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.

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".

 

Would You Like the HST Map to Right?

Of course you would.  The "HST Map" to getting to "Right" is exactly what you want.  What should you do to get the right result every time?  What should you do to collect the right amount of HST every time you make a supply?  What should you do to calculate the right amount of input tax credits and recaptured input tax credits every time you file a GST/HST return?  What should you do to recover the maximum amount of credits, refunds & rebates allowed?  What should you do so that the Canada Revenue Agency says you are in the "Right" place when they complete any audit?

Unfortunately, these maps do not exist on supermarket shelves - but they can be generated or customized on a business-by-business basis by commodity tax lawyers and accountants.  Where "Right" is for you depends upon the facts and where you want to go.  Just as there are many cities and towns with the same name, there are many different "Right" destinations on an HST map.  If you do not know where is "Right", how are you going to determine the path to take to get there? How can you be sure you are taking the correct route to "Right"?  If you follow the directions someone else uses to get to "Right" you may be at the wrong "Right".

Once you can identify the destination of "Right", then a customized map can show you how to get there.  The customized map will set out the process that you must follow to get to your chosen "Right" destination.  The directions are a critical part of the map to "Right".

The HST map may take the form of a memorandum or opinion letter.  Sometimes the process involves seeking additional directions, which would be in the form of an advance GST/HST ruling from the Canada Revenue Agency.

It is possible to hire a commodity tax lawyer or accountant to prepare a customized HST map if you would like to get to "Right" and stay there.  These maps do exist - believe it or not.  Would you like one?

I should add one closing note that the Department of Finance may move "Right" on you when you are not looking.  Just like with the television show "Lost", you may find that you are no longer where you thought you were/should be.  Maybe the producers were thinking about the tax authorities when they came up with the plot for "Lost" --- hmmmm

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.

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).

First Ontario HST Returns May Be Filed Now

This is so exciting (NOT) - It is August 2010 and this means that some businesses that are in a net refund position (that is, their input tax credits exceed their GST/HST collected) may be filing their GST/HST returns for the month of July 2010.  The businesses that would file their GST/HST returns early would most likely be monthly filers.  Some examples are builders of multi-unit residential complexes, persons who made a large purchase of equipment in July 2010 due to the recoverability of HST, exporters and exempt entities.

July 2010 has now ended (months seem to come and go so much more quickly).  Businesses will be working on their records and filing their GST/HST returns (many must now file electronically).

The first GST/HST return must include HST collected during the transition period - please do not forget.  All HST must be remitted to the Receiver General of Canada - do not send it to the ontario Ministry of Finance.

When calculating input tax credits, please include all GST/HST paid or payable before August 1, 2010.  If you are a large business, do not offset the recaptured ITCs against the ITCs collected number - it has its own line on the GST/HST return.

Input Tax Credit Reporting 101

Many businesses are conducting tests to determine whether they are recording their input tax credits properly.  In particular, they are verifying that when they pay harmonized sales tax (HST), the HST is recorded properly in their computerize records so that when they file their first GST/HST return for the reporting period that includes July 1, 2010, they include the HST paid on purchased supplies.

When a business files a GST/HST return, they should include in the input tax credit line all GST and HST paid or payable.  Even though some input tax credits of large businesses are subject to recaptured ITC rules (which will not be addressed in this post), they must claim the full amount in the ITC line and NOT undertake an offset calculation.  For the purposes of the example below, I am assuming the business is located in Ontario:

Type of Supply Value of the Supply GST Paid or Payable HST Paid of Payable  Total ITC
real property rent $10,000 $500 $800 $1,300
legal services $20,000 $1000 $1,600 $2,600
telecommunications $500 $25 $40  $65
computers  $10,000  $500 $800  $1,300
energy  $1,000  $50  $80  $130
vehicle  $50,000  $2,500  $4,000  $6,500

While there would be many other entries in a typical business, in the above example, the ITC to be claimed is $11,895.  As previously mentioned, if the business is subject to the recaptured ITC rules, that calculation does not affect the ITCs claim line and is addressed/calculated elsewhere.

A GST/HST registrant has a prescribed period of time (often 4 years) in which to claim input tax credits.

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...

My Latest HST (and Customs Duties) Presentation

Here is a copy of my latest PowerPoint presentation that I delivered on May 25, 2010 entitled "Let's Talk About HST and Customs Duties".  Yes, it is an odd combination of information.  The presentation was delivered in the context of supply chains involving Canada (Ontario in particular).  The focus was on non-income tax compliance.

