For Many Businesses In Ontario, Only The Accounting Departments Knows HST Means More Work

When harmonized sales tax ("HST") was announced to be introduced into Ontario, the McGuinty Government told everyone that the administrative burden for businesses will decrease.  Those who work in the area know the truth - there is more work now than there was before HST.

Big businesses (many of which are not really that big) have a greater administrative burden with HST record keeping and reporting because they recapture certain input tax credits and undertake the calculations very quickly or face late filing penalties. 

Builders of real property experience a greater administrative burden with HST because they must file many different forms for transitional rebates, new housing rebates and the recaptured input tax credits.  What they did not tell builders is that they will have to file separate forms for the GST portion of the rebate and the PVAT portion of the rebate.  Builders also face late filing penalties.

Same holds true for long term care home and retirement home builders who also must file multiple forms to claim the new residential rental property rebates and transitional rebates (separate forms for each for the GST portion and the PVAT portion).  I have spoken with one client who spent hours just trying to determine which forms needed to be filed out.  Some portions of some forms did not need to be completed because there were other forms to complete instead.  My client could not figure out what to do to get the much needed money back and called me.  It even took me a couple of billable hours to create the road map.  Quite frankly, the forms are a bureaucratic mess.  I should also note that after the forms are filed by builders, they are usually audited and valuations are required before the money is paid (often after a year of waiting).

Public sector bodies (municipalities, universities, schools, hospitals, charities, not-for-profits) also have to complete and file separate forms for the GST portion and the PVAT of the public sector body rebate.  In most cases, the percentage of the rebate at the federal level is different than the rate at the provincial (PVAT) level.  If the public sector body (e.g. a charity) operates in more than one province, there are separate calculations because the provincial rebate rates are not harmonized.  Some provinces do not offer all the rebates.

In addition, businesses must collect HST according to the place of supply rules.  Some of these businesses are charging HST on transactions where they did not previously collect provincial sales tax.  This may be because the sales tax base changed or it may be because the transaction involves an HST province.  Prior to HST, there may not have been a nexus between the supplier in the province and after HST the business is a tax collector of HST.

There are many other examples that I could provide.  Many involving having to spend large amounts on legal or accounting advice to make sure 13%/15%/12% mistakes are not made.  Instead of providing more examples where the administrative burden has increased, I will ask you to provide real life examples by making comments.  Please add to the discussion.

Canada Revenue Agency Auditors Concerned About Registrants Overclaiming Input Tax Credits

Based on personal experience and not any official report from the Canada Revenue Agency ("CRA"), it is obvious to sales tax professionals that the CRA are concerned about goods and services tax ("GST") and harmonized sales tax ("HST") registrants over claiming input tax credits.

On a GST/HST return for a reporting period, the registrant must report the amount of GST/HST collected during the reporting period on its taxable sales.  However the registrant remits "net tax" after adding amounts it must add and deducting amounts it may deduct.  One of the most important category of deductions from GST/HST collected is input tax credits being claimed.  The more input tax credits, the less GST/HST that must be remitted (and in some cases, the larger the refund cheque).

The most obvious concern to CRA auditors is that GST/HST registrants claim false input tax credits when they file their GST/HST returns.  False claims are when a person did not actually purchase a business input and are making up a deduction.

One of the most common audit issues if failure to maintain records relating to input tax credits that meet the documentary requirements of subsection 196(4) of the Excise Tax Act (Canada) and the Input Tax Credit Information (GST/HST) Regulations.  The CRA will reject input tax credits when the documents to support the claims are not available or if the documents do not contain all the relevant information (e.g., the GST/HST number of the supplier).

Another common audit issue is that the input tax credit is claimed too early (and, therefore, in the incorrect reporting period.  For example, a business files monthly returns.  A business buys a building on March 2nd.  If the registration claims the input tax credit for that building purchase in the February GST/HST return, the input tax credit will be denied and moved to March.

The last two areas of concern are often a source of frustration for businesses.  Honest business owners can get caught.  They are not the bad guys who are essentially stealing money by making false claims.  They are often busy and do not have the best record-keeping systems or do not have the time to chase down a supplier for information after the goods/services are provided and the money has been paid.  They do not pour over every detail on a piece of paper because hey know what transaction transpired.

Amounts Paid To Canada Border Services Agency As Ascertained Forfeiture May Include GST

In the recent case of 208539 Alberta Ltd. v. The Queen, Justice D'Arcy of the Tax Court of Canada held that an importer of record may be entitled to claim an input tax credit (ITC) for GST imposed as a result of an ascertained forfeiture.  An ascertained forfeiture occurs when the Canada Border Services Agency (CBSA) issues a penalty with respect to imported goods after importation.  The CBSA is no longer in a position to seize the goods and charge a penalty to release the goods.  As a result, the CBSA sends the importer of record an assessment of a penalty.

