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

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

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

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

Voluntary Disclosures: Get Ahead of the Sales Tax Problem

If you make a voluntary disclosure of a sales tax error (giving rise to a payment), you get ahead of the problem.  You maintain an element of control.  If the Canada Revenue Agency or provincial governmental authorities (whichever is applicable) find the problem during the audit, you may have little control over the outcome.  This is why it is recommended that you make a voluntary disclosure if you find your sales tax mistakes and do not wait for the auditor to "maybe find it".

The Canada Revenue Agency and the Ontario Ministry of Revenue have developed voluntary disclosure programs that promise to not charge a gross negligence penalty (and other forms of penalty) if you voluntarily come forward to report the errors and pay the tax and interest.  In some cases, the authorities will even grant relief on a portion of the interest if the disclosure goes back many years.

For a voluntary disclosure to be accepted, it must be voluntary.  This means that the authorities have not informed the taxpayer of an upcoming audit.  If you were not on their radar and you come forward, there is a potential for financial savings.

But, that is not enough for the disclosure to be accepted.  It must be the first time this problem is identified with the tax authorities.  If you have made this type of error before and were informed about the error, the authorities will not accept the disclosure as voluntary.  They expected you to make the corrections to the sales tax recording and remittance systems after their earlier discussions with you.

Even if this is a first time issue, that is not enough for the disclosure to be accepted.  It must be complete.  You must do the work that an auditor would do.  You cannot hide some of the information or transactions.  For example, I recently worked with a non-resident client to make a voluntary disclosure of Ontario retail sales tax payable on goods imported from outside Canada for own use.  The client made an initial disclosure and payment based on Canada Customs import documentation.  Before we submitted the paperwork, we undertook a second review of the records and realized we have forgotten imports from another province.  We updated the disclosure and paid the additional tax.  We submitted to the authorities a detailed spreadsheet with each of the transactions and the back-up documentation at tabs matching the excel spreadsheet line number.  We made it easy for the government to audit and agree with our calculation.

The auditor assigned to the voluntary disclosure may conduct a desk audit or an on-site audit after the supporting documentation is provided.  If the auditor finds that the disclosure is not complete, he/she will assess the tax that you said was owing, the additional tax he/she found was owing, and then will calculate interest and penalties on the entire amount.

Many mistakes can be the subject of a voluntary disclosure; but, not all mistakes can be the subject of a voluntary disclosure.  If you collected sales tax and did not remit it, you will not be permitted to make a voluntary disclosure.  The government has a serious issue with you keeping their money.

Believe: It is Possible to Stop an Incorrect Assessment

It is better to help the auditor get the right answer (that is, assess the right amount) than to watch the auditor arrive at the wrong answer and then spend months or years fighting to convince someone else to overrule the auditor and lower the assessment.  If you believe that the auditor will make a mistake and do not give the auditor the information he/she needs to make a correct calculation, then the auditor will make a mistake. If you think the auditor does not understand your business and do not explain your business, then the auditor will not understand your business.  If you think the auditor does not understand the law and you do not explain the law to the auditor, then the auditor may make an error in law.

However, if you take a positive approach from the start of the audit to help the auditor make the correct assessment, it is more likely the auditor will make the correct assessment.  If you take time to educate the auditor concerning your business, the auditor is more likely to understand your business.  If you undertake the effort to explain the facts in a simple and organized manner, it is more likely that the auditor will see the facts from you point of view.  If you take the time to know the law, it is more likely that you and the auditor can productively discuss the law.

For example, in a recent case, a client called saying that the auditor had informed the client that she would be coming with a significant assessment in a few days.  After a little positive effort on our client's part, she was informed last week that there would be no assessment.  The client had prevented the incorrect assessment by taking steps to correct misunderstandings.  Merely saying to an auditor that she/he is stupid will not stop the assessment.  The client worked with us to organize the facts, research the law, and come up with valid arguments that the auditor (and her supervisor) could accept.

If the client had not acted quickly to become as prepared as possible, the assessment would have been issued. If the client had not taken a positive attitude and approach to change the outcome, the assessment would have been issued.  If the client had not believed she could stop an incorrect assessment, it would not have happened.

Disproving Audit Assumptions

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

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

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

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

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

Ontario Retail Sales Tax and the Graphic Design Industy

The Association of Registered Graphic Design (Ontario) (ORDG) has monitored Ontario retail sales tax (ORST) developments for its members for number of years.  One of the benefits on membership is access to documentation prepared by ORDG relating to ORST for submission to the Ontario Ministry of Revenue.  Go to ORGD website to see more.

Canada Post Strike Makes Filing Ontario Retail Sales Tax Objections/Appeals Difficult

Subsection 24(3) of the Retail Sales Tax Act (Ontario) (ORSTA) requires that a notice of objection be served on the Minister by sending the notice of objection by registered mail.  Subsection 25(3) of the ORSTA  requires that a notice of appeal be served on the Minister by sending the notice of appeal by registered mail.  However, Canada Post is on strike and is locked out.  An assessed person cannot serve the Minister by registered mail even if they tried.

What should an assessed person do seeing that it is impossible to comply with the ORSTA provisions?  If there is a statutory deadline that must be met during the strike/lockout, the assessed person should send a fax to the auditor or appeals officer informing that Ontario Ministry of Revenue official that they intend to file a notice of objection or appeal.  This step will take away the argument that the Minister did not know the assessed person's intention. 