HST Will Cost Municipalities

The Sudbury Star has posted an article that harmonized sales tax will cost the City of Sudbury $450,000 per year.  This will mean a budget shortfall and potentially higher municipal taxes. 

Under the federal Excise Tax Act (Canada), where a municipality makes exempt supplies (and cannot recover the amounts paid as GST as input tax credits), the municipality may claim a rebate of 100% of the GST.  So, under the GST regime, municipalities are tax neutral.  This will continue for the 5% GST portion of expenditure by municipalities.

However, under the HST, the 8% provincial component in Ontario is not fully recoverable.  There are two scenarios.  First, if the HST paid by the municipality matches with a exempt supply by the municipality, the rebate is 78% of the 8% provincial HST component.  For example, if a municipality paid $100,000 for third party snow removal services, the municipality would pay $5,000 GST (that is fully recoverable) and $8,000 OHST.  Only 82% of the $8,000 is recoverable by the municipality by way of a rebate.  The remaining 22% is an unrecoverable cost to the municipality.

Second, the municipality may be caught by the restricted input tax credit rules if the municipality sells more than $10 million in taxable supplies in a year.  I would expect that the City of Sudbury would fit into this category.  Under the restricted input tax credit rules, the OHST component of purchases of energy, certain telecommunications, certain vehicles and fuel and meals and entertainment are not recoverable for a number of years after implementation of HST.  For example, if the municipality purchases electricity that is allocable to taxable activities (e.g., the municipal skating rink, swimming pools, etc.) and the cost over a year is $1,000,000, the $80,000 in HST is unrecoverable if incurred in after July 1, 2010 to June 30, 2013.

HST also means that consumers will pay more for certain property and services acquired from the City.  The article provides the following examples:

* A one-year adult membership at Howard Armstrong Recreational Centre will jump from $218.25 to $235;

* A three-month child, youth or senior pass to city swimming pool will jump from $59.50 to $64;

* The 25-week Walk Your Way to Wellness Program for seniors will jump from $92 to $99;

* Ice rental for the Walden Oldtimers Hockey Tournament will go from $209 to $260;

* A plot in the city's Veteran's cemetery will go from $954 to $1,027;

* Adult athletic field rates will go from $57.50 per game to $62 per game. The cost of lights, if needed, will go from $17.75 an hour to $19 an hour;

* Renting the chalets at Adanac or Fielding Park for a Saturday night will jump from $174.75 to $188;

* Use of weigh scales at city landfill sites will jump from $16.25 to $17.50.
 

Continue Reading...

This Is The Time To Revisit Your 2010 Budget - HST Changes May Present Opportunities

Whenever the government announces tax reform or a tax auditor plans to conduct an audit, these events that businesses cannot control present an opportunity to revisit past planning.  For example, harmonized sales tax implementation in Ontario and British Columbia on July 1, 2010 and the change in the HST rate in Nova Scotia on July 1, 2010 should encourage proactive businesses to go over their 2010 budget plans.  Some budget items will be affected by the outside changes and, therefore, should be adjusted upwards or downwards so that the business stays within budget.

For example, hospitals, doctors offices, dentists offices, nursing homes/long term care homes, residential rental property businesses, charities, day cares, schools, colleges, universities and other educational institutions, an other businesses engaged in whole or on part in exempt activities will see their costs increase and will not be able to recover 100% of the increased costs.  These are the businesses that will benefit most from the exercise of taking their 2010 Budget, adjusting for new HST costs, recalculating, and then making changes.

In addition, large businesses and large corporate groups (where the business or corporate group makes taxable and zero-rated sales in excess of $10 million per 12 month period) will be subject to the restricted input tax credit rules and, therefore will see certain costs increase by 8% without the corresponding recovery.  Where costs go up, and offsetting change may be required.

These businesses have an opportunity (I know, it does not seem like a positive event)  to review budget plans and make adjustments.  It may be that certain expenses will have to be cut.  it may be that profit margins will have to increase.  It may be that the review of commercial rent (which will be subject to HST after July 1, 2010) will cause a reconsideration of the location of the business and a better location may be identified.  It may be that cost savings opportunities may be identified (e.g.,  subscriptions are a less expensive option if paid before July 1, 2010).   It may be that new technology may be installed to control/reduce energy costs in the long term.  It may be that ORST recovery or GST/HST recovery opportunities will be identified (that the business had been overlooking).  It may be that the investigation will result in a new road map for the business to more profits.

In an unrelated matter last week (which I will use as an example), I assisted a client with a NAFTA verification.  The review of the business operations in preparation of a visit from the United States Customs and Border Protection, the client undertook the analysis of the bill of materials and the costs to produce a product.  That analysis resulted in the client identifying changes in costs due to the appreciation of the Canadian dollar and the squeezing of the profit margin.  As a result of the unwelcome verification, changes were made on the purchase side and sales side of the business.  The result will be a healthier balance sheet at the end of 2010.

