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

Last Week, the Canada Revenue Agency ("CRA") released GST/HST Info Sheet GI-122 "The GST/HST Implications of the Acquisition of Solar Panels Under the micro Feed-In Tariff Program in Ontario" to clarify when a person must register for GST/HST purposes and when input tax credits ("ITCS") will be allowed.  The new Info Sheet follows a period of uncertainty during which auditors would not allow ITC claims (and auditors questioned whether homeowners in the Micro FIT were permitted to register for GST/HST purposes).

Under the Micro Feed-In Tariff Program in Ontario, homeowners may install solar panels on their roof or elsewhere on their property, engage in activity of electricity generation, and engage in the commercial activity of selling the electricity to the Province of Ontario.  The issue is whether the homeowner is renovating used residential property (where no ITCs would be allowed) or purchasing solar panels and other equipment to manufacture energy and sell that energy to the province.

The Info Sheet determines that the homeowner (participating in the Ontario Micro FIT program) must register for GST/HST purposes if he/she receives more that $30,000 per year from the province under the program.  If the homeowner does not make $30,000 under the program, he/she may be a "small supplier" and would not be required to register for GST/HST purposes.  Small suppliers may voluntarily register for GST/HST purposes.

If a homeowner registers for GST/HST purposes, he/she must charge, collect and remit GST/HST on the money received from the Ontario government under the FIT Program.  They also must be careful to charge GST/HST on other taxable supplies (e.g., garage sales, sales of used cars, etc.).

If a registered homeowner purchases equipment to be used in connection with energy generation, he/she may claim ITCs and recover the GST/HST paid on those purchases.  However, these claims are subject to an audit by the CRA.  As a result, homeowners must be careful to not use the CRA as a personal ATM machine.  In other words, the CRA will scrutinize ITC claims to ensure unrelated home repairs and other personal expenses do not give rise to ITC claims.

For more information, there is a complex / high level opinion given by Torys LLP to the Solar Industries Association that has been posted on the Internet. For even more information, please go to the Solar Industries Association web-site.

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Yesterday I shared with you the Bloomberg Businessweek article "Buy American and Fairer Trade Can Solve Job Woes: Alan Tonelson".  In this article, Alan Tonelson suggests that the United States should impose additional duties at the border on goods coming from a country with a value-added tax.  Canadians should be concerned because under the goods and services tax ("GST") and harmonized sales tax ("HST") regime, most exported goods are zero-rated. 

If the United States Administration followed Mr. Tonelson's advice, they would arguably be in breach of their most-favoured-nation (MFN) obligations at the World Trade Organization ("WTO") and in the North American Free Trade Agreement (NAFTA).  Simply put, the MFN concept focuses on non-discrimination.  In particular, goods at the border must be treated the same.  As a result, the United States cannot impose higher tariffs on some goods at the border and lower tariffs on other goods (except there may be lower duties if there is a free trade agreement that satisfied the requirements of GATT Article XXIV).

The U.S. is not allowed to charge a 13% tariff on all goods from Ontario, a 12% tariff on goods from B.C., a 5% tariff on goods from Alberta, a different tariff on goods from the EU, a different tariff on goods from Australia, etc. in retaliation of zero-rating. The U.S. is not allowed to increase its tariff rates on goods from some countries (VAT countries) and not raise tariffs on goods from other countries (non-VAT countries).  To be clear, under the GATT, 1947, the United States cannot increase tariffs from their current MFN bound levels against any WTO country. Under the NAFTA, the United States cannot raise tariffs against Canadian goods above the levels agreed in the NAFTA (most NAFTA tariff rates for Canadian goods are now duty-free or 0%).

There are rules in the WTO Subsidies and Countervailing Measures Agreement  ("SCM Agreement") that would allow the United States to impose countervailing duties, but only after a trade remedy process. However, any attempt to impose countervailing duties against Canadian good as a result of zero-rating would undoubtedly lead to a challenge at the WTO under the Dispute Settlement Understanding.

The United States should be mindful of its international obligations while dealing with its domestic financial issues.  Options that breach international obligations must be taken off the table as trade wars with each and every country that imposes a VAT will not be helpful to global recovery efforts.

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In an recent article in Bloomberg Businessweek printed online on September 18, 2011 entitled "Buy American and Fairer Trade Can Solve Job Woes: Alan Tonelson", Canadians are put on notice that the U.S. is taking aim at value-added tax ("VAT") regimes that do not charge VAT on exported goods. Canada's goods and services tax ("GST") and harmonized sales tax ("HST") regime zero-rates exports.  Zero-rating means that Canada imposes GST/HST at the rate of 0% instead of the applicable GST/HST rate on domestic transactions.  This means that Canada may soon have a significant Buy America problem.