In that fax, the assessed person should ask for an extension time to serve the Minister by registered mail until after the Canada Post labour disruption has ended.  The assessed person should inform the auditor or appeals officer that he/she will be sending the notice of objection or notice of appeal by courier.   The assessed person should serve the Minister by courier even though that method of service is not technically correct. The assessed person should ask whether additional service by registered mail will be required when the Canada Post labour disruption has ended.  If the auditor or appeals officer says nothing, then the assessed person should send the notice of objection or notice of appeal by registered mail after the Canada Post labour disruption has ended.  If the auditor/appeals officer indicates that the Ministry of Revenue considers the actions taken to be in compliance with the statutory provisions even though the notice was not sent by registered mail, then further action may not be required.

The most important thing is to comply as best you can and document everything. Have paper evidence that you can provide at a later point in time to a Court if necessary.  Take reasonable steps to communicate and comply.  Do not miss the deadline because it will be difficult to distinguish between those assessed persons who forgot about their deadline and those who were impacted by the strike.

I would expect that the Ministry of Revenue will act reasonably - stop laughing!

Ontario Retail Sales Tax Audits

Despite harmonization, Ontario retail sales tax (ORST) continues to be important because auditors are verifying compliance with ORST laws occurred prior to July 1, 2010.  The ORST rate was 8% and the normal audit period is 4 years (but can be longer for sales tax collected and not remitted and any misrepresentation attributable to neglect, carelessness or willful default). As a result ,the assessment period remains open for those who were in the ORST system prior to July 1, 2010 (or should have been in the system).

It is a MUST to resolve as many sales tax issues with the auditor during the audit because it gets REALLY expensive to resolve issues after the audit is finalized AND it takes a REALLY long time. 

First, it is important to know that an assessed taxpayer (including assessed vendors) must pay 100% of the amount assessed or post security for 100% of the amount assessed and then fight to get the money back.

Second, at the present time, if you have to file a notice of objection (an informal appeal), it takes OVER 19 months for the objection to be assigned to an officer.

Third, after the objection gets assigned to an appeals officer, they will do everything in their power to drag the process and cause the taxpayer to spend a lot of money on lawyers.  The Government's strategy is to get the taxpayer to walk away from the collected assessed amount.

Fourth, it regularly takes years for the appeals officer to make a determination and in over 80% of the time, the appeals officer will confirm the assessment stating such things as "I am not a lawyer and do not know the law", I do not know anything about contract law", "If you do not promise to give up your right to an appeal, I will confirm the entire amount", etc.). 

Fifth, the Ministry of the Attorney General's office, which handles formal appeals to the Ontario Superior Court of Justice, does not have lawyers dedicated to Ontario retail sales tax files.  It is not their top priority to move sales tax cases to Court.

In my experience, every attempt is made to extend the length of time the dispute is ongoing because the Government of Ontario has the taxpayers' money.

If you are being audited by the Ministry of Revenue, contact a lawyer to help at the time of the audit.  Otherwise, you will be dealing with the problem of an assessment for a long time.  Please contact Cyndee Todgham Cherniak (416-760-8999) if you require assistance.

Sales Tax Audit Tip - Ask to Include the Auditor's Manager or Senior Manager

First, I should say, DO NOT CALL WOLF. Asking to include to the auditor's manager or the senior manager at a meeting with you (the vendor or taxpayer) and the auditor should be used in limited (but greater than occasional) circumstances. If you ask for a meeting, the general rule is that a meeting must be arranged.

In this blog post, I focus on Ontario retail sales tax. However, the concept also applies to goods and services tax (GST).

I have asked for a meeting with the auditor's manager or senior manager when there is a fundamental disagreement of the applicability to a taxing provision to a client's situation. I have asked for a meeting when the auditor does not appear to understand the facts (often the facts are complex) and I feel that the auditor is going to raise an assessment incorrectly. I ask for a meeting with the auditor's manager when there is a serious personality conflict between my client and the auditor (it has happened) and I feel that the auditor may be biased and intent on punishing my client.

I do not ask to speak to the auditor's manager to intimidate the auditor - it does not work. I do not ask to speak to the auditor's manager regarding little issues. I do not ask to speak to the auditor's manager on the first day of the audit. I do not ask to speak to the auditor's manager when my client is clearly in the wrong.

In Ontario, if a retail sales tax assessment is issued, then the auditor's job is complete and the only recourse a vendor or taxpayer has is to file a notice of objection. It currently takes over 2 years for a notice of objection to be reviewed by the Ontario Ministry of Revenue Tax Appeals Branch. Usually, the tax assessment must be paid within 18 months and interest continues to accrue. For this reason, I feel it is my role to make sure the auditor gets the assessment correct.

If I receive an audit summary (which is a summary of the auditor's findings), which usually precedes the actual assessment, I ask for the reasons for the assessment. When there is a disagreement over the law or an interpretation of the law, an administrative statement or a court decision, I ask to speak to the auditor's manager, who usually has more discretion and more experience. Sometimes I for the auditor to write Tax Advisory for a ruling and that I will help with the facts so that the answer received is more likely to be correct (does not always happen that way).

There is a fine line between being assertive and aggressive, proactive and reactive. That being said, recently, managers have agreed with me (when I have known that i am correct) and some assessments have been reduced (1) Case 1: from over $1 million to close to $0, (2) Case 2: from approximately $500,000 to about $25,000 and (3) Case 3: by over $300,000. These results obviously depended on the particular circumstances of the file.