In some cases, the ascertained forfeiture penalty may only include customs duties (or a multiple of the customs duties that would have been payable).  In these cases, the importer of record would not be entitled to claim an input tax credit.

In other cases, the ascertained forfeiture penalty states that an amount is being charged as GST that should have been paid with respect to the importation.  This was the situation in the case at hand.

Judge D'Arcy held that the importer of record was entitled to claim the ITC for the amount that was GST, but not the amount that was penalty or customs duties.

Another interesting aspect of the decision is the discussion on whether the documentary requirements for the ITC had been satisfied.  The CRA was arguing that the documentary requirements in subsection 169(4) of the Excise Tax Act  and Input Tax Credit Information (GST/HST) Regulations was not satisfied.  Judge D'Arcy was correct in holding:

The Appellant satisfied the paragraph 169(4)(a) documentary requirements once it provided the CRA with sufficient information to enable the amount of the input tax credit to be determined. As I noted previously, the First Customs Letter, the Second Customs Letter and Exhibit A2 together evidence the amount of Division III tax that Canada Customs collected from the Appellant ($17,039.93) and the fact that the Division III tax was paid by the Appellant in respect of the imported goods.
 

I would expect that there are a number of importers of record who are engaged in commercial activities who have not claimed their ITCs paid in respect of ascertained forfeitures and detentions penalties.  It will be important to ensure the correct person claims the ITC.  Time limits for claiming the ITC will also be a critical issue.  All that being said, there may be found money - if you have received a notice of ascertained forfeiture or retrieved goods from CBSA detention, it is time to review the documentation.

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".

 

Do You Really Want to Have an HST Map to Right?

Yesterday I had a discussion with a friend who was deciding on whether to write to the Canada Revenue Agency, GST/HST Rulings Directorate for a GST/HST ruling on an issue.  The discussion started that the client had followed advice given years ago that its supply was exempt.  The client had not collected GST for a number of years.  With the implementation of harmonized sales tax, the cost of being wrong has increased from 5% to 13% (in Ontario).  The client contacted my friend to revisit the issue.  The client does not want to be assessed - this is understandable.

The problem with writing in for an advance GST/HST ruling is that the CRA may not give the desired answer.  The CRA may disagree with the original analysis.  The CRA may see things differently.  The CRA may have given other rulings that are inconsistent with the ruling requested.  What if the CRA determines that the supply is taxable now, was previously taxable, and that the exemption did not apply to past supplies? What if the CRA determines that they were not in the "Right" place? There is a risk.

When there is a risk that the CRA will not give the ruling requested, the affected party (i.e., the client) must answer the question "Do you want to get to "Right"?  If the client wants the "Right' answer and to know where is "Right", the client should obtain an advance GST/HST ruling (which is binding) or an interpretation (which is not binding).  If the clients wants to continue to treat its supplies as exempt, then the client does not want to be at "Right".  If the client plans to ignore the ruling if it does not reaffirm what they want to do/are doing, the client does not want to be at "Right" and would increase its risk by applying for an advance GST/HST ruling.

It is important to determine whether the client (or you) want to have the "Right" answer or merely the answer the client (you) want.  They are not necessarily the same thing.

If the client (you) want to get to "Right", it is possible to prepare a customized map.  If the client(you) are not sure whether you really want to get to "Right", more thought is required on whether you do not care if you stay at 'Lost".

What Can I Do To Motivate You To Make Positive Steps Towards Better GST/HST Compliance

I would like to offer you words of encouragement to make positive improvements towards better goods and services tax (GST), harmonized sales tax (HST) and other sales and local taxes (SALT) compliance.  I would like to motivate you to make your working lives easier if you are blessed with the task of GST/HST/SALT recording and reporting.

The Canada Revenue Agency (CRA) motivates us to act by fear of negative events, such as an audit and/or assessment.  The CRA motivates compliance by threat of penalties and interest assessments.  They are not wrong in approaching GST/HST in this manner as it is a self-reporting system --- follow the rules of suffer negative consequences.  Many businesses are motivated by money and fear and this system works for some. However, it does not work for many. 

Almost all businesses have just completed the task of filing a GST/HST return.  Annual filers filed their first GST/HST by today's deadline.  Quarterly filers have filed their second GST/HST return (for Q4 2010) by today's deadline.  Monthly filers filed their December 2010 GST/HST return by today's deadline. 

How many of you have spent hours of frustration in performing the calculations and rechecking documentation and numbers in order to file the GST/HST return?  How many of you could not verify whether you were to remit GST at 5% or HST at 13% or 12% or 15%?  How many of you had to self-assess GST/HST and were unsure what to do?  How many of you needed to complete documentation for a refund/rebate and were not sure what to do?  How many of you could not trace your point of sale rebates, your exempt sales and your zero-rated sales (sales when you did not charge GST/HST)?  How many of you walked away from the task wanting to scream at assistants and others within your organization?  How many called someone in your organization and "idiot" or other unpleasant name (if you did, go apologize).

Would you like this task to be easier for the next reporting period?  Are there answers you need in order to perform the task better next month or quarter or year? Is there training that you or your employees need? Would you like to take better control over this reporting process?

If you want to make the tasks related to GST/HST reporting easier, you can. Take the negative experience and make a list of why it was a negative experience to file your GST/HST return.  Write down what worked and what did not.  GST/HST compliance will improve if you fix the things you listed as not working properly. 

Did you have difficulties making sure you claimed 100% of you input tax credits? Fix it.

Did you have difficulties making sure you recaptured input tax credits where required? Fix it. 

Did you have difficulty reconciling various reports? Fix it. 

Were you lacking information that you needed to make decisions? Fix it.

Do you need help to fix it? Find people who understand GST/HST to help you. They do exist.

You can do this.  You can improve your job. You can spend more time with family and friends during GST/HST reporting time. You can be the force of positive change and others will be grateful. what are you waiting for --- another SALT return?

Should Companies/Partners Undertake GST/HST Inspections Before Buying a Business?

Most people hire a home inspector to inspect a home before buying a home.  They hire home inspectors to find the problems that they cannot see so that they do not experience large unexpected expenditures after the closing date.

Should businesses (corporations and partners/joint venturers) hire a GST/HST expert to conduct a GST/HST focused review prior to the closing date so that they do not buy GST/HST problems that a Canada Revenue Agency auditor may blame on the buyer?  What I am referring to is due diligence and a private audit of GST/HST books and records.

A GST/HST inspection is prudent if the buyer is buying the shares of a corporation.  The past errors (liabilities) are acquired in a share purchase transaction.  If you find a serious problem with the GST/HST compliance, then a purchase price reduction can be discussed.  The purchase price reduction for the shares may be quantified by way of a pre-closing voluntary disclosure - but that may delay the transaction.  If you do not want to delay the closing of the transaction, an amount of the purchase price may be put in a reserve or escrow account as the voluntary disclosure proceeds.  It is not necessary to conduct a a voluntary disclosure and reserves can be maintained depending what is found in and quantified during the GST/HST inspection.

Similarly, a GST/HST inspection is prudent if the buyer is purchasing a partnership unit or joint venture interest in an existing partnership or joint venture. As discussed with corporations, the buyer would be buying the GST/HST history and the existing problems.

Even if the acquisition is an asset transaction, a GST/HST inspection is prudent.  If the buyer is making offers of employment to existing employees, they will continue to make any mistakes they had been making in their record keeping and reportings. If you would like to stop bad practices, you need to know they exist and take positive steps to teach proper practices.

GST/HST inspections are not usual - yet.  With the implementation of GST/HST in Ontario and British Columbia, the cost of mistakes increased to 13% and 12% respectively, plus additional basis points for interest and penalties.  Depending on the value of the business that is being acquired, there is more money at stake than the cost of replacing a leaky roof or old furnace.

Would you like to find MONEY in your Business?

If you would like to find money in your business, you should conduct an internal compliance verification.  You should undertake a review of your internal controls to ensure that you are recovering every cent of GST/HST that you are entitled to recover under the law. I would be surprised if you do not find something you have missed.  Treat the internal review as a treasure hunt with the same determination as a child with a treasure map, you may just find money.

Your review of your internal controls should also look for your failures to charge GST/HST appropriately and your failures to remit GST/HST collected and/or GST/HST that you must self-assess and remit from your own bank account.  It goes without saying that the same holds true for other sales taxes. This is finding money too and, it is a method to save money as the interest and penalties will cost you if a Canada Revenue Agency (CRA) auditor comes to visit, conducts an audit and finds your mistakes.

I have a list of places in the books and records of a business where I look for additional amounts that have been missed by a business owner and his/her staff or bookkeeper or accountant. I will not give that list out to anyone - but I use my list that has been created from years of experience (often from helping clients through audits and assessments). 

I will share one tip today. 

Since the implementation of HST, have you taken your purchase invoices and checked to see if you have claimed all of the input tax credits (ITCs) that you can to recover GST/HST paid to your suppliers?  This is a good time to take a good sample of those invoices and check to see if the GST/HST has been recorded properly and whether your internal record keeping is working to permit full recovery.  

First, do you have all the invoices?  Are you missing some of the invoices that you remember paying?   Do you remember a good of a service that was acquired and there isn't an invoice in your sample?  If an invoice is missing, you may not have recorded the input tax credit.  Do you have methods to record GST/HST paid when there wasn't a typical invoice (e.g. pursuant to an agreement of purchase and sale or a commercial lease or a license, etc.). Do you record the GST/HST amount included in each check that yo write?  What about bank drafts, wire transfer and other forms of payment?