Alan Tonelson's article has a subtitle "VATs Are Protectionist", which is a signal that what follows is not going to be friendly.  Some of the points made by Tonelson are:

• New tariffs should be imposed on countries with VATs;
• VATs contribute to U.S. trade deficits;
• VATs raise the price of imports because they are imposed on domestic consumption 9thereby making U.S. goods more expensive);
• VATs subsidize exports (because governments do not impose VAT on exports); and
• NO exceptions from the new import tariffs should be allowed for products made by U.S. trading partners who have a VAT regime.

If this idea moves into law, Canada and the EU countries, Australia, New Zealand and a number of other significant trading partners would be affected.

While I hope that this latest protectionist rhetoric does not go anywhere, Canadian businesses need to be concerned about this issue.  Canadian businesses need to communicate their concerns with the Canadian government and become engaged on this topic. In addition, businesses need to prepare and diversify their export base because it is clear that the U.S. market may become more unfriendly to Canadian manufactured goods.

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I am pleased to informThe HST Blog readers that I have been listed in the Canadian list in Who's Who Legal: The International Who's Who of Business Lawyers: Trade and Customs 2010.  See link below

http://www.whoswholegal.com/profiles/40485/0/Todgham%20Cherniak/cyndee-todgham-cherniak/

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

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

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

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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.

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

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

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

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

    QUOTES:

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

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

    QUICK FACTS:

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

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

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

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

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

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

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

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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.

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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.

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On April 6, 2010, the New Democratic Party in Nova Scotia has announced that it will increase the provincial component HST rate by 2% by July 1, 2010 (when Ontario and British Columbia harmonize). This will result in Nova Scotia having a combined GST/HST rate of 5% + 10% = 15% (the highest in Canada). The Nova Scotia NDP government expects this will mean $214.8 million in much-needed revenue this year.

In that same article, CBCnews reports that the increase in the HST rate is intended to bring the Nova Scotia budget into a balanced state within 4 years. At least, this is what the politicians are telling the electorate and consumers who will be paying more on almost everything.

Nova Scotia joined the HST Zone in 1997 and the consumers have adjusted to the HST regime. That being said, with Ontario and British Columbia joining the HST Zone on July 1, 2010, the Department of Finance has announced new place of supply rules for all in the HST Zone (and outside the HST Zone). We continue to wait for the HST place of supply rules to be announced in a legislative format (i.e., regulations or a Bill). The updated place of supply rules are game changers for services and intangible property and there are notable changes for real property and goods. Nova Scotia, therefore, will be adjusting to the new rules while increasing the cost of mistakes to 15%.

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Many U.S. news outlets are reporting that U.S. White House economic advisor, Paul Volcker, spoke today about the possibility of the United States implementing a value added tax ("VAT") at the federal level.

• CBS - VAT: Will the U.S. Adopt a Value-Added Tax?
• Fox News - Obama Economic Adviser Says U.S. Should Consider 'Value-Added Tax'
• Reuters - Volcker: Taxes likely to rise eventually to tame deficit
  
• New York Times - Will We Get a V.A.T.?

About 150 countries have a VAT. It comes in different shapes and sizes, ranging from 5% in Canada (down from 7% thanks to the federal Conservative Party) to 25% in Sweden. Wikipedia has a great summary of who has what value-added tax and the rates. Canada's value-added tax is called the goods and services tax ("GST"). New Zealand and Australia also have GST. The EU has a value added tax called VAT.  

If the United States moves towards a value added tax regime, there are a number of qualified, English speaking lawyers, accountants, consultants in Canada and ex-Canada Revenue Agency officials who would like a green card (preferably in a warmer State where there are no hurricanes). The Canadians will potentially sign cards saying "Trust us. it's not so bad: At least you do not have States adopting the HST like Ontario and British Columbia".

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The Canada Revenue Agency is close to releasing a revised wash transaction policy for goods and services tax (GST) and harmonized sales tax (HST).   A "wash transaction" occurs when a supply that is taxable at 5% or 12% or 13% is made and the supplier has not remitted an amount of net tax by virtue of not having correctly charged and collected the tax from the recipient who is a registrant who would have been entitled to claim a full input tax credit (ITC) if the tax had been correctly applied.  In other words, the supplier makes an error in not charging the correct amount of GST/HST when the recipient is entitled to a full input tax credit.  As a result, the Government of Canada is not deprived of tax revenues as a result of the error.

The old wash transaction policy in GST Memorandum 16-3-1 "Reduction of Penalty and Interest in Wash Transaction Situations" granted a concession to suppliers.  The CRA did not collect interest, but did impose a 4% wash penalty.

This 4% penalty may be gone under the new policy.  Please stay tuned for what we are told is good news.

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