Change is not fun.  Change is rarely welcome.  Usually change means more work.  The question is whether the results of the new work will be positive for the business.

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.

Canada Revenue Agency Releases a New WebCast on Completing New Electronic GST/HST Return

The Canada Revenue Agency (CRA) has made available a WebCast about the completion of the new electronic GST/HST return.  While the WebCast will not win an academy award for best short film or best foreign film, it is worth watching (it is longer than I expected).  If you cannot bear watching the WebCast, there is a transcript.

The WebCast gives important information to registrants for GST (and HST) purposes and others who must file GST/HST Returns.  The WebCast includes important information for builders of real property  and other businesses (anyone with sales over $1.5 Million in annual taxable sales (including exports and other zero-rated supplies)) who must file GST/HST Returns electronically starting with their July 2010 GST/HST Return or the GST/HST Return for the reporting period including July 1, 2010.   The July 1, 2010 date is important because Ontario and British Columbia want to have electronic records on how much HST they should be expecting to receive from Ottawa.

When planning to watch the WebCast, please  bring some healthy popcorn to watch the video as part of the video does explain how exactly you are to complete the GST/HST Return on a line by line basis.

At the present time, there are four different electronic filing options, as follows:

  • GST/HST NETFILE
  • GST/HST TELEFILE
  • GST/HST EDI filing and remitting, and
  • Internet File Transfer, and we will review in detail the GST/HST NETFILE option.

For those who have never filed electronically using NETFILE go to www.cra.gc.ca/gsthst-netfile to get signed up. Before you file, you will need your 15 digit Business Number, your Reporting Period dates and your four digit access code.

Watching the WebCast will give businesses who must file in this manner important ideas about how to set up their internal records and reporting systems to enable quick completion of the electronic GST/HST Return.  For example, the manner in which restricted input tax credits are required to be reported would suggest separate internal accounting records (General Ledger) accounts for Ontario, British Columbia, etc.  This would suggest that invoices should clearly indicate the place of the supply (e.g., write on the invoice "The Place of Supply is Ontario and, therefore the applicable GST/HST rate is 13%").  Taking such steps will make it easier for the auditors (and your memories) at the time of an audit.

Based on my discussions with some larger businesses who are being asked to file using the GST/HST NETFILE method, some businesses actually are not able to use the CRA's preferred electronic filing method due to their computer systems.

Another important issue that has arisen is payment.  Non-resident companies like the idea of electronic filing.  However, they do not have a Canadian funds bank account.  To open a Canadian funds bank account, they need to have an extra-provincial registration in a Canadian province of territory for doing business in that jurisdiction.  It is not necessary to have a permanent establishment in the province or territory to open a bank account. However, the CRA looks at the location of bank accounts in its consideration of residency/permanent establishments.  As a result, there is a problem that needs to be resolved to facilitate the quick payment of GST/HST obligations without changing ones characterization for other tax purposes.  I should note that it is not necessary to make payments of GST/HST Returns electronically and the old fashioned method of sending a cheque or wire transfer remains acceptable for now.

Harmonized Sales Tax's Restricted Input Tax Credits Rules Means Not 100% Recovery For All Ontario Businesses

The Ontario government will harmonize the provincial retail sales tax (RST) with the federal goods and services tax (GST) on July 1st, 2010. One of the benefits being discussed in certain circles as a reason to support harmonization is that  Ontario businesses will receive input tax credits (ITCs) and recover harmonized sales tax (HST) and GST paid on business purchases. They say business will essentially be able to recover the 13% paid on business purchases, including the HST component paid on previously non-taxable and exempt purchases for RST purposes.

However, this is not quite correct.  Not all businesses in Ontario will benefit immediately to the tune of 13% ITCs. Specifically, businesses with annual taxable supplies greater than $10 million (including corporate groups and related companies), as well as certain financial institutions, municipalities, charities, universities, colleges and schools, hospitals, nursing homes, etc., will be restricted from claiming ITCs for the provincial portion (currently 8 per cent) of the HST, until 2015.

The restricted ITCs are on a few business inputs, such as certain uses of energy; certain telecommunications services; certain road vehicles and their fuel; and food, beverages and entertainment. The ITCs restrictions will be in place for the first five years of the HST, after which ITCs on the exempt items will be phased out over the following three year period.

Ontario has released an Information Notice on Restricted Input Tax Credits to provide additional information to businesses.