If you are in the middle of a bad audit, please contact Cyndee Todgham Cherniak at 416-760-8999.

Ontario Has Not Updated Its Precedent Assessment Letter

Ontario businesses (primarily vendors) are being audited for Ontario retail sales tax (ORST) compliance as the ORST program is being wound down.  The auditors move to the Canada Revenue Agency (CRA) in March 2012.

When business is audited they receive an audit summary setting out the auditor's findings and the proposed assessment amount.  As the time of the assessment, they receive (1) an assessment letter and (2) the assessment (often sent separately and sometimes of different days). result The assessment letter continues to state (incorrectly):

"Failure to comply with the above-noted requirements of the Retail Sales Tax Act in the future may in the application of a 25% penalty under section 20(7) and/or 20(4) under the Act."

The Ministry of Revenue have forgotten to tell the auditors that vendors must now comply with the provisions of the Excise Tax Act (Canada) and not the Retail Sales Tax Act (Ontario) (with the exception of insurance companies and buyers of used cars).

If a vendor is audited by the Ontario Ministry of Revenue and receives an assessment, it does not mean that they now (after July 1, 2010)  must charge ORST or remit ORST in respect of own use or pay ORST on purchases of tangible personal property and taxable services.  Vendors are not required to charge 13% HST and 8% ORST as the assessment letters suggest.

Failure to update the assessment letters may lead to confusion and unjust enrichment of Ontario.

Sales Tax Audits and Paranoia

I am often reminded of President Ronald Reagan's famous quote when talking to a person who has received a "nice" letter from the tax authorities informing them about an upcoming sales tax audit of their business - "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'"

The truth is that a sales tax auditor is coming to visit to find non-compliance with sales tax laws and yes, "they really are out to get you".  They may phrase their intentions in the positive.  They may say that they are there to confirm compliance with sales tax laws. However, it is my experience that most young auditors are eager to show their bosses in the tax authorities that they are good at their job, which is finding the mistakes.  The older auditors are jaded and they take the Dr. House approach "everybody lies".  There are some auditors who have industry specific knowledge and a positive approach (I can recall an Ontario retail sales tax auditor who audited a bar owner client 4-5 years back), but they are the special ones.  This category of auditors know that no one is perfect and they deal with the imperfections with dignity and respect.  They show respect for taxpayer fairness (like taxpayers are treated the same) and fair treatment of taxpayers.

Sales tax auditors ask in their nice letter concerning the audit for information to be available for their review when they arrive to conduct the audit.  During the audit they ask questions and ask for more documents to be made available for their review.  I always recommend that a client organize all the requested documents prior to the arrival of the auditor and for the client to have those documents in folders on the table/desk/work area the auditor will use during the audit.  I also recommend that the client undertake their own sample review two weeks before the scheduled audit to find the mistakes before the auditor. This is the equivalent of looking under the bed for monsters.

If I am called in at the time the letter arrives, I ask the same questions that the auditor will ask about the business.  If there is time, I help the client write a customized memo to the auditor about their business, the sales tax laws that are applicable and the tax authority's administrative statements and ruling letters that are applicable. This is the equivalent of becoming comfortable in ones surroundings and knowing how to respond to dangers that may arise.

A business owner should not be paranoid, but should be vigilant.  The business owner can be pro-active.  The business owner can participate in the audit process in a way that reduces the stress and feeling of lack of control.

Categories of Ontario Retail Sales Tax Assessments

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

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

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

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

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

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

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

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

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

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

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

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

B) audit summary: this is not an assessment; 

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

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

Ontario Auditors Should Not Assess Vendor for ORST Paid By Purchaser

Ontario retail sales tax auditors are busy auditing vendors who applied for vendor permit numbers prior to July 1, 2010 (prior to the implementation of HST). The sales side audits sometimes disclose that a vendor failed to charge ORST to a purchaser (often years after the fact).

I cannot count the times a vendor has asked me if the auditor can collect the same Ontario retail sales tax (ORST) from both a vendor and a purchaser.  The answer is "NO".  If a purchaser has been assessed and paid the ORST in connection with a transaction with a vendor, the vendor cannot be assessed the same ORST.  This would be double tax.  This would be the government taking advantage of both parties to the oversight.

Section 20(3) of the Retail Sales Tax Act provides:

"The Minister may assess against every vendor who has failed to collect tax that the vendor is responsible to collect under this Act a penalty equal to the amount of tax that the vendor failed to collect, but, where the Minister has assessed such tax against the purchaser from whom it should have been collected, the Minister shall not assess the vendor." (emphasis added)

I often advise vendors to call their purchasers to see if they have been assessed ORST with respect to their transactions.  If the answer is "yes", the vendor needs to receive information to provide to the auditor --- and quickly. 

I was surprised recently to learn that an auditor was busy auditing a vendor and discovered that it had not charged ORST systematically on goods that the vendor thought was exempt.  The Ministry was auditing the purchasers at the same time.  I provided information to the auditors concerning the overlapping audits as the vendor and purchasers worked out how to deal with their ORST issue.

If you ask the auditor to check to see if they have assessed purchasers, the auditors usually decline (okay, the appropriate word may be "refuse").  That being said, I have met a few nice auditors in my day and, when the transactions involve only a few big relationships, the auditor has (in limited cases) obliged.