When you are look at your invoices, check again whether the suppliers properly invoiced you GST/HST?  Do the invoices issued between May 1, 2010 and June 30, 2010 properly record GST/HST charged during the transition period?  Does the invoice reflect the correct amount of GST/HST?  This is also a great time to analyze whether the invoices (and any other evidence relating to payments of GST/HST) meet the documentary requirements of the Excise Tax Act and regulations - inadequate documentation is the top audit issue and reason why CRA auditors reject ITC claims and issue assessments.  Have you ever inquired what information is necessary (and should be maintained) to satisfy the CRA of your entitledment to claim an input tax credit?

Second, have you recorded the amounts of input tax credits in your records? If so, are there any errors? If not, how can you claim the correct amount of an input tax credit if the amounts are not recorded?  Even if they are recorded in your books and records, have you checked to see that the process actually works so that when you press the button for a calculation, that number is correct?

If your business does not claim full input tax credits, do you claim the correct amount of rebates/refunds of GST/HST (e.g. you are engaged in exempt activities in whole or in part)?  The same two steps discussed above can be used to verify that your internal controls record the GST/HST that you are entitled to claim by way of rebate/refund.

If you find previously unrecovered GST/HST, you may be able to amend your GST/HST return for the period (depending on the reporting period in which the error occurred).   You may be able to claim the input tax credit/rebate/refund on your next GST/HST return.  You may be able to file a refund claim. I cannot tell you how you get your hands on that found money without knowing the facts.

You may undertake an internal review by yourself or you may call in a professional to maximize your recovery - you do not know what you do not know and what you have missed  A small number of lawyers and accountants who understand the GST/HST laws and administrative policies may be called to assist you with this internal controls review process.  Most sales tax lawyers and accountants charge an hourly rate for their services.  There are also sales tax consultants who conduct these types of reviews and they sometimes charge you a percentage of what they find (you split the found money).

Since I am a lawyer, I have to mention that the benefit of using a lawyer is that analysis and report is subject to solicitor-client privilege and cannot be obtained by the CRA unless that privilege has been breached.  Everything you say to a lawyer about your lack of attention to internal controls and mistakes cannot be divulged to the CRA or tax authorities.  A lawyer's files should not be obtained by the CRA if they arrive with a warrant or seizure request.  If the CRA does attempt to seize a lawyer's records, the records/files may be placed under seal and reviewed by a court before the CRA can review them (which allows the lawyer to claim privilege and a judge to decide if the claim is appropriate on a document-by-document basis).

Finally, if you conduct periodic compliance verifications of your internal controls, you may have a due diligence defence if at some future point in time you are audited.  If your review process captures most of your mistakes and you miss one or two items, that can be expected. However, if you miss a lot of your errors, there would be the same question by the auditor as to whether you took care in implementing your GST/HST systems.

Good luck searching for money.  Please let us know if you find any.

The ABCs of Harmonized Sales Tax

Harmonized sales tax ("HST") is here to stay in Ontario for 5 years due to the arrangement between Premier McGuinty and the Government of Canada.  The provincial portion of the rate (currently 8% and called PVAT to those in the know) may be altered on or after July 1, 2012.

Now for something serious and not so serious at times - the ABCs of HST:

A is for Almost Everything - HST covers almost everything;

B is for Bookkeeping - Registrants need to keep detailed records and maintain books are records that can be audited by the Canada Revenue Agency Auditors;

C is for Canada Revenue Agency - The CRA enforces the HST (both the GST and PVAT portions);

D is for Documentary Requirements - A top 10 audit issue is that registrations do not maintain adequate information to support input tax credit and refund claims;

E is for Exemptions - Exempt means that HST/GST is not charged, but the supplier is not entitled to claim input tax credits - so GST/HST is passed on in the price of the property/services;

F is for Filings - Registrants must file their GST/HST returns on time and large businesses must recapture ITCs on time and builders must report certain information in their filings or face costly penalties;

G is for Government Contracts - Suppliers to the Ontario, British Columbia and Nova Scotia Governments must charge GST/HST (previously Ontario and BC did not pay GST or PST);

H is for HST - should have expected this one - or I could have written "Hated Sales Tax";

I is for Input Tax Credits - ITCs are good for businesses engaged in commercial activities who get to recover GST/HST on business inputs (good until they get audited and mistakes are found);

J is for Judge - If you disagree with the CRA about an assessment, file a notice of objection and notice of appeal and take the dispute to a Tax Court of Canada judge;

K is for Knowledgeable - While it is self-serving, you need to talk to a knowledgeable practitioner as the HST rules are complicated;

L is for Legislation - the Excise Tax Act needs to be updated - we have not had a good review since 1997;

M is for MUSH Sector - The MUSH (Municipalities, Universities, Schools, Hospitals) sector have a rebate scheme and difficult rules;

N is for Non-Residents - Businesses outside Ontario (e.g., in other Canadian provinces, the United States and overseas) may be required to charge, collect and remit HST and do not know or understand it;

O is for Ontario Retail Sales Tax - HST replaces ORST, but ORST is still applicable on used car sales and certain insurance premiums;

P is for Place of Supply Rules - Whether you charge HST depends in part on the application of the place of supply rules, which determine if the supply takes place in an HST province and which HST province;

Q is for Quick Method - really a misnomer because it is not quick and some people using it will have to apply special transition rules;

R is for Recaptured ITCS - Large businesses (those that make over $10 million is sales per annual alone or with affiliated entities) must pay back certain ITCs claimed relating to PVAT and must report on monthly GST/HST return;

S is for Small Suppliers - Small supplier do not have to register for GST/HST purposes;

T is for  Technology - Technology helps capture and report GST/HST information - this cannot be done manually;

U is for Unhappy Consumers - Consumers are paying more on electricity, home heating, bikes, services, etc because of HST;

V is for Voluntary Disclosures - If you make a mistake and have not been contacted by a CRA auditor, you may consider making a non-names voluntary disclosure via a practitioner so save paying a penalty;

W is for web-site - go to www.thehstblog.com for information on HST or www.cra.gc.ca;

X is for Xerox - you need to keep good records as evidence to show auditors - you need to invest in a good scanner or photocopier;

Y is for Yikes - This is what a person says when they hear they will be audited for HST (probably say something else - but this is a clean web-site); and

Z is for Zero-rated - If property or services are zero-rated, you pay GST/HST at a rate of 0% and the supplier gets an input tax credit (therefore, health care and educational services should be zero-rated instead of exempt).

Canada Revenue Agency Issues Ruling that ITCs Available If Retailer's Goods Stolen

On April 28, 2010, the Canada Revenue Agency (CRA) issued Headquarter Letter (Ruling) No: 120360 in which it ruled that the taxpayer should be entitled to claim an input tax credit (ITC) for the amount of goods and services tax (GST) (can substitute HST here too) paid on the purchase of the goods for resale that were subsequently stolen from the taxpayer's store.  The taxpayer would be required to meet the other ITC documentary requirements.

In this case, the taxpayer filed a claim for recovery against its insurance and the insurance company denied that portion of the claim that was GST because the insured taxpayer could recover those amounts by other means.  This did not bother the CRA.

This is a fair ruling in the circumstances. 

Other taxpayers should rely on CRA rulings at their own risk as their factual circumstances may be different.  A taxpayer should seek a binding ruling from the CRA if they wish certainty.

Registrant Purchasers of Real Property Should Update Certificates

The GST rules (now the HST rules) have historically allowed a supplier (seller) of taxable real property to make a supply to a recipient (purchaser) and not collect GST/HST in respect of the real property if the purchaser is registered for GST/HST purposes and provides a written certification of registration status.  The relevant sections of the Excise Tax Act are subsections 123(1), 221(2) and 228(4).

What happens in these real property transactions is that the purchaser provides the seller a certification at closing and the supplier verifies the purchasers GST/HST registration number with the Canada Revenue Agency (as a due diligence step).  If the certification is verified by the Canada Revenue Agency, the seller does not collect GST/HST from the purchaser at the time of the closing/transfer and the purchaser self-assesses GST/HST on its GST/HST return for the period in which the transaction took place.  On the GST/HST return, the purchaser indicates the amount of GST/HST he/she/it is self-assessing and takes an input tax credit  on the same return to neutralize the cash flow effect. The purchaser also files a GST Form 60 with its GST/HST return.

These certifications are not a prescribed form (that is the CRA has not developed a form to complete) and many lawyers and real property businesses have developed a precedent that they use.  These precedent certifications need to be updated to account for HST.

I would recommend that the new certifications include the following information:

  1. The Recipient's (buyer's) correct legal name;
  2. The Recipient's GST/HST number;
  3. The Recipient's reporting period (not necessary, but helpful to diarize self-assessment deadline);
  4. The Recipient's mailing address in the Canada Revenue Agency's records (I have needed this in the past to verify items 1 and 2);
  5. The municipal address of the real property (in order to make HST place of supply determination at the time f the self assessment)
  6. The transfer value of the real property; and
  7. The rate of HST applicable (based on 5 and 6).

The Registrant Real Property Certification should make reference to both GST and HST on a going forward basis so as not to confuse the auditor who wants to raise a big assessment against the parties.

We have prepared such precedent certificates for transactions and will be willing to sell a precedent for a flat rate of $100 (the cost of which can be recoverable).

Effective Communication Will Be The Key To A Successful HST Compliance Program

After a business realizes that harmonized sales tax (HST) is coming and that changes are required to systems and documentation, the business must figure out what is necessary to ensure compliance.  The government publications help, but do not give enough information to make sure that businesses know what they must do to comply.

It is not sufficient for the Ontario Ministry of Revenue to announce that HST is 13%, HST is payable and collectible where GST is payable and collectible (except if a point of sale rebate is permitted), the implementation day is July 1, 2010, there are transition rules and place of supply rules and most businesses should stop charging Ontario retail sales tax on July 1.  What is missing is effective communication on what steps businesses should take to prepare.  This trial and error approach is costly for businesses - Businesses should try to comply and government will tell them where the mistakes were made by assessing GST/HST, interest and/or penalties.

The onus (and I do not mean legal onus or burden of proof) is on suppliers (sellers/retailers) and recipients (buyers/[purchasers) to figure out the legal requirements and be perfect in their implementation of the law (to the extend it is currently passed) and administrative statements (to the extent they are written and accurately reflect the written or unwritten law) and place of supply rules (which have not been passed by way of law or promulgated by way of regulation yet).  In other words, the communication from government to businesses is insufficient to ensure compliance.

In addition, businesses must effectively communicate within the organization in order to ensure compliance.  Someone must do their best to understand the HST rules and communicate the rules within the organization so that the proper system changes are made.  If the tax department/Chief Financial Officer does not discuss HST implementation with the sales department, the sales persons might not know what is subject to HST and what is not.  The sales persons may not understand when an invoice should include HST and when HST is not payable.  The sales persons might not know that they must charge HST on sales made in May and June if delivery occurs after July 1, 2010.

In addition, the computerized systems cannot change themselves.  Usually there is the information technology (IT) guru within an organization that must write computer source code or undertake configurations to ensure that HST is charged on invoices.  If there is not effective communication with the IT guru about what changes need to be made to electronic documents and computerized systems to record HST, the computers may be of little help in fulfilling their important role(s).

In addition, the IT guru may have to make adjustments to accounting systems so that the record keeping/ accounting programs track the GST and HST properly.  The computer system will be a useful tool to ensure GST and HST collected is added / reported correctly when GST/HST Returns must be completed and filed electronically (or in paper format).  The computer system will be a central tool in recording and reporting input tax credits, rebates, refund and restricted input tax credits.  If the IT guru does not receive clear instructions, he/she might not make all the necessary changes.

Effective compliance often includes an internal audit or monitoring of the systems to ensure that accurate information is communicated.  If no one has this role / function within their job description, the job might not be performed.

If problems are discovered, effective communication is necessary to make new and further adjustments to the system.  For example, if a September 1, 2010 invoice to the Government of Ontario did not include GST and HST (because prior to HST implementation neither taxes were charged), whoever discovers the problem will need to communicate the mistake internally within the organization so that the sales people, the IT guru, human resources, the tax department or CFO and others make the necessary changes.  Someone will also need to contact the Government of Ontario and send the invoice for the GST/HST or amended invoice including GST/HST.

Finally, I have to point out that effective communication extends to lawyers, accountants, customs brokers and other service providers.  A business will get incorrect/incomplete answers to questions if there is ineffective communication to outside service providers.  If you are going to rely on a service provider's help, you need to communicate all the relevant facts and instructions - otherwise the advice or services that you expect to be provided to you may not be provided.

Make An HST CheckList

Harmonized Sales Tax (“HST") will become a reality in Ontario and British Columbia on July 1, 2010. However, some businesses will be required to start collecting HST on May 1, 2010. In addition, some businesses outside the HST Zone ( HST Zone = Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador) will also be required to charge collect and remit HST to the Federal Government in accordance with the place of supply rules when the place of supply is within the HST Zone.

It is time to make a “To-Do" list to get ready for HST. The Canadian Federation of Independent Businesses (CFIB) has released an HST checklist this week.

The CFIB list applies for businesses with gross revenues less than $10 million. This is not limited to corporations, trusts, partnerships or sole proprietorships, it also includes family of businesses that are related to each other as the threshold test would be applicable to persons and their related entities.

The checklist below builds on the CFIB list is as follows:

  • Formulate an internal committee of persons who will oversee the HST conversion - the group includes more than top management and the tax specialist/chief financial officer. Plan to meet weekly and prepare checklists.
  • Calculate a budget to address HST conversion issues, including information technology programmers to update your systems and advisors on HST.
  • Contact the persons in your business responsible for information technology as they will be on the front-lines in updating your computer systems.
  • Conduct a sales side audit and determine whether the supplies made by your business are subject to HST. Your business may be required to charge HST on goods that were not subject to retail sales tax.
  • Update sales equipment (e.g. cash registers) and computer systems in order to properly charge HST.
  • Ensure your invoices properly state whether HST is applicable, the HST rate, your GST/HST registration number, and all other information required by the input tax credit regulations.
  • Consider whether your business may offer point of sale rebates and make adjustments to record-keeping.
  • Conduct a purchase side audit and determine whether your purchases are subject to HST. HST will affect what you sell and what you buy. Purchase exemption certificates will no longer be usable when your business buys what were previously RST exempt goods, such as goods that are purchased to be resupplied.
  • Determine your largest expense items and review your largest contracts to determine what will change with the implementation of HST.
  • Identify which suppliers to your business may not be sophisticated enough about HST and ensure they charge the correct amount of HST. Since the Canada Revenue Agency may assess both suppliers and recipients, purchasers have a duty to check the invoicing of their suppliers.
  • Consider whether HST will affect your cash flow and make arrangements for credit. Commercial rent, inventory, electricity, production equipment & machinery, goods purchased for resupply, custom computer software, etc will be subject to HST (and was not subject to RST).
  • Review the transition rules to see when you must start to collect HST or pay HST and when you must self-assess HST.  It can be as early as May 1, 2010.
  • Determine whether the restricted ITC rules apply to your business/related businesses. If your business is over the $10 million threshold, you will not be able to recover HST paid on certain purchases for the first three years of HST. You will be required to set up accounting records to track and report restricted input tax credits on a province-by-province basis. The reporting on HST returns will start on July 2010 GST/HST return, which must be filed electronically.
  • Determine whether you are required to file GST/HST returns electronically, what method of filing electronically your business must use and make arrangements to be able to file electronically starting in July 2010.
  • Determine whether the place of supply rules require your business to charge HST. If your business operates in more than one province, the assessment must be made on a province-by-province and supply-by-supply basis.
  • Set up accounting records for each applicable HST province.
  • Establish internal policies and procedures to ensure HST is properly charged
  • Prepare written materials for sales staff to follow and train your staff on HST.
  • Update sales equipment so that HST is charged at the point of sale.
  • Update computerized payments so that HST is charged where applicable. In some cases, computer programs will need to be rewritten/updated so that the place of delivery (e.g. goods) is reviewed in determining whether HST is applicable.
  • Adjust online payment software or web interfaces used for selling via the Internet (or receiving payments for services and intangibles via the Internet) to reflect the applicable HST rates.
  • Update the information communicated on websites.
  • Prepare and publish new written materials if the publications include information on sales taxes charged.
  • Update internal computer/record keeping, record keeping on input tax credit claims, rebates, refunds, etc., accounts payable record keeping, accounting records on meals and entertainment expenses and taxable benefit calculations.
  • Update internal reports - e.g., expense reports spreadsheets, employee cars, inter company transactions, etc..
  • Determine whether your business must pay HST on imported goods, services and/or intangible property.
  • Determine whether any inter company payments are subject to HST and make adjustments to records and expectations.
  • Take steps to ensure that the business stops collecting retail sales tax/social services tax on July 1, 2010 and that the final returns are prepared
  • Prepare PST/RST/SST records to be audited as both Ontario and British Columbia have said they plan to conduct four years of audits in the next two years.
  • Consider whether the job descriptions of employees need to be updated to reflect HST responsibilities.
  • Public relations - consider whether you need to educate your customers about HST.

This list is not all-inclusive.

Preparing for Harmonized Sales Tax

The current plans are that Ontario and British Columbia will harmonize their provincial sales taxes ("PST") with the goods and services tax ("GST") on July 1, 2010. Whether you support the idea of harmonized sales tax ("HST") or not, all businesses must prepare for the sales tax reform or risk costly errors in the future.

In preparing for the HST, there is a very long list of questions that should be asked. The following list is only the "tip of the iceberg":

1.      Has your business changed the general ledger ("GL") accounts for your 2010 taxation year to reflect change on July 1, 2010? Since HST will be implemented on July 1, 2010, any business that does not have a June 30th year end will need to ensure that the accounting records have the additional GL accounts so that PST is recorded pre-July 1, 2010, HST is recorded post-July 1, 2010 and that the tax base of depreciable capital costs include PST pre-July 1, 2010 and do not record recoverable costs post July 1, 2010. There are a number of other adjustments that will be required.

2.      Has your business adjusted its record-keeping to track restricted input tax credits? The Ontario and British Columbia HST proposals included the announcement that between July 1, 2010 and June 30, 2012, large businesses (businesses making over $10 million in taxable sales) will not be entitled to receive any input tax credits ("ITCs") (that is, recover HST paid) on purchases of:

  • (a)    Energy (except where purchased by farms and for use in producing goods for sale;

  • (b)   Telecommunication services (other than internet access and toll-free numbers);

  • (c)    Certain automobiles and road vehicles; and

  • (d)   Meals and entertainment expenses.

The time period for full restrictions on ITCs may be extended. The current plans are for the restrictions to be phased out between July 1, 2012 and June 30, 2015. As a result of the restrictions on the HST component, large businesses and any business that may become a large business (that is, may exceed the $10 million taxable sales threshold in an affected taxation year) should record the GST component and HST component separately in their books and records for these expense items.

3.      Has your business considered whether HST will affect cash flows and budgets? Many businesses have not yet considered whether payment of HST on commercial rent, electricity, production equipment and machinery, management fees, legal fees, accounting fees, temporary placement, rights to use intellectual property, etc. will affect their cash flow. Businesses that file GST/HST annually, quarterly or even monthly may have to address cash flow issues that will arise due to the upfront payment of GST/HST to suppliers and the delay before claiming permissible input tax credits.

4.      Has your business considered when the HST rules will start to affect your business decisions and activities? On October 14, 2009, the Ontario and British Columbia governments released publications outlining the transition rules for transactions that occur after October 14, 2009. The underlying purpose of the transition rules is to ensure that the provinces receive HST after July 1, 2010, even if arrangements were made prior to that date.

Type of Supply

Consideration Due or paid after July 1, 2010

Consideration Due or paid between May 1, 2010 and July 1, 2010

Consideration Due or paid between October 14, 2009 and July 1, 2010 (Category A Businesses)

Sales of Tangible Personal Property

HST applies

HST applies – registered vendors should begin collecting

HST applies re certain businesses required to self assess

Leases and Licenses Tangible Personal Property

HST Applies

HST applies – registered vendors should begin collecting

HST applies re certain businesses required to self assess

Services

HST Applies

HST applies – registered vendors should begin collecting

HST applies re certain businesses required to self assess

Sales of  real property (not residential)

HST Applies

NO HST

NO HST

Sales intangible property

HST Applies

NO HST

NO HST

Type of Imported Supply

Consideration Due or paid after July 1, 2010

Consideration Due or paid between May 1, 2010 and July 1, 2010

Consideration Due or paid between October 14, 2009 and July 1, 2010

Imported TPP (crosses border into Ontario/BC after July 1, 2010

HST applies

HST applies

HST applies re certain businesses required to self assess

Imported Services for consumption, use or supply in ON or BC to extent service performed a/f July 1, 2010

HST Applies

HST applies

HST applies re certain businesses required to self assess

Imported IPP for consumption, use or supply in ON or BC to extent IPP leased, licenses a/f July 1, 2010

HST Applies

HST applies

HST applies re certain businesses required to self assess

(There are many complex transition rules but these are not set in this abridged article. See the editor's note below. Indeed, there are a number of industry-specific transition rules relating to prepaid funeral and cemetery services, subscriptions to newspapers, magazines and periodicals, passenger transportation services, freight transportation services, commercial parking passes, memberships in clubs, organizations and associations, admissions to places of amusement, direct sellers, continuous supplies, real property construction, combined supplies, progress payments, holdbacks, etc.)

5.      Has your business undertaken a review of each existing contract to determine whether HST is going to be applicable? This question needs to be asked if your business is the vendor/supplier or the purchaser/recipient. If a business does not undertake this exercise, the business will be exposed to audit risk.

6.      Are there any changes required to your business' public statements on web-sites, quotation sheets, contracts, etc.?  Does your business communicate to customers/clients which sales taxes you will be charging or whether certain sales taxes are included in quoted prices? Do you sell to persons who may not be familiar with the proposed HST changes and who may challenge the charges at a late date in court? Do you sell to municipalities that will not be entitled to receive 100% of the HST by way of a public sector rebate? Do you sell to businesses and charities which are not able to recover the entire HST component? In short, the manner in which your business communicates information may expose your business to litigation risk with third parties.

7.      Are there any improvements that should be made to your documentation to ensure that you have the evidence necessary to justify non-collection of HST on export sales of goods and services that occurred outside Ontario or British Columbia? If a business does not charge, collect and remit the correct percentage of GST/HST (13% for Ontario and 12% for British Columbia), then a Canda Revenue Agency ("CRA") auditor may ask for evidence to justify a decision. If a business exports goods, the auditor may require proof of exportation and all shipping documents, including import documentation from the foreign jurisdiction. If the destination is another Canadian province, proof of delivery to that jurisdiction will likely be required. Contracts and invoices should indicate the place of delivery clearly. Since it is difficult to document the place of delivery of services and intangible property, questions should be asked concerning what documentation may be recorded and maintained. For example, a service provider may be required to present dockets on time spent outside Ontario or British Columbia performing services, hotel receipts, travel tickets, etc. 

8.      Has your business educated the accounting staff about the HST changes and trained the staff on recording information on incoming and outgoing invoices to account for the HST component? The CRA auditors require the business to review each and every invoice to ensure the GST/HST is correct. If a business fails to detect errors by suppliers, the recipient may be assessed unpaid GST/HST, penalties and interest. In addition, if an incoming invoice from a supplier does not satisfy the documentary requirements for claiming ITC's, an auditor may deny the credits.

9.      Has your business implemented codes of conduct or internal policies relating to sales taxes and income taxes in Canada that must be updated? If your business does not have internal controls, should internal checks & balances be established?

10.  Has your business considered whether the change to HST creates any opportunities to save money?

As mentioned, this list of questions is not definitive, but points to the scope of matters to be considered in preparing for harmonization.