property (Goods) Brought Into British Columbia". On February 7, 2013, the British Columbia Ministry of Finance reissued Bulletin PST-013 "Tangible Personal Property (Goods) Brought Into British Columbia".

Self-assessment on goods brought into British Columbia was an issue under the previous social services tax regime - and it is back again with PST.  Individuals who bought goods outside British Columbia were required to self-assess BCSST when they imported the goods into British Columbia (even if the importation was in their luggage or vehicle).  Similarly, individuals from Alberta/Washington State (elsewhere) with chalets in the beautiful British Columbia mountains were required to self-assess BCSST.  These rules return with the implementation of the new and improved BC PST on April 1, 2013.

Some businesses who use imported goods for their own use (and the goods are not exempted) must self-assess BC PST with respect to importations of goods that occur after April 1, 2013.  Under the previous BCSST regime, this was a problem for many businesses.  Often there was documentation issues with respect to inter-provincial transactions because inter-Canada transactions do not require reporting to border officer (as is the case with importations from outside of Canada).

For example, I have a client in the Ontario who has a small branch operation in British Columbia. They load information on laptops in Ontario and train the BC employees on the systems in Ontario.  The employees return to British Columbia with their new computers after the training.  They will need to monitor these transfers as BC PST will be payable.

Another example would be the BC resident who travels to Ontario (or another Canadian province) for a vacation and buys artwork or clothing or other personal items.  Another example is a BC resident who buys a motor home or vehicle or boat in Alberta (or other province) and drives home to British Columbia.  These individuals will be required to self-assess BC PST whether they bring the goods to BC themselves or have the goods shipped to be delivered in BC.

Bulletin PST-013 "Tangible Personal Property (Goods) Brought Into British Columbia contains useful information for individuals about some of the applicable exemptions. However, there are no statutory references or references to the regulations because the publication was prepared prior to the finalizing of the laws.

British Columbia Issues Revised Bulletin for Registering for New BC PST

In December 2012, the British Columbia Ministry of Finance issued Bulletin PST-001 "Registering to Collect Provincial Sales Tax".  On February 26, 2013, the British Columbia Ministry of Finance issued a revised Bulletin PST-001 "Registering to Collect Provincial Sales Tax". Since the British Columbia PST starts on April 1, 2013, businesses need to turn their minds to whether they must register for BC PST purposes. There isn't much time left to you have your number on time and inputted into your compliance systems.

Businesses inside and outside British Columbia that were registered under the old and defunct social services tax regime cannot use their old BCSST number.  They must re-apply for and obtain a new PST registration number.  New businesses that have come into existence after harmonization (and those that existed prior to harmonization) will no longer be permitted to use their GST/HST number with respect to provincial sales tax (they will still use the number to collect and remit GST). These businesses in British Columbia need to register for and obtain a BC PST number.

Many non-resident businesses are also required to obtain a BC PST registration number.  I will leave it to another post to discuss the far-reaching nature of the registration and collection requirements in the new BC legislation.

Registration is possible on-line, in person or by fax.  The on-line registration process appears to be simple.  Please let us know if you have used the electronic registration method and how soon did you get your number.

We would be pleased to speak with non-residents of British Columbia concerning the new registration rules.  The British Columbia government closed gaps in the law (real and perceived) in order to ensure a greater tax base of registered businesses.

Canadian Sales Tax Rates (as at May 1, 2012)

Canadian Sales Tax Rates Chart
As at May 1, 2012

Province/Territory

Provincial Sales Tax

GST/HST Rate

GST Included in PST Tax Base

Combined Rate

British Columbia

N/A[1]

12%[2]

N/A

12%

Alberta

Nil

5%

N/A

5%

Saskatchewan

5%

5%

No

10%

Manitoba

7%

5%

No

12%

Ontario

N/A

13%

N/A

13%

Quebec

9.5%[3]

5%[4]

Yes[5]

14.98%

New Brunswick

N/A

13%

N/A

13%

Nova Scotia

N/A

15%

N/A

15%

Newfoundland/Labrador

N/A

13%

N/A

13%

Prince Edward Island

10%[6]

5%[7]

Yes[8]

15.5%[9]

Northwest Territories

Nil

5%

N/A

5%

Yukon

Nil

5%

N/A

5%

Nunavut

Nil

5%

N/A

5%



[1] British Columbia will reinstate provincial sales tax on April 1, 2013 at a rate of 7%

[2] On April 1, 2013, the GST/HST rate will decrease to 5% because British Columbia is de-harmonizing

[3] Quebec will harmonize with GST on January 1, 2013. The proposed amended QST rate is 9.975%

[4] On January 1, 2013, the Amended QST, GST rate will be 14.975%

[5] Starting January 1, 2013 there will no longer be tax on tax

[6] Prince Edward Island will harmonize with GST on April 1, 2013. The proposed rate will be 14%.

[7] Prince Edward Island will harmonize with the GST on April 1, 2013 and impose HST at the rate of 14%

[8] Starting on April 1, 2013, there will no longer be tax on tax

[9] Will reduce to 14% on April 1, 2013

What Should B.C. Premier Clark & Minister Falcon Do Now?

British Columbia Premier Christy Clark and Finance Minister Kevin Falcon should act like the Chairman and Chief Financial Officer of a publicly listed corporation.  What would the Chairman and CFO of a publicly listed corporation do if the federal government issued a harmonized sales tax ("HST") assessment for $1.6 Billion?  They would hire the best lawyers in the area of commodity tax and the best litigators to review all relevant documents, all relevant law and see if there is any valid argument to object to paying the assessment.  The Chairman and CFO of a publicly listed corporation would attempt to preserve shareholder value if at all possible. The Chairman and CFO would not give up immediately and write a big cheque without considering all legal options.

Yesterday on the Lang & O'Leary Exchange on CBC, I discussed the need to review carefully the Comprehensive Integrated Tax Coordination Agreement between Canada and B.C..  Annex C addresses the issue of the transitional payment of $1.599 Billion and what happens if the CITCA is terminated before the 5 year anniversary date.  Sections 9-17 of Annex C are the most relevant to consider.  The key question will be whether British Columbia has committed a "material breach" under the CITCA?

The answer to this question needs to be considered carefully given the fact that the people of British Columbia have spoken in the referendum and the Government of Canada cannot demand the Government of B.C. to ignore the will of the people in the very unique circumstances.  This is not a case where the politicians have unilaterally decided to back out of the CITCA.  In fact, Premier Clark does not want to terminate the CITCA and may hope to try again in the future to implement the HST.  The Government of B.C. has followed the law in holding the referendum and has spent significant resources to educate the public about how they should vote.  How do these facts interact with the CITCA wording?

I am not saying that this is the answer to the $1.599 Billion question.  I am saying that a lot of questions need to be asked of really smart people who are not ex-political aides.  It is time to ask HST lawyers and contracts lawyers and litigators to canvass all the legal arguments.  In the end, the $1.599 Billion may be payable.  Let's not start with that conclusion and give up on asking more questions.

What Does A Seller Do When Someone Refuses To Pay HST?

This is a problem now and the problem will occur more regularly in British Columbia after the referendum results are misstated and people believe the HST should not be charged.  The answer that vendors, sellers & service providers do not want to hear is the only answer to give.

GST/HST registrants are tax collectors for the government.  They must charge, collect and remit the HST or risk an assessment plus interest and penalties.  During an audit by the Canada Revenue Agency ("CRA") will assess the registrant for failure to collect HST or a failure to remit the HST.  This means that if the vendor does not charge the purchaser HST (when he/she should), the CRA will assess the vendor.  If the vendor does charge the HST on the invoice and the buyer does not pay the HST, the vendor must remit that HST to the government with its GST/HST return for the period during which the transaction took place (regardless of whether the money was actually received).  If a vendor fails to remit HST, it will be assessed.

There are special rules for bad debts that do not apply to only the HST portion.  There are also special rules that allow a registrant (seller) to sue a recipient (vendor) for HST, however, these rules only kick in after an assessment by the CRA.

The CRA auditors will not be sympathetic when a vendor does not follow the rules.  Telling an auditor that the buyer refused to pay the HST will fall on deaf ears.  The auditors will not care that the vendor would have lost the sale and the profits related to the sale.

Vendors in British Columbia should post a sign in their shops telling buyers that HST will be collected until the transition date (currently said to be March 2013).  This includes service providers who provide in person services (such as hair salons).  Other vendors and service providers should include a statement in quotations that:

 "Harmonized Sales Tax ("HST") is payable in respect of any property or services provided prior to the date established by the Province of British Columbia and Federal Government of Canada to transition to a provincial sales tax (the "Transition Date").  HST will continue to be charged after the Transition Date if required by law.  All applicable provincial sales taxes are payable in respect of property and services provided after the Transition Date."

This statement may be added to contracts for property or services.

If a buyer does not pay the HST after the property or services are provided, the vendor may pursue the buyer in Small Claims Court or the provincial court for breach of contract.  However, in respect of point of sale refusals, the vendor will have to make a business decision whether to meet refusal with a refusal to make the sale. Service providers and restaurant owners who have provided the service and experience the refusal at the cashier are in a very difficult position and may have no other option but to call the police before the person dashes (while being careful to avoid a false imprisonment claim made against them).

In any event, document any situation where there is a refusal to pay the HST and provide as much detail as possible..  Even if an unsympathetic CRA officer will not accept the information, the Tax Court of Canada may sympathetically suggest that a remission order would be appropriate.

What Will Happen If The "Yes" Vote Wins In British Columbia?

The most important document to study will be the "hard-to-read" Comprehensive Integrated Tax Coordination Agreement between British Columbia and the Government of Canada signed in November 2009 (called the CITCA by tax geeks).  The second most important document to read is the amendment letter to the CITCA signed in March 2010.  A review of the original Memorandum of Understanding may also be helpful. There will be other relevant documents that will be made public voluntarily and through access to information requests to the Government of Canada and the Government of British Columbia.  These documents will need to be reviewed carefully to determine the best plan to move forward.

What exactly will happen will happen in response to a "Yes" vote is yet to be determined.  What we know is that many will not like the plan.  The elimination of the Harmonized Sales Tax ("HST") in British Columbia will not happened immediately on August 26, 2011 if the "Yes" (anti-HST) vote is the successful side.  People celebrating at bars and restaurants will see HST on their bills after the announcement.

Businesses will need time to adjust.  This would be fair to the businesses who are, in reality, the tax collectors from the public.  The businesses will need to know what to do and the mechanisms to collect another tax (even if it is the British Columbia social services tax) will have to be put in place.  Businesses throughout Canada and not just British Columbia will need to adjust their record-keeping systems.  As with HST implementation, a change will involve a lot more work than just changing a tax rate in the computer.

Businesses inside and outside British Columbia will also need to register to collect the replacement tax.  The government will need to launch a new education campaign to communicate the obligations on businesses.  Also with the "To Do List', the government will need its own "To Do List", which will include setting a time line, passing legislation, education of the public (and duck as the tomatoes are thrown), hire people in the Consumer Taxation Branch, train the new employees, prepare policies and bulletins, talk with the Federal Government about repayment, enforcement and other process matters, etc.

If the "Yes" vote wins, GST registrants in British Columbia will still be required to charge, collect and remit HST when they sell to an HST province.  They will still be obligated under the Excise Tax Act (Canada) and regulations thereto to file a GST/HST returns in the future.  The HST Place of Supply Rules will still apply to certain transactions.  So, HST will not be elimniated fully under any change plan.

The rules relating to claiming refunds, rebates and credits under the HST tax system will need to be clarified for B.C. businesses.  There is a possibility that there may be a deadline set for amounts a business or consumer is entitled to receive from the Government of Canada.

If the HST is going to be eliminated, businesses who are registered for GST/HST purposes and entitled to claim input tax credits will take the opportunity to purchase goods and services before the change.  Those businesses that will have to pay unrecoverable provincial sales tax after the change may decide to undertake the expenditures at a time when they can recover HST by way of an input tax credit.  Businesses will take prudent steps to save money while the change occurs. 

Consumers, on the other hand, may delay purchases until after the change occurs when they are purchasing an exempt good, real property, intangible property or services that are not subject to provincial sales tax.  This will most negatively affect the real estate market and the service sector.  There will be transition rules for the change that will need to be developed and communicated.

Consumers outside the province of British Columbia may delay purchases of goods from British Columbia until after the change (or at least after the date of the announcement of the plan for the replacement tax).  The place of supply rules may change and give rise to opportunities to save sales tax.

In the meantime, the Government of British Columbia will undoubtedly talk about repayment of the monies received from the Government of Canada to implement the HST.  There will be talk of new taxes that were not in place in British Columbia before July 1, 2010.  As sure as night follows day, if the "yes" vote is the majority, the blame game will start.

We will continue to watch and report on this developing story - if it develops into a story.  Nothing much will happen if the "No" vote is the majority.

Today is the last day for obtaining referendum ballots in British Columbia

Today is July 22, 2011.  By midnight tonight, all residents of British Columbia should have their HST referendum ballots to Elections BC.  It is no coincidence that July 22, 2011 is the deadline - On July 23, 2009, the B.C. Liberal Government announced they would implement the HST in B.C. as of July 1, 2010.  The B.C. Liberal Government should have asked the question 2 year ago.  But they did not because a referendum 2 years ago would have decisively rejected the HST.  Two years later, the result is indeterminable.

In light of the fact HST was announced two years ago and the HST has been in effect in B.C. for just a little over one year, the ballot question makes more sense. The actual question on the ballot is: “Are you in favour of extinguishing the HST and reinstating the PST in conjunction with the GST?”

A "Yes" vote means that the voter is making a statement of the B.C. Liberals that the HST should stop and the Social Services Tax (PST) should be reinstated.  Under the old PST regime, most goods were subject to sales tax (exempt goods were not subject to sales tax), only taxable services were subject to sales tax (some services were taxable and many services were not taxable), real property was not subject to sales tax and intangible property was not subject to sales tax. 

A "No" vote means that the voter has accepted the HST should remain and the voter has faith that the B.C. Liberals will reduce the HST rate as promised.  Okay, some of the voters who vote "No" may not believe the B.C. Liberals will keep their promise, that element is not critical to the vote choice.  A "No" vote keeps the HST in place.

Many people have asked me what is the right answer to the referendum question.  As an HST lawyer, I cannot answer that one as the answer does not come from the law. 

The democratic  ideals that Canadians hold dear require the residents of British Columbia to submit a vote on the HST referendum question.  How often are the residents of a province asked for their views on tax policy? -- well, never.  This is an opportunity of a lifetime, appreciate the opportunity.

It is all fine and wonderful that the politicians are now asking for the voters to participate in the democratic process on HST.  The voters know that to vote "No" is to approve actions of the government after the fact.  Some voters will see the "No" vote as an answer to as different question:

  • Should I let the government get away with misleading the people of B.C.?
  • Should we let Premier Campbell's legacy be that B.C. residents ultimately agreed with his decision to implement the HST?
  • Should the government have raised taxes without taking the opportunity to make spending cuts?

Other voters will not be as negative in their approach to the task at hand.  Some of the voters who vote "Yes" will be answering a different question:

  • Have I adjusted to the HST?
  • Can I afford to pay the HST on a wide range of property and services in order to maintain a strong economy?
  • Would I prefer the status quo instead of more changes to the sales/consumption tax regime in Canada?
  • Is the devil we know (HST) better than the devils we do not know (the new taxes and fees that the government will impose to raise revenues)?

The residents of B.C. who have lost their jobs because of HST or gained employment after HST implementation will focus on different elements behind the referendum question.  The small and medium sized business owners who have lost B2C business will have to ask if the consumers will return if the tax regime returns to the old PST system.  Small and medium sized businesses will also weigh the administrative ease of compliance with the HST system (ask if it is easier first) and the fact that if they make errors, The assessments that the Canada Revenue Agency will make will be significantly higher and penalties and interest on assessed amounts (also a form of penalty) will be higher.  Audits will be more stressful and fighting the taxman will be just as hard (the amounts at stake in the fight will be higher).  Small and medium sized businesses also need to ask whether they will be increasing their cost of tax compliance leaving less profit.

There are many tough questions.  Take 4 deep breaths and determine what vote is right.  Then continue to breathe as British Columbians wait for the referendum results.  How long before B.C. gets the results? That will depend on how many votes are submitted and all the theatre that will take place as the votes are counted and recounted.

Please comment on how you voted and why (please keep it clean my dear readers).

Warning: Registered Persons Should Not Claim 100% Of The ITCs on Meals & Entertainment

When I read the article in the Vancouver Sun entitled "Entrepreneur says HST cuts red tape", all I could think is this guy is going to be audited by the Canada Revenue Agency (CRA).  Here is a guy trying to help the B.C. Liberal Government win the HST referendum and is putting out his story for the world (and the CRA) to see.  However, either he does not understand the HST rules regarding meals and entertainment expenses or the reporter does not understand the rules.  What has been written might catch the attention of the CRA.

The Vancouver Sun article states:

  • Taneja footed a $429.42 bill for a birthday party of 20 at the Waldorf, then headed with a staff member to meet some friends at 100 Nights, where he spent a further $358.40 on food and booze;
  • But HST costs Taneja incurs to do business get refunded, and he supports the harmonized tax as a better alternative to the PST/GST hybrid. Before, businesses could recover the five-per-cent GST, but not the seven percent PST component.
The reality is that any registrant for HST purposes cannot recover 100% of the HST paid on meals and entertainment expenses.  At best, the registrant is limited to an input tax credit (ITC) of 50% of the HST paid on meals and entertainment expenses.  Large businesses (businesses that make taxable supplies in excess of 10,000,000 per year, certain financial institutions and certain MUSH sector businesses) may be subject to the recaptured input tax credit rules and these businesses must reverse their ITCs on the provincial component of the HST charged in connection with their meals & entertainment expenses.
 
For example, if a small business, such as the individual in the Vancouver Sun article, has a meal expense of $200 (including tip) in British Columbia, they would pay HST in the amount of $24.  The allowable input tax credit would be only $12 (not the full $24).
 
Now for the reality check - Under the British Columbia PST regime, a person did not pay social services tax on restaurant meals (food component) and paid SST on alcohol.  Assuming the restaurant meal did not include alcohol, prior to HST, the individual would pay $200 plus $10 GST.  The individual would recover $5 by way of an input tax credit.  As a result of HST, the unrecoverable cost of the restaurant meal increased from $205 to $212  (costs $7 more).
 
The CRA may audit ITC claims to ensure that a registrant indeed paid the HST in connection with commercial activities and that he/she has the documents required that meet the documentary requirements.  The individual in the article is said to have met "friends at 100 Nights".  If a registered person goes out to dinner with friends, family or for personal reasons, he/she is not entitled to claim ITCs in connection with the personal expenditures.  The CRA will be concerned that under the HST regime, sole proprietorships and other registrant may be using their GST/HST returns improperly as a personal ATM to government money.  It was never intended that individuals recover personal costs. 
 
In the circumstances of the person in the Vancouver Sun article, the CRA will go through the receipts (and there better be receipts) with a fine tooth comb and will want information about the many meals and entertainment expense claims, including who was the business client at each of the restaurant/bar. The CRA auditor may ask for the names and contact information of the business associates and will follow-up with the business associates to see if they met for business purposes.  The threat of an audit or quasi-criminal charges for lying to an auditor often cause the business associates to convey accurate information about the meetings over meals & entertainment. Also, business clients do not like the attention of the CRA and contact by the CRA may negatively affect a business relationship (I have seen this happen before when an individual writes a person's name on an expense claim and the meeting did not actually occur).
 
I would like to warn those registrants who are not familiar with the HST rules and who do not have an accountant/bookkeeper who knows the HST rules.  Following the actions of the person in the article may get you into trouble with the CRA.
 
As for the Vancouver Sun article, the next article may have a different title: "HST Audit Increases Red Tape".

 

Disproving Audit Assumptions

As a general rule, the auditor's assumptions are considered to be correct and it is up to the taxpayer to rebut the assumptions -- that is, prove that the auditor's assumptions are not correct.  If you can knock out the assumptions, you may be able to knock out the assessment.

Taxpayers have said, and I cannot disagree, that this approach means that a taxpayers is considered to be "guilty" of making a sales tax mistake and must prove his/her innocence.

During a typical audit, the tax auditor interviews the taxpayer about his/her business operations and various factors that influence.  The auditor should also review evidence in addition to sales tax journals, sales receipts and other tax documents.  In most cases, the auditor understands the information that is provided.  If the auditor exercises sound judgment, the information provided by the taxpayer to the auditor will be considered to be prima facie evidence. Assumptions based on that information may or may not reasonable in the circumstances.  In any event, these assumptions will form the basis for most audit assessments.  This begs the question - What if the auditor's assumptions are wrong?

Once the auditor makes a judgment call about the assumptions used in making an assessment, the onus (burden) shifts onto the taxpayer to prove the auditor’s assumptions are incorrect. The taxpayer must bring documentation to this exercise.  Mere verbal bald statements will not suffice.  The taxpayer may generate new documents (supported by existing documents/evidence) to explain his/her alternative position --- but their subjective approach (it is always subjective and self-serving) will be scrutinized.  The taxpayer must be reasonable and methodical in disproving an auditor's assumptions. It can be done and is often done.

Sometimes it is possible to show that the auditor failed to gather sufficient information to make “reasonable” assumptions and, therefore, the auditor's assumptions are arbitrary and cannot be trusted.  The key to refuting the auditor’s assumptions is evidence, evidence and evidence.  The correct approach must be reasonable, transparent, and as subjective as possible. If you do not understand what constitute good evidence, an experienced sales tax practitioner can be a useful guide.  Quite frankly, if you cannot sell an experienced sales tax practitioner about the merits of your case, you may not be able to win an objection or appeal.  A fresh set of eyes who want to help may be just what you need.

Categories of Ontario Retail Sales Tax Assessments

There are good assessments (being nil assessments) and bad assessments (you own money to the Ministry).  This blog post is going to list the most common types of Ontario retail sales tax (ORST) assessments.  It is not a complete list of every type, but I will hit the highlights:

1. Assessment of a vendor who has collected ORST and failed to remit the ORST;

2. Assessment of a vendor a penalty for failure to collect ORST from a purchaser as required (including innocent mistakes);

3. Assessment of a purchaser who did not pay ORST to a vendor as required (even when the vendor did not ask for the ORST or honestly thought the sale was exempt);

4. Assessment of a director for the ORST liability of the corporation;

5. Assessment of a person who imports taxable goods into Ontario;

6. Assessment of a person who hires a non-resident contractor (who has not coordinated with Ontario) who builds real property in Ontario and imports building materials; 

7. Assessment of a person who over claimed a rebate or refund;

8. Assessment of a buyer of a business to which the bulk sales tax applies in circumstances where the vendor owes Ontario ORST on past activities and the buyer did not get a clearance certificate; and

9. Assessment of an assignee, liquidator, administrator, receiver, receiver-manager, secured or unsecured creditor, agent of the creditor, trustee or other like persons who distribute property or proceeds from the sale without obtaining a clearance certificate from the province and there are outstanding ORST liabilities.

Another categorization of assessments that you should be aware of are:

A) interim assessment - meaning that the auditor has guessed the amount and not finished his/her work before issuing an assessment;

B) audit summary: this is not an assessment; 

C) final assessment: this is an assessment if it is in the form of a notice of assessment; and

D) revised assessment: if an auditor issues an assessment and subsequently revises the assessment, the new assessment generally replaces the previous assessment (if it relates to the same transactions) and restarts the limitation period for filing a notice of objection.

What Is The Best Defense to A Purchase Side Audit?

The Ontario Ministry of Revenue conducts audits of vendors (sales side audits) looking for failures to remit tax collected and failures to collect tax.  The Ministry also conducts audits of purchasers (some are also vendors) looking for failures to pay tax on taxable goods (called purchase side audits).  When an auditor is looking at the purchase side of the business and failures to pay Ontario retail sales tax ("ORST"), the best defense is that "The other guy was audited already or self-assessed the ORST - you have your money".

The Ministry should not audit both the vendor and the purchaser for the exact same tax.  This happens sometimes because an audit or a purchaser can lead to an audit or a vendor and vice versa because an audit brings out information of non-compliance of others. Often the auditor goes from an audit of one person to his/her next "target" who was discovered in a previous audit.  Many times the auditor may not know of the other audit/assessment.  It should not be assumed that the auditor is intentionally trying to collect the same tax twice.

Over the course of my career, I have helped many businesses during the audit process by asking them to review an audit summary (before the "finish assessment" button is pushed) and identify large amounts of unpaid ORST on the purchase side of the audit.  I explain that the Ministry cannot assess the same tax twice.  If they have good relationships with their suppliers, I explain the benefits of picking up the phone and calling their contact at a supplier to see if they have been visited by an ORST auditor.  Sometimes the answer is "unfortunately, yes" and sometimes the answer is "luckily, no".

If they answer is "unfortunately, yes", it will be necessary to determine if the transactions at issue in the current audit were covered by the other audit and assessment.  If the answer is "yes", then the auditor should remove those items from the proposed assessment before pressing the 'finish assessment" button on the computer (there really isn't such a button).

Even if the answer is "luckily, no", the supplier may have self-assessed if they determined they should have charged and collected the ORST.  The supplier could have made a voluntary disclosure or received advice from an accountant or lawyer and the ORST could have been remitted without the purchaser knowing or receiving a new invoice showing ORST remitted/remittable.

It is worth mentioning that the vendors may use this defense if a purchaser has voluntarily disclosed or self-assessed and remitted ORST or if the purchaser has been audited.  The vendor may show an auditor that the ORST has been remitted or paid to the Ministry of Revenue in order to defend portions of a sales side audit.

The next step after finding that "the other guy has paid or remitted the ORST" is to communicate the information to the auditor and providing adequate proof that the monies have been paid.  This is where an experienced lawyer may be able to help with the clear communications and strategy. 

The existence of this defense is important to know now more than ever before because Ontario is auditing in order to finish all ORST audits by March 2012 (when the auditors transfer to the Canada Revenue Agency).  There is an increased likelihood that this defense is available given the volume of audits.

Voluntary Disclosures Must Be Complete and Accurate

When a lawyer or accountant discovers that a client has made an error (e.g., treated certain sales as tax exempt when they are actually taxable), they may recommend that the client make a voluntary disclosure.  Assuming that the disclosure meets the administrative criteria of the tax authority as being voluntary (which is an entirely other problem), the hard part is "getting to 'Yes' with the auditor".

The voluntary disclosure must be complete and accurate.  The auditor operates under the mantra "accept, but verify".  If the person making the disclosure leaves out important information that they do not want the auditor to know, they may be fooling themselves and not the auditor.  The auditor may discover those secrets during a desk audit or an on-site audit.  The factual circumstances may not make sense to the auditor if part of the story is missing and the auditor will dig further. Do not assume that the auditor will accept the cheque on behalf of the government and not have a single follow-up question.  That never happens.

When a business makes a voluntary disclosure, they often do so to avoid paying the penalty that is charged when an auditor finds the mistake. In return for not charging the penalty, the government wants a complete and accurate disclosure of the relevant facts in order to be in a position to determine that the business is coming in to full compliance.  Essentially, in a voluntary disclosure, you do the work for the auditor and the auditor quickly reviews the work (and in the case of correct disclosures, simply agrees with your worksheets).

Voluntary disclosures can be problematic when this simple review stage cannot take place because the information is not provided.  In many cases of voluntary disclosures by inexperienced persons, there is no intentional wrongdoing, but the disclosure is not complete because of the inexperience.  The auditor wants certain information and if the person making the disclosure does not understand the task at hand, or the sales tax regime, or the facts that are relevant or the documentation that will be relevant, etc., the good intentions of the voluntary disclosure can turn into a big and costly mess.

It is kind of like that home renovation project that started with a beautiful photo in a magazine and when you did it yourself to save money, it ended really badly and was much more expensive.  Or, you hired a cheap contractor who did not have experience renovating bathrooms, but took on the project, and ran into problem after problem after the demolition phase.  Part way through the project, you could not turn back and go back to the status quo.

Consider sales tax specialists as a "Mike Holmes" of voluntary disclosures.  Professionals who have done this before plan ahead.  They use their knowledge to investigate the potential issues BEFORE moving forward with the project.  They develop a plan that is tried and true.  They help you be reasonable in your expectations.  They work with you so that the results are successful and within the planned budget.

Many sales tax lawyers who have helped many clients make voluntary disclosures have precedents that they use to prepare the voluntary disclosure.  They know the statutory provisions, the case law, and the tax advisory opinions that apply.  Sales tax lawyers are able to help you gather the facts and communicate the facts correctly.  They can anticipate the follow-up questions and include the answers in the disclosure.  They can help you organize the applicable documents and the documents that the auditor likes to review in the normal course. 

Getting to "yes" in a voluntary disclosure means meeting the auditor's expectations and needs.  The auditor must put together a report for a supervisor.  You must give the auditor what he/she needs to get that approval.

Please Do Not Throw Your Notice of Assessment in a Drawer & Forget About It

It is bad enough to receive a notice of assessment from the Canada Revenue Agency (CRA) or the Ontario Ministry of Revenue or the Canada Border Services Agency (CBSA) or some other tax authority.  You clearly did not want to be in a position that you have to pay an amount of money (especially large assessments) to the government.  However, ignoring the notice of assessment is not the right option to choose concerning what to do next. 

If you do not agree with the amount stated on the notice of assessment as the amount (or the imposition of a penalty amount or the interest calculation) or the basis for the assessment or do not know why you received the assessment and want to have the taxing authority make a correction, you usually must file a notice of objection/notice of appeal/request for redetermination or take a positive step to request further consideration of the matter.  In almost every taxing statute, there are statutory time periods (also called "limitation periods") which are often 30 or 90 or 180 days depending on the tax at issue and the legal route to resolve the dispute.  If you throw the notice of assessment in a drawer, you may miss the filing deadline and lose your opportunity to file a notice of objection, appeal or request for a redetermination. This would be bad for you.

Some tax statutes allow for you to ask the head of the taxing authority or a court or tribunal for an extension of time to file the notice of objection, appeal or request for a redetermination.  However, usually you must make the request within the statutory time period for the objection/appeal/redetermination.  For example, if you have a 90 day period to file a notice of objection, you must ask for your extension of time before the 90 day period expires.  You must explain the reason for needing an extension of time - and saying that you forgot about the notice of assessment is not a good excuse.  You must also demonstrate that you intended to file an objection/appeal/redetermination - and saying that you threw the notice of assessment in a drawer shows that you planned to ignore it.

Pulling the notice of assessment out of the drawer one week or one day before the statutory objection/appeal/redetermination deadline is problematic as you will have to find someone to help you file your objection/appeal/redetermination under extreme stress and you will forget important facts and potentially winning arguments.  You will reduce your likelihood of success when you do not leave yourself and your advisors enough time to do a good job.

Finally, I hear from many clients who pull the notice of objection out of the drawer years after the limitation period for filing an objection/appeal/redetermination has expired.  At that point in time, they are being pursued by the collections department of the taxing authority and the amount of interest after time can double the liability.  At some time, it will catch up with you.  When you are pursued by collections officers or receive a director's liability assessment for the original assessment amount plus interest compounded daily at 6% or more, you will wish that you did not thrown the original assessment in a drawer.  At that stage, there is even less a professional can do to correct any mistakes made by the auditor.

Cascading Taxes: When Is HST Payable In Addition To/Including Another Tax?

A tax on a tax is called a "cascading tax".  Cascading taxes are common in today's world.  As a general rule, most new taxes and levies can result in cascading tax (HST charged on top of the new tax) unless the provincial government asks the federal cabinet to list the new tax in a regulation.

Goods and services tax (GST) and harmonized sales tax (if applicable) (HST) is calculated on the consideration payable for a supply of property or services.  Subsection 154(2) of the Excise Tax Act (Canada) provides that "the consideration for a supply of property or a service includes:

(a) any tax, duty or fee imposed under an Act of Parliament [that means federal laws] that is payable by the recipient or payable or collectible by the supplier, in respect of that supply or in respect of the production, importation, consumption or use of the property or service [other than GST/HST];

(b) any provincial levy [intended to cover provincial laws] that is payable by the recipient or payable or collectible by the supplier, in respect of that supply or in respect of the consumption or use of the property or service, other than a prescribed provincial levy that is payable by the recipient [that means it is in a regulation]; and

(c) any other amount that is collectible by the supplier under an Act of the legislature of any province and that is equal to, or is collectible on account of or in lieu of, a provincial levy, except where the amount is payable by the recipient and the provincial levy is a prescribed levy."

The term "provincial levy" is defined to mean "a tax, duty or fee imposed under an Act of the legislature of a province in respect of the supply, consumption or use of the property  or a service."  What is most significant about this definition is that unless the levy is imposed pursuant to an Act of the legislature of the province, GST/HST would not be payable on the tax-included price. It is always necessary to go to the source of the taxation/fee/levy.

The Taxes, Duties and Fees (GST/HST) Regulations contain a negative list of provincial levies that are excluded from the GST/HST calculation.  If the provincial law is not in the list, then the provincial levy is included in the price for the purposes of calculating GST/HST.

Ontario has a very short list including the following:

  • the Land Transfer Tax Act, R.S.O. 1990, c. L.6,
  • Chapter 760 of the City of Toronto Municipal Code, made under Part X of the City of Toronto Act, 2006, S.O. 2006, c. 11, Sched. A, if the tax, duty or fee would have applied to that transfer under that chapter as it read on February 1, 2008

The Taxes, Duties and Fees (GST/HST) Regulations also prescribe in the list "a tax imposed by the legislature of a province, under an Act referred to in the definition of "general sales tax rate", which includes subsection 2(1) of the Retail Sales Tax Act (Ontario). This exclusion is more complicated, but has been generally applied to exclude Ontario retail sales tax from the calculation of GST.

Now that Ontario has harmonized and is not using the Retail Sales Tax Act to impose taxes representing significant revenue, any new provincial levy may be included in the GST/HST calculation as it would not be listed by the Taxes, Duties and Fees (GST/HST) Regulations.  I say "may" because the other requirements in section 154 of the Excise Tax Act would have to be met. To be excluded from the GST/HST calculation, new taxes must fall within a listed Act in the manner it is identified or the provincial government must ask the Government of Canada (specifically federal cabinet) to change the regulation.

It seems as if in most situations, suppliers assume (and act as if) the tax/fee is included in the calculation of GST/HST because it is the safe thing to do.  However, questions are not asked if this is correct.   For every provincial levy or charge that we might be inclined to include for the purposes of calculating GST/HST, we must ask questions before including the fee in the calculation:

  • Is the tax/fee imposed pursuant to a law of Canada?
  • Is the tax/fee imposed pursuant to an Act of the legislature of a province?
  • Is the tax/fee imposed by a regulation or a rule and there isn't a charging provision in an Act of the legislature (I an thinking carefully about the ecotaxes)?
  • Is the tax/fee imposed under a municipal by-law?
  • On what is the tax/fee imposed?
  • Is a recipient of a supply responsible for paying the tax/fee under the law imposing the tax/fee?
  • Is the supplier of the supply required to collect the tax/fee?

I have serious questions whether the Toronto plastic bag fee is subject to HST.  I have serious questions whether GST/HST should have been charged on top of the ecotaxes.  I have questions whether certain destination marketing fees are subject to GST/HST.  I think that consumers are paying GST/HST on top of many taxes and fees when the GST/HST laws do not require GST/HST to be charged.

The unfortunate reality is that the implementation of HST has incentivized Ontario and British Columbia to cause prices to increase so that they get more HST revenues.  It is in the interest of the government for retailers and suppliers to make mistakes and overcharge consumers.  It is no longer in the interest of Ontario and British Columbia to list new provincial levies in the Taxes, Duties and Fees (GST/HST) Regulations.  It is no longer in the interests of the leaders to keep prices down for consumers.

For this reason, it is more important than ever for businesses and retailers to understand the law and force the governments to follow the law.  It is more important than ever before that provincial levies are imposed in a transparent manner.  It is more important than ever for the people to make it known that there is a cascading tax and the government is accountable to them and needs to request the new tax to be listed.

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B.C. Anti-HST Group Files Court Challenge

On July 5, 2010, an group led by Bill Vander Zalm filed a judicial review with the Supreme Court of British Columbia to challenge the Liberal Government's actions to implement the HST.  The two main orders sought are:

1. An order in the nature of certiorari quashing the Order of the Lieutenant Governor in Council No. 661, dated November 30, 2009, and approval given therein to the Minister of Finance to enter into the Comprehensive Integrated Tax Coordination Agreement with the Government of Canada; and

2. A declaration that the Comprehensive Integrated Tax Coordination Agreement between the Government of Canada and the Government of British Columbia dated November 30, 2009 is of no force or effect and a nullity.

In simple terms, the orders, if granted by the Supreme Court of British Columbia, would undo/remove certain procedural steps that have led to the HST implementation and could cause all HST house of cards to fall.

I have read a copy of the Petition to the Court and find that it raises serious procedural issues.  The most interesting points are raised in paragraphs 10-11, 16 & 18 of the Petition:

10. On November 30, 2009, the Lieutenant Governor in Council, by Order in Council 691 made pursuant to s. 4 of the Ministry of Intergovernmental Relations Act, R.S.B.C. 1996, c. 303, purported to give authority to the Minister of Finance to enter into the Comprehensive Integrated Tax Coordination Agreement with the Government of Canada (the "CITC Agreement").

11. In the CITC Agreement, the Government of British Columbia agreed, subject to the requisite legislative approvals, to the imposition and implementation of PVAT in British Columbia.  The CITC Agreement purports to authorize the Government of Canada to introduce the necessary legislative amendments to include British Columbia as a participating province under Part IX of the Excise Tax Act. The parties agreed that the PVAT would be implemented in British Columbia on July 1, 2010.

16. The British Columbia Legislature did not purport, in the Consumption tax Rebate and transition Act, to ratify the CITC Agreement, authorize the Minister of Finance to enter into the CITC Agreement or otherwise approve the PVAT for British Columbia.

18. The British Columbia has not ratified the British Columbia CITC Agreement.

In simple terms, the B.C. Liberal Government did not take the formal procedural steps required to approve the cornerstone CITC Agreement. 

In addition, the B.C. Liberal Government did not that the legally and constitutionally required steps. Part 3 of the Petition sets out the laws that were not followed.  This is the part of the case that will be fascinating for legal historians and constitutional law observers.  The case will look into the well known principle of law associated with the Boston Tea Party  - "No taxation without representation".

What is argued to be a fatal flaw of the HST implementation in British Columbia is "[t]he CITC Agreement did not originate in the [B.C.] Legislature, and has not been ratified or approved by the Legislature..."  Taxation of the people was not done properly.

The questions raised in the Petition are important ones for the people of British Columbia and businesses.  While businesses may be concerned that Mr. Vander Zalm may be correct and their input tax credits may be taken away, my humble view is that the case has been brought quickly and the answer will be provided relatively quickly [even though Mr. Joseph Arvay, Q.C. has voiced hope that the case will be head by August 1, 2010, judicial proceedings take time and appeals lengthen the process].  Businesses will be better off if the judicial review decision is quick - rather than having the issue raised and determined 10 years from now after a large assessment of a single taxpayer.  If 10 years of tax collection and filing GST/HST returns is reversed 10 years from now, the retroactive uncertainty and ramifications will be worse for businesses.

The implementation of HST in British Columbia is major tax reform that was rushed to meet the July 1, 2010 date.  If the Mr. Vander Zalm is correct (and I think he is raising very important points and he is knowledgeable in government procedures), he is doing the right thing for the citizens of British Columbia by asking for a judicial review of the government's procedural steps and constitutional and legal authority to implement the HST. 

Tomorrow Is The Last Pre-HST Day, Do You Have Any Purchases to Make

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.

Have You Picked "The Chosen One" in Accounts Payable?

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.

Continue Reading...

Tip: 3 Days Left in Pre-HST World: Do Some File Cleaning

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).

The New Harmonized Value-Added Tax System Regulations Contain a Surprise - An Anti-Avoidance Rule

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):

Continue Reading...

Graphic Designers in Ontario/BC Have HST Characterisation of Supply Questions

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.

Retailers Need to Know GST/HST/PST Rates Across Canada

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:

Canadian Province Federal GST Rate HST Rate Provincial Sales Tax Rate
British Columbia 5% 7% N/A
Alberta 5% 0% 0%
Saskatchewan 5% N/A 7%
Manitoba 5% N/A 7%
Ontario 5% 8% N/A
Quebec 5% N/A 7.5% (charged on GST incl price
New Brunswick 5% 8% N/A
Nova Scotia 5% 10% N/A
Newfoundland/Labrador 5% 8% N/A
Prince Edward Island 5% N/A 10%

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.

Ontario Government and BC Government May Not Follow HST Transition Rules & Give Selves Sale Tax Holiday

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.

Canada's Department of Finance Has Released Financial Institution Rules for the Harmonized Sales Tax (HST)

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
  •  

 

British Columbia Releases Lists of What is Subject to HST and What is Not

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.

Landlords Not Happy about HST and are Asking Tenants to Leave

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.

British Columbia Government Restructures Itself To Save HST Costs

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.

An HST Calculator - What a Useful Tool!

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.

More Horror Flicks - Transitional Rules for Intangible Personal Property; Admissions Memberships and Transportation Passes

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.

More Horror Flicks - CRA Web Cast on Transition Rules on Supply and Install Contracts

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.

Hint: Go to The HST Library for Harmonized Sales Tax Transition Rules

I have linked many of the harmonized sales tax (HST) publications by the Government of Ontario, Government of British Columbia, the Canada Revenue Agency and the Federal Department of Finance in the HST Library. Look at the horizontal bar at the top of this blog (below the lighthouse).  These documents contain the official position on what are the transition rules and what they mean.

If you do not find what you are looking for, please go to the links section of the blog in the right side bar.  Publications posted in the last two weeks have not been linked yet - sorry for that,

Most of the rules are vague and difficult to understand - sorry to be the messenger.  The HST transition rules regulations are drafted as broadly as possible so that the auditors can say that your particular situation is covered.  Too bad that the average person may not be able to understand how to apply a general rule to their specific fact situation.

If you need assistance in getting ready for the HST transition, which starts on May 1, 2010 (I have bee saying for a while that July 1 is not really the date), please feel free to contact me at 416-760-8999.

B.C. Government is Pledging To Pass HST Laws by Saturday

CTV News is reporting that the Campbell pledges to pass the Bill 9-2010 "Consumption Tax Rebate and Transition Act" by Saturday, May 1, 2010.   The report states:

The B.C. Liberals say they're determined to ensure the controversial harmonized sales tax is introduced as law by Saturday.

Liberal House Leader Mike de Jong says a vote on the proposed law by 6 p.m. Thursday will pave the way for the 12-per-cent HST despite any delay tactics the New Democrats may use.

De Jong says the NDP have known since last July that the HST must be law by May 1 to ensure tax collection regulations can take effect.

He would not say directly if the government will invoke closure to end the HST debate, but is adamant politicians will have the opportunity to vote on the tax.

The interesting fact is that the transition rules require vendors to start to collect HST on May 1, 2010.  So, the passage of the HST laws in British Columbia would be down to the wire.  That being said, the most important aspects on Bill 9-2010 relate to the ending of the British Columbia social service tax (BCSST), which officially occurs on July 1, 2010.

Reminder: May 1, 2010 May Be Your Official Start of HST Collection/Paying Obligations

This may be your last week of harmonized sales tax (HST) freedom. Sorry to be the messenger of the news.

July 1 may be the "official" implementation date of HST in Ontario/British Columbia; however, under the transition rules, all current GST registrants (wherever they are located) currently doing business in Ontario/BC, may be required to collect the 13% HST starting on  May 1, 2010.

Rule 1: If a customer purchases goods after May 1, 2010 AND pays for the goods after May 1, 2010 AND the goods are delivered after July 1, 2010, HST will be collectible on that sale even if the money is paid before July 1, 2010.  For example, a consumer purchases a custom sofa on May 2, 2010.  The delivery date for the sofa is July 23, 2010.  HST will be collectible and payable on the amounts paid for the sofa after May 1, 2010 due to the delivery date of the goods.

Rule 2:  A client purchases services after May 1, 2010 AND pays for the services after May 1, 2010 AND the services are provided after July 1, 2010, HST will be collectible on that sale even if the money is paid before July 1, 2010.  For example, a client contracts with a painter who is really busy due to the incoming HST.  He cannot paint the rooms in the house until August 2010.  Even if the client pays the painter before July 1, 2010, the supply is subject to HST because the services will be performed after July 1, 2010.

Exception to Rule 2: HST will not be payable by other clients of the painter who starts to provide the services before July 1, 2010 and is 90% complete as of July 1, 2010.

Rule #3: If a lessor (supplier) leases equipment to a lessee (recipient) starting on May 1, 2010 for 12 months and is paid in full on May 30, 2010 for the 12 month lease period, GST and HST will be collectible and payable on 10 of the monthly lease installments. GST and Ontario retail sales tax (or British Columbia Social Service tax) would be collectible and payable for 2 (May and June) of the 12 months.  Assumption is that place of supply rules puts the equipment in Ontario or BC.

If a supplier collects HST in May or June 2010, they do not remit it until their first GST/HST return after July 1, 2010.  In other words, this is the one time that it is okay to keep the tax collected for a little longer than your next return.  The reason why the Ontario and British Columbia do not want supplies to remit the HST in May or June is that the provinces will not get the money.  The HST will be characterized and GST in the computer systems.  That being said, all GST, ORST and BCSST must be remitted on time.

Consumers in Ontario and British Columbia Are Confused About HST

Today, the Toronto Star published and article entitled "Marketers latch on to HST deadline", which rightly points out that sellers are using harmonized sales tax (HST) implementation on July 1, 2010 as a marketing/sales tool to encourage consumers to buy now (before July 1).  Examples of goods and services that are being marketed by savy marketers include, cars, gym memberships, homes, bikes and season theatre tickets.

I would like to help consumers with the following (which is not a complete analysis):

Bikes: In Ontario, bicycles are exempt from Ontario retail sales tax (ORST).  After July 1, 2010, bikes will be subject to GST and HST in Ontario.  As a result, individuals can save the 8% HST component by purchasing a new bike before July 1, 2010 (and taking delivery before July 1, 2010).  If you plan to by a stationary exercise bicycle, the ORST exemption does not apply and, therefore, the tax will be the same before and after July 1, 2010.

Homes: Most new homes and substantially renovated homes are subject to GST.  Homes are not subject to ORST (or British Columbia social service tax (BCSST)).  That being said, the tangible personal property (e.g., lumber, bricks, tiles, windows, paint, etc.) that is used to build or renovate a home is subject to ORST (and BCSST) and is embedded in the cost. 

After July 1, 2010, new homes will be subject to HST and the buyer may or may not be entitled to receive a new homes rebate.  The HST will be charged on the sale price of the home (not just the tangible goods that were used to build the home).  As a result, more tax is likely payable after July 1, 2010.

As a general rule, used homes that have been lived in by an individual generally are not subject to GST (and will not be subject to HST).  There are a number of exceptions to this rule that are fact specific.

It is important to note that whether a new home or a used home is being purchased/sold, after July 1, 2010, the real estate agent's commission, home appraisal fees, home inspection fees, legal fees, moving services and renovation services will be subject to HST (not previously subject to ORST).  Some buyers and sellers are trying to close deals before July 1, 2010 in order to save the HST component on these fees.

It is important to note that the BCSST rules on services are different than Ontario and some services are subject to BCSST.

Cars: Cars are subject to GST.  Cars are also subject to ORST or BCSST.  The combined tax on a new car should be the same before and after July 1, 2010.

In Ontario, ORST is payable on private transfers of used cars.  This ORST will continue to be payable after July 1, 2010 if a car is sold via a private sale after July 1, 2010.  The ORST is paid at the time the change on ownership is registered at the Ontario Ministry of Transportation.  If a used car is purchased at a car dealership, the dealer will charge GST and HST.

Gym Memberships:  The HST transition rules include a special rule for memberships.  If a membership is purchased before May 1, 2010 and paid for in full before May 1, 2010, then HST is not applicable. If a membership is purchased after May 1, 2010 or paid after May 1, 2010, then HST is payable only in respect of the portion of the membership fees attributable to goods and services rendered after July 1, 2010.  Marketers must make it clear that the special savings apply only in the membership is paid for in full before May 1, 2010.

Here is the example provided by the Government of Ontario:

Example 14: In June 2010, a person purchases a four-month membership in a fitness club for the months of June through September 2010. The HST would be payable with respect to three of the four months of the membership (i.e., on 75 per cent of the total consideration).

Season Tickets to the Theatre: The HST transition rules provide that if a contract for property and/or services are purchased before May 1, 2010 and paid in full before May 1, 2010, then HST will not be applicable.  In order to save HST, some consumers may wish to buy seasons tickets before May 1, 2010.

That being said, in Ontario, amusement ORST is a 10% tax as opposed to an 8% tax.  The amusement ORST applies to admissions into places of amusement (including theatres)depending on the size of the venue (there is an exemption for theatres with fewer than 3,200 seats). As a result, depending on the size of the theatre, it may or may not be beneficial to make the purchase before May 1, 2010.

One quote in the Toronto Sun article struck my attention:

“It’s expected businesses would promote those types of sales,” said Tatiana Chabeaux-Smith, a spokeswoman at Consumer Protection B.C. “There doesn’t seem to be anything deceptive — it’s a sales tactic.”

I have to disagree.  If the car salesman convinces a person to buy a car now in order to save HST, he/she is providing incorrect information in order to make the sale.  This should not be an acceptable sales tactic.  I will predict more small claims court cases after July 1, 2010 when pressure tactics to make a sale are discovered and the enthusiasm for the purchase dissipates.

Great Article About What Is Unconstitutional Provincial Indirect Taxation

Benjamin Alarie and Finn Poschmann have written a very good opinion article in today's Financial Post newspaper entitled "Ontario's quiet taxes through regulation". In this article, they correctly point out that under Canada's Constitution, a province's powers to impose taxes are broad and limited.  They write:

"Canada's constitution and the case law that surrounds it define the relative jurisdiction and powers of the federal government and the provinces. In matters of taxation, government authority is extensive, and legislatures may enact laws imposing a wide range of taxes.

Despite these broad powers, governments are limited in what they may do without legislative approval. They may use regulation, which is not approved by a legislature, to set fees to recover the costs of goods or services they provide to the people being charged the fee. They may not, however, use regulation to impose taxes that fund the general activities of government."


Read more: http://www.financialpost.com/opinion/story.html?id=2940982#ixzz0lw205pO8

The focus of the article is Regulation 66/10, which directs the Ontario Energy Board to assess a special levy on the Independent Electricity System Operator and distributors in respect of and in proportion to the amount of electricity they distribute.  As a result, the discussion is focused on this particular levy (not HST).

That being said, the authors have made the following important points that may arise in HST debates soon or in the case of a big assessment in the future:

  • From the perspective of the Constitution Act, 1867, taxes are either direct or indirect; in Canadian law, a direct tax is paid by the person on whom a charge is levied, and an indirect tax is passed on to others, as with most sales taxes. Under subsection 92(2) of the Constitution, provinces have the jurisdiction to impose direct taxes but not indirect taxes.
  • In no case ...does a province have the constitutional ability to impose a tax -- direct or indirect --through regulation alone.
  • In the event of a successful constitutional challenge that showed the levy to be a tax, however, the province would be under an unambiguous legal obligation to return the revenues.
  • The province could impose retroactive tax legislation allowing it to keep the revenue.

The article is worth reading and saving --- in the event of an audit and assessment.

Key HST Dates to Help With Preparation

There are a number of key dates in the time lines for harmonized sales tax (HST) in Ontario and British Columbia.  I hope that these time lines help you prepare and organize yourselves.

Ontario

 

March 23, 2009

 

McGuinty Government announces plans to implement HST

After October 14, 2009 Certain businesses and public service bodies may be required to self-assess and remit the provincial component of HST (=8%)
March 25, 2010 Place of Supply Rules announced
May 1, 2010

GST registrants will begin to charge and collect HST for property and/or services to be delivered after July 1, 2010 (if not paid in full by April 30, 2010)

Ontario businesses should be registered for GST/HST purposes

Systems should be in place to record and track HST (collected and paid) and restricted input tax credits

Week of June 28, 2010 To the extent possible, issue pre-HST invoices and reduce audit risk
July 1, 2010

HST Implementation Date (13% HST applies)

Certain Ontario businesses will be required to file GST/HST returns electronically

Businesses that are required to file GST/HST returns electronically should take steps to be ready

July 23, 2010 Final Ontario retail sales tax return is due
August 31, 2010 Any monthly GST/HST filer must remit HST collected between May 1, 2010 and July 31, 2010
October 31, 2010

Any applicable Ontario retail sales tax must be paid by this date

Any quarterly GST/HST filer must remit HST collected between May 1, 2010 and September 3, 2010

November 23, 2010 Final Ontario retail sales tax supplemental return is due

 

British Columbia

 

July 23, 2009

 

Campbell Government announces plans to implement HST

After October 14, 2009 Certain businesses and public service bodies may be required to self-assess and remit the provincial component of HST (=7%)
March 25, 2010 Place of Supply Rules announced
May 1, 2010

GST registrants will begin to charge and collect HST for property and/or services to be delivered after July 1, 2010 (if not paid in full by April 30, 2010)

BC businesses should be registered for GST/HST purposes

Systems should be in place to record and track HST (collected and paid) and restricted input tax credits

Week of June 28, 2010 To the extent possible, issue pre-HST invoices and reduce audit risk
July 1, 2010

HST Implementation Date (12% HST applies)

Certain British Columbia businesses will be required to file GST/HST returns electronically

Businesses that are required to file GST/HST returns electronically should take steps to be ready

July 23, 2010 Final British Columbia social service tax return is due
August 31, 2010 Any monthly GST/HST filer must remit HST collected between May 1, 2010 and July 31, 2010
October 31, 2010

Any applicable British Columbia social service tax must be paid by this date

Any quarterly GST/HST filer must remit HST collected between May 1, 2010 and September 3, 2010

January 23, 2011

Final British Columbia social service tax supplemental return is due

Vendors will be entitled to commissions re final British Columbia social services tax returns and supplemental returns filed before this date

 

B.C. NDP Party Hopes to Prevent Passage of HST Legislation

The British Columbia Times Colonist newspaper is reporting that the New Democratic Party (NDP) in British Columbia is planning to use any means available to prevent the passage of Bill 9 - 2010 "The Consumption Tax Rebate and Transition Act" that was tabled in the British Columbia Legislature on March 30, 2010. That being said, the fist vote relating to the Bill passed 47 to 34 due to the number of seats held by Premier Campbell's Liberal Government. So, while the NDP's plans to stop the unpopular HST legislation should be welcomed by the electorate, they should not expect to be saved from HST.

The report indicates that the NDP leader, Carole James, plans to use legislature procedures to have a debate. The NDP plan to table amendments to Bill 9-2010 and take their allotted speaking time in the Legislature. The hope is at least a one month delay,

The Ontario Progressive Conservative Party, lead by Tim Hudak, tried unsuccessfully to delay the passage of the Ontario version of the HST legislation using similar legislative mechanisms.  However, Bill - 218  Ontario Plan for More Jobs and growth Act, 2009" passed in Ontario in December 9, 2009.

The unfortunate reality is that HST is going to be a reality soon - very soon.  The late passage of legislation in British Columbia will not help businesses prepare.  In fact, if the delay tactics successfully take a month or more, HST collection obligations may have already kicked in -- as of May 1, 2010.  Businesses must collect HST on supplies of property and/or services if:

(1) the contract is entered into after April 30, 2010

(2) the property and/or services are to be delivered after July 1, 2010, and

(3) consideration is paid after May 1, 2010

It is also unfortunate that the place of supply rules have been released in administrative statement format only (as of April 1, 2010).  The regulations have not been promulgated by the Federal Government.  As a result, as of April 1, 2010, businesses do not have sufficient information to ensure they are ready as of May 1, 2010 or even July 1, 2010.  Something that should be discussed is a period of leniency by the Canada Revenue Agency regarding enforcement.

British Columbia Starts Process to Pass HST Legislation

On March 30, 2010, the Government of British Columbia tabled Bill 9-2010, which is legislation to implement harmonized sales tax (HST) into B.C. law and wind down the British Columbia social services tax (BCSST) and hotel room tax. The HST implementing legislation is called the Consumption Tax Rebate and Transition Act. The Government of British Columbia also issue a press release at the time the Bill was tabled in the Legislature.

The HST rate for the province of British Columbia will be 12%. HST will come into effect on July 1, 2010.

The Consumption Tax Rebate and Transition Act eliminates the seven-per cent BCSST and introduces HST-related measures designed to mitigate the impacts of the HST on persons in British Columbia.

It is expected that the legislation will be passed in due course. This is a necessary step in the process.