This Audit Comes With A Warning

Recently, I was called in to assist a vendor who had a visit from an Ontario retail sales tax ("ORST") auditor on a Tuesday and the auditor indicated that the assessment would be issued on Wednesday.  What was different about this audit was that the issues were complex and it was so very quick. A year ago, this audit would have taken months to complete.  A year ago, the auditor would give the vendor time to review an audit assessment before pushing the "issue assessment" button.  A year ago, the auditor would have allowed the complex issues to be debated and possibly would have requested guidance from tax advisory on the complex issues.  Not this year ....

What was different is that this auditor had arrived with the conclusions already formed.  This meant two things: (1) the auditor was targeting a specific type of business and had seen the issue before, and (2) the auditor was rushing quickly through a list of targets.

What is different is that ORST auditors move to the Canada Revenue Agency in March 2012 and have to complete all remaining audits before they move jobs.  Auditors do not have the luxury of time because the clock is ticking.

Ontario businesses need to prepare for audits and call in specialists earlier - procrastination is no longer an option.  Vendors may not have time to find an ORST specialist and canvass the issues in the period between the auditor's initial visit and the auditor pressing the "issue assessment" button.  Specialists may not be able to run to a vendor's aid on short notice.

Once an assessment is issued, the assessed person must file a notice of objection in order to dispute the amount assessed.  More importantly, the assessed person must pay 100% of the assessment immediately or according to a payment schedule arranged with the Ministry of Revenue.  Even more importantly, it takes over 2 years for an appeals officer to review an ORST notice of assessment and even longer to make a decision.  I have a notice of assessment filed in 2007 that has not been dealt with yet by the Ministry.  If the issues are complex, the assessment may be confirmed at the appeals stage and the assessed person must go to court to get the money back.

ORST audits are different in this final rush to close the books.  Vendors who do not realize that things have changed may be surprised.  Vendors who have not yet been audited, should expect a visit from an auditor.  They should also plan ahead if they want to limit the negative effects of the audit.

What Is The Best Defense to A Purchase Side Audit?

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

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

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

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

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

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

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

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

Voluntary Disclosures Must Be Complete and Accurate

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

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

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

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

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

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

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

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

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".

The Taxman Cometh - Ontario Retail Sales Tax Audits Are On the Increase

I am seeing more Ontario retail sales tax (ORST) audits (and large proposed and actual assessments).  I am seeing rushed audits.  I am seeing quick analysis without the auditor referring questions to Tax Advisory.  The reason is that we are in the final 13 months of ORST auditors working for the Ministry of Revenue before moving to the Canada Revenue Agency.  Almost all ORST auditors will change jobs in Match 2012 and, therefore, all their audits need to be complete and assessments issued.  This is why we are seeing so much activity, because there isn't much time left to visit all vendors who were registered for ORST purposes.

A range of businesses are being targeted - restaurants & bars, graphic designers, interior designers, cabinet makers and other installers, software manufacturers, manufacturers, printers, telecommunications companies, builders, accountants, etc.

If you are assessed, you may wish to file a notice of objection.

Under the Retail Sales Tax Act, the notice of objection must be filed within 180 days of the date of mailing  of the statements of notice of assessment (look at the notice of assessment and/or the envelop).

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?

HST on Energy and Residential Heating Costs

Ontario retail sales tax ("ORST") was not imposed on electricity and residential heating fuels.  ORST was imposed on "tangible personal property", which was defined in the Retail Sales Tax Act (Ontario) (ORSTA) as "personal property that can be seen, weighed, measured, felt or touched, or that is in any way perceptible to the senses, and includes ... natural gas and manufactured gas." 

To the extent that the following forms of residential heating were captured by the definition of "tangible personal property, the ORSTA contained a specific exclusion to ensure they were not subject to ORST:

  • Gasoline (because it was taxed and remains taxed under the Gasoline Tax Act (Ontario);
  • Fuel (because it was taxed and remains taxed under the Fuel Tax Act (Ontario);
  • Fuel oil (because it was taxed and remains taxed under the Fuel Tax Act (Ontario);
  • Coal;
  • Coke (not the soda pop variety);
  • Wood;
  • Natural gas and manufactured gas (as defined by the Minister);
  • natural water (including ice and steam);
  • Electricity of all purposes; and
  • Ethanol or methanol that is sold and purchased as fuel to generate power by internal combustion.

When HST was implemented in Ontario on July 1, 2010, these exemptions disappeared and the list above became subject to HST.  The increase is tax payable by consumers was the 8% PVAT rate.

What some people do not realize is that the fuel tax and gasoline tax, to the extent it applied before July 1, 2010, continues to apply.  In other words, the amount of tax payable increased because the McGuinty Government did not repeal the Fuel Tax Act or the Gasoline Tax Act.

In addition, HST will apply to services provided by an energy supplier and administrative charges, such as:

  • connection or disconnection of a service or equipment,
  • installations, inspection, testing, maintenance or repairs,\relocation or upgrades of a service or equipment,
  • analysis of the use of an energy product;
  • activation or cancellation of an account,
  • late payments,
  • interest,
  • returned or dishonoured payments,
  • method of payment,
  • account adjustments,
  • account information,
  • franchise fees; and
  • Equipment-related charges, including charges relating to equipment purchased or leased by the person acquiring the energy product.

So, if you are wondering what changed - there you have it.  Premier McGuinty had the option on ensuring that you did not pay more on essentials such as electricity and residential heating - he made a choice not to give consumers a break.  Premier McGuinty and Minister Dwight Duncan had (has) the option in the Comprehensive Integrated Tax Cooperation Agreement (the agreement between Ontario and the Government of Canada re harmonization) to select point of sale rebates (meaning the supplier does not have to collect the PVAT portion of the HST).  McGuinty and Duncan decided Ontarians can and will pay HST on electricity and home heating.

Premier Campbell, who is resigning in part because of HST did agree to a form point of sale rebate (called a Residential Energy Credit) for residential electricity and home heating. Energy products qualifying for the Residential Energy Credit are electricity, natural gas, propane, heating oil (including bio diesel or similar renewable fuel), kerosene, heat and steam.

These are the facts folks ... Please do not shoot the messenger ... use this information instead.

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

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

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

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

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

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

If You Think Bankrutcy Is The Solution To HST/GST/ORST Problems, Please Read This

Michael Lewis has written a great article about "What happens in bankruptcy".  It is a helpful article to many, including individuals who get themselves into trouble with the Canada Revenue Agency and/or the Ministry of Revenue (Ontario).

Recently, I have received a number of calls from individuals with GST/HST or ORST liabilities from a past assessment.  Each story is different.  Some people can work out payment arrangements with the collections authorities and we help them negotiate a workable arrangement.  Some people have been incorrectly assessed or the collections authorities have taken steps that are not authorized by the law - we help them using legal avenues that are available.  Some people are just not able to pay their debt and we discuss filing for bankruptcy. 

 

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).

How Much is That Doggie in the Window?

A pet (dog or cat or other) will cost more because he veterinarian bills are subject to HST.  Prior to HST, you would have paid Ontario retail sales tax (PST) to the pet store when you purchased your pet and you would have paid PST on the food and toys.  However, prior to July 1, 2010, you would not have paid PST on the vet exams and tests.  Now, you will pay HST on virtually every charge by the vet.

On December 28, 2010, I took my dog to the vet as she had bloody sores on her back and was in pain. She cried most of the night and could not get comfortable.

The vet charged me $77.00 (plus HST) for the examination and made decisions to run tests.  The hospital cytology cost $66.00 plus HST, the skin scraping (which is actually gathering a little skin to analyze) cost $51.50 plus HST and the culture and sensitivity aerobic (which is testing the goopy matter for the type of infection so that the correct antibiotics are prescribed) cost $129.50 plus HST.

After the analysis, antibiotics were prescribed at $64.60 plus HST (the same antibiotics are not subject to HST when prescribed to a human), a medicated topical spray to calm skin cost $50.46 plus HST (again a similar treatment would be exempt if prescribed to a human patient).  I also purchased some skin sensitivity dog food that was subject to HST.

My poor dog was still very uncomfortable, so I took her back to the vet for a medicated bath (and that really helped).  The medicated bath was $65.00 plus HST.  The vet also prescribed another medicine to be added with food or to be injected in my dogs mouth with a syringe (without needle tip).  This cost another $49,32 plus HST.

I still need to purchase a three month supply of Invermectin to solve the real issue - demodex (the second incidence in the last two years and my dog is 10 years old).

In addition, I still need to take my dog for her annual physical in 2011, pay for her annual shots and her heart worm medication.  I also will take her for her semi-regular groomings and nail clippings.  I buy rawhide bones for her weekly teeth cleaning.  I should not forget to mention that I will continue to buy her dog food and pay HST.

All totaled, I will pay over $250 in HST in the first year of HST on my dog.

While I can make sacrifices to pay the HST, some cannot and should consider the ongoing costs of pets, including HST, when making purchasing decisions.  If I had to choose between relieving my dogs pain and treating her infection or not, it would be a hard decision.  my vet tells me that many pet owners since July 1, 2010 could not afford treatment for their pets and either the pet suffered or was euthanized.

New ORST Auditors Are Making Big Mistakes - What Can You Do?

Ontario has hired a significant number of new auditors to complete Ontario retail sales tax (ORST) audits before the March 2012 deadline when the Ministry of Revenue staff join the Canada Revenue Agency.  What I am seeing is inexperienced auditors who do not know the law issuing large assessments to Ontario vendors and walking away saying that they can file a notice of objection if the vendor disagrees.  The audits are being rushed and the new auditors have not allocated themselves enough time to complete the task correctly.

What this means is that assessed vendors must file a notice of objection and pay the full amount of the assessed ORST while they wait for a Ministry of Revenue appeals officer to review the objection (and it takes more than two years for the appeals officer to pick up an appeal). I have an objection that I filed in 2007 that has not been moved forward by the Appeals Branch.

What can vendors do?  My best recommendation is to be very prepared for any audit.  As soon as you receive the letter or call that an ORST audit is to occur, organize all the relevant documents.  Conduct test audit to determine if you have any problems. Find your own mistakes --- in other words, do the auditors job before the auditor. Know what the assessment should be before the auditor does.

If you have a disagreement with the auditor over the application of the law or his/her interpretation of the facts, call in an expert ASAP.  Many vendors wait until after the problems have developed too far to call in an expert.  If the time clock is running out on the audit, it becomes more difficult to set up a meeting with a supervisor or request that the auditor seek a tax advisory opinion.

Many vendors want to save money and ask a book-keeper or accountant without sales tax expertise to help them during the audit and in preparing notices of objection.  Please remember that it may cost more if you are assessed and have to pay the full amount while waiting for an objection to be considered.  Once the Ministry of Revenue has your money, they will not want to give it back and will be incentivised to delay.

Ensuring that the assessment is correct when it is issued is the best strategy to adopt.  That being said, when you are audited by an inexperienced auditor for the government, it is easier said than done.

A Vendor for ORST Purposes May Judicially Review Collections Action of Minister

A client came to me after the Ontario Minister of Revenue issued a writ of seizure and sale pursuant to paragraph 37(1)(b) of the Retail Sales Tax Act (Ontario).  The writ of seizure and sale instructed the sheriff to seize my client's assets and sell them to satisfy an alleged retail sales tax debt.  The alleged debt allegedly arose thirteen years prior to the issuance of the writ.  I am using the word "alleged" because there is a disagreement over whether an assessment was ever issued against the person against whom the writ was issued.

On May 13, 2010, the Divisional Court of the Ontario Superior Court quashed the writ.  We had filed  judicial review of the Minister of Revenue's decision to issue the writ of seizure and sale.  In other words, after the decision, there was no writ permitting the sheriff to seize and sell assets.

In Carter v. The Minister of Revenue, the Divisional Court held that pursuant to Rules 67.07(2) and 67.07.1(1) of the Rules of Civil Procedure,  "the Minister was required to obtain leave to issue the warrant in question, some thirteen years after the alleged assessment became final and binding."  On August 30, 2010, the Ontario Court of Appeal agreed when deciding a motion by the Minister for an extension of time to seek leave to appeal the Divisional Court decision.  The Court of Appeal stated:

I believe the Minister overstates its case by arguing that the Divisional Court is placing a de facto limitation period on tax collection.  The court' decision simply holds that the Minister requires leave to use one of its remedies - the warrant - where it waits six years to do so.

This is an important decision because the economy and the shifting of Ministry personnel to the Canada Revenue Agency (due to HST implementation) has caused the Ministry to look at old assessments that have not yet been collected.  The morale of the story is that if the Minister of Revenue issues a writ of seizure and sale (also called a warrant) and the alleged debt is more than six years old (based on the date on the assessment), the Minister must seek leave from the Superior Court of Justice before issuing the writ. The Minister would have to notify the alleged tax debtor and the alleged tax debtor would have the opportunity to dispute the facts and law raised by the Minister.  This means that it is possible that the writ would not be issued and the alleged tax debtor would not have to face the potential of having assets seized and sold and then fighting the government to receive damages (if the actions were in error).

I should add a reality check for persons who are at the receiving end of the Minister of Revenue's collection actions - the cost of pursuing a judicial review is expensive.  While I cannot give exact details, I can say that a judicial review to the Divisional Court can result in legal fees in the range of $50,000 - $100,000.  I can tell you that the lawyers who act for the Minister of Revenue may take legal steps that will cause the legal fees of the applicant in a judicial review to increase.  I can tell you that the costs awarded by the court may be a small fraction of the legal fees incurred by a successful applicant.  However, I can also tell you that if enough money is at stake and the case has merit (e.g., the Minister did not seek leave to issue a writ or the writ is issued against the wrong person or for an incorrect amount), a judicial review might be worthwhile.

Motion Denied - Justice Was Not Delayed

On August 30, 2010, the Ontario Court of Appeal denied a motion brought by the Minister of Revenue for an extension of time to file an appeal in respect of a judicial review of a retail sales tax writ that was quashed by the Ontario Divisional Court.  A copy of the decision in The Minister of Revenue v. Robert Carter is available in The HST Library.

This is an important case. Robert Carter brought a judicial review (in Robert Carter v. Minister of Revenue) of writ issued by the Minister pursuant to paragraph 37(1)(b) of the Retail Sales Tax Act (Ontario). The Ontario Divisional Court quashed the writ on the basis that the Minister did not follow the process set out in Rules 60.07(2) and 60.07.1(1) of the Rules of Civil Procedure, which required the Minister to seek leave of the Court to issue the writ (due to the fact the alleged assessments were issued thirteen years earlier).  This Minister did not file leave to appeal within the 30 day time limit.  The Minister brought a motion to the Ontario Court of Appeal seeking an extension of time to file leave to appeal.  Mr. Carter opposed the motion on two grounds:

(i) the Minister did not meet the test for an extension of time; and

(ii) the Minister had not paid Mr. Carter the cost previously awarded by the Divisional Court.

The Court of Appeal agreed with Mr. Carter.

The overarching principle that is applied by the Court in such cases is "whether the 'justice of the case' required that an extension be given".  The Court of Appeal has consistently applied four factors in exercising its discretion:

1)  Whether the Appellant formed an intention to appeal within the relevant period;

2) The length of the delay and the explanation for the delay;

3) Any prejudice to the respondent; and

4) The merits of the appeal.

The Court of Appeal ultimately decided these questions in favour of Robert Carter, the respondent.  The Court was satisfied that Mr. carter demonstrated prejudice and the Minister did not show that he has a meritorious appeal.

There are many quotable statements in the decision:

  • The Ministry of Revenue wields considerable power and discretion that can affect the lives of residents in Ontario in profound ways. Insofar as the Ministry's bureaucracy is unable to comply with the Rules of Civil Procedure in doing so, it seems to me that the answer to this problem is for the Ministry to review its internal decision making processes, not for this Court to make accommodations for the Ministry that are not available to other litigants.
  • Aside from indemnifying the winning party, costs are also used as a tool to encourage settlement, deter frivolous actions and defences, and discourage unnecessary steps in the litigation process. And, because they offset some of the outlays incurred by the winner, they make litigation more accessible to litigants who seek to vindicate a legally sound position.
  • Certiori is a broad and flexible remedy. Generally speaking, it is available in most situations where a government decision has an effect on an individual's rights or legitimate expectations.  On its face, s. 37(1)(b) gives the Minister  degree of discretion in the choice of enforcement measures.  This choice will have a serious effect of the rights and obligations of individuals subject to an assessment.  I am not persuaded that this exercise of executive discretion is sheltered from judicial review simply because it can be described as routine.
  • I believe the Minister overstates its case by arguing that the Divisional Court is placing a de facto limitation period on tax collection.  The court' decision simply holds that the Minister requires leave to use one of its remedies - the warrant - where it waits six years to do so.

I will comment further on some of these points in other postings on this blog.

I must admit that I am pleased with this result for my client. I will keep readers posted on whether the Minister files an appeal to the Supreme Court of Canada.

 

 

 

New Guidance for ORST Purchase Exemption Certificates for Insurance

In August 2010, the Ontario Ministry of Revenue issued Tax Tip #19 "Purchase Exemption Certificates" directed at resellers of taxable insurance (insurance premiums).  The Ministry wrote:

This information will help purchasers understand when a valid Purchase Exemption Certificate (PEC) may be used.

Claiming RST Exemptions

Retail Sales Tax (RST) will continue to apply to premiums paid under a contract of insurance or benefits plan after June 30, 2010. Some purchasers may be entitled to an exemption from RST. To claim the exemption, the purchaser is required to provide the seller with a valid PEC.

Examples where a PEC may be used by the purchaser to acquire insurance products exempt from RST include:

- Contract of insurance on agricultural products, structures, equipment, livestock and recreational equipment purchased by a person actively engaged in the business of farming

- Cargo insurance for the portion where the risk is not in Ontario

- Contracts of insurance in respect of an aircraft where the purchaser of the aircraft is exempt from RST

- Contracts of Insurance entered into by Indian Bands or Band Councils.

Information Required on a PEC

A valid PEC must show:

- Name of person or name of business•

- Address•

- Name of authorized person•

- Vendor permit number, if it applies•

- Reason exemption is being claimed•

- Date the PEC is issued•

This information is useful to the small handful of persons still caught in the Ontario retail sales tax regime (where a life of input tax credits and a single sales tax did not start on July 1, 2010).  what is missing is the useful guidance on who need to know this information --- this Ministry should of started with "For Whom it May Concerns - you know who you are - don't ask us to send you this Tip, we hope you find it on your own". 

Please let me help by identifying the class of persons who might benefit from this notice - it is buyers of taxable insurance (under the Retail Sales Tax Act (Ontario) who are not the final user or consumer.  It is relevant for those persons who resell the insurance such that another purchaser is downstream.  The purchase exemption certificate allows the middleman to not have to pay ORST and apply for a refund to get it back.

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

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

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

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

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

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

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

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

Ontario has a very short list including the following:

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

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

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

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

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

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

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

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

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Are You Ready? July 23, 2010 is the Day of Your Last Regular ORST Return

On July 23, 2010 - TOMORROW - Is the day the last regular Ontario retail sales tax (RST) returns are due.  Are you a vendor?  Have you added up all the RST you collected in the period before July 1, 2010?  Is your RST return ready to be filed?  Have you written that last RST cheque?  How are you going to celebrate?

Vendors must file their final RST return for reporting periods ending on or after June 30, 2010.  The final RST return should be filed with the Ministry of Revenue on or before July 23, 2010.  Some vendors may be required to file a supplemental RST return on or before the 23rd day of the following month. The final supplemental RST returns are to be filed by November 23, 2010.

Harmonized Sales Tax - Tax Tip 13 (June 2010) "Prepare for Ontario's HST: Final, Supplemental and Amended Retail Sales Tax Returns" provides more information on what you should do.

Many Government Purchasing Departments Are Reopening Contracts and Seeking Price Reductions

This past week, I have seen a dozen or so requests made by municipal and Ontario government departments writing to their suppliers and seeking price reductions relating to existing contracts on the basis that savings related to embedded Ontario retail sales tax (ORST) must be passed on to the buyer (government department).  Most of the requests that I have seen suggest that the basis for the request is contained in the harmonized sales tax (HST) laws.

The truth is that the HST laws do not require that suppliers reopen contacts for renegotiation and pass on any savings to the purchasing government department.  The question is whether there is a provision in the contract that requires that any savings relating to tax reform be passed on to the purchasing government department.  So far, I have not seen any contract containing such a provision --- but, some may exist.

The practical reality is that if a supplier to a government purchaser does not make adjustments or open the kimono so to speak and engage in a discussion), then the government purchasing department may not renew a contract or may treat the supplier negatively in the future in a procurement situation.  As a result, even though the contract does not require price adjustments, suppliers may choose to make adjustments in order to keep the customer happy.

I will give you an example that may seem odd to a sales tax lawyer/accountant without full facts.  In one matter, a client provided a photocopier and toner to the government purchaser.  The cost of the photocopier was already a sunk cost.  However, the purchasing government department said they expected a price reduction because the supplier bought toner and the ORST cost of the toner was within the contract pricing.  As a result of HST, the supplier would no longer pay ORST on the toner and would recover the HST on the toner by way of an input tax credit.  The government department wanted a price adjustment to remove the ORST on the toner that would have been considered by the supplier in its initial pricing under the contract. The small price adjustment made sense to keep the purchasing manager happy.

With three of the matters I reviewed this week, due to the nature of the contract, there was no ORST savings to pass on to the government department.  That being said, the purchasing manager needed to be convinced and the client needed to provide detailed information about its pricing in order to prove to the purchasing manager that this was the case.  The dilemma was that in proving that there was no ORST cost embedded in the pricing, the government department needed to be provided with information that could be used in the future to negotiate price reductions.  in other words, the supplier needed to show too much of its internal information and supplier information.

Two clients priced their contract years ago so that some aspects of the contract were loss leaders and some aspects of the contract resulted in a profit.  The contracts as a whole resulted in a profit to the supplier.  In this exercise, the purchasing government department attempted to reduce the profit margins on the profitable aspects of the contract in order to achieve overall savings (to the detriment of the suppliers' bottom lines).

In all cases, the purchasing manager made it clear that he/she expected price adjustments and would communicate internally if no price adjustments were made.  Pressure was exerted and suppliers to the government were discouraged from maintaining the status quo and not "throwing the government a bone".

One reason for the pressure on the government side is that the Ontario government will start to pay HST on goods and services that were not subject to GST and/or ORST in the past.  Municipal governments do not receive all of the Ontario HST component back by way of a rebate (previously and under HST, 100% of the GST payable was refundable).

I would be pleased to discuss these issue that I am seeing with anyone in this situation.

On June 30, 2010 The Ontario Ministry of Revenue Cancels Ontario Retail Sales Vendor Permits

On June 30, 2010, the Ontario Ministry of Revenue released Tax Tip #15 "Vendor Permits" and informed all persons with vendor permits (registrations for Ontario retail sales tax purposes) that their vendor permits were being canceled on June 30, 2010.

The Ministry of Revenue states:

"On June 30, 2010, all current RST vendor accounts will be closed by the Ontario Ministry of Revenue. Vendors should not destroy their permits which should be kept along with other business records as required. For details on how long records should be kept see tax information bulletin Retention/Destruction of Books and Records on [the Ministry] website."

However, certain insurance providers are still in the retail sales tax system.  The Ministry indicates that they must re-register:

On July 1, 2010 all businesses primarily engaged in insurance activities will be automatically re-registered and a new vendor permit number will be issued. Tax return filing frequencies that are currently in place for RST returns will be maintained after June 30, 2010.

A door is closing and a new one is opening - HST.  This is a logistical step in the transition.

New Canada Revenue Agency Guides Help With New Housing Rebate Calculations

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

Tomorrow is June 30, 2010, the last day before the sales tax world in Ontario and British Columbia changes.  Today you should ask yourself, CAN I MAKE A PURCHASE AND SAVE HST.

Consumers will be thinking about saving HST. The question that needs to be asked is what is not subject to Ontario retail sales tax, but will be subject to HST.  I cannot provide an all-inclusive list.  However, here are a few suggestions on what you might buy today:

  • land survey (I am doing this today believe it or not)
  • landscaping services
  • house cleaning services
  • painting services
  • if you sign an agreement of purchase and sale of a previously lived-in home, you may save the real estate commission
  • if you take possession and title of a newly built home before July 1, 2010, you save the HST
  • hair dressing/colouring services
  • manicure/pedicure
  • massage
  • dry cleaning
  • taking Rover to the vet
  • visiting the dentist for teeth whitening (not on my list - sorry Dr Jay)
  • ask a lawyer to draft a will or a pre-nuptial agreement
  • buy a domain name (is your name taken yet?)
  • fill up your home heating fuel tank
  • propane for the summer barbeque
  • clean the swimming pool
  • one last pre-HST Botox injection
  • one last work-out at the gym
  • energy-efficient home appliances are exempt from ORST
  • bicycles are exempt from ORST
  • custom computer software is exempt from ORST
  • subscription to Cosmo, Oprah, Mike Holmes or any magazine that interests you
  • notice in the newspaper about a garage sale, birth notice, death notice, in memoriam, etc.
  • ticket to see a play in a small local theater
  • ticket to a dinner theater
  • pre-paid funeral expenses/deposit on final resting place

What is on your list?

I will be writing another post tomorrow on the purchases that businesses have been waiting to make in order to save the unrecoverable ORST and recover HST by way of input tax credit.

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

One risk-management step that is often over-looked in a time of sales tax reform is selecting "The Chosen One" in accounts payable who is tasked with reviewing all incoming invoices to ensure that suppliers are properly charging sales taxes. 

When auditors arrive with their spreadsheets in hand, they conduct a (1) purchase side audit and (2) a sales side audit. During the purchase side audit, the auditor reviews a sample of incoming invoices to ensure that the business under audit has paid the right amount of sales tax on its business inputs.  Where a supplier to the business does not charge retail sales tax (ORST) or goods and services tax (GST), the auditor will assess the purchaser business - as it is allowed to do under the law.

Businesses can control this assessment risk by assigning the task of reviewing incoming invoices to a trained person - "The Chosen One".  This accounts payable employee will review each incoming invoice and either seek corrections from the supplier or make arrangements to self-assess the tax that is applicable, but not charged.

With the start of harmonized sales tax (HST) in the provinces of Ontario and British Columbia, this is a perfect time to ensure that someone is actively reviewing incoming invoices.  First, you will want to make sure that suppliers are no longer charging ORST on invoices for goods and services provided after June 30, 2010.  If a supplier still shows ORST or PST (provincial sales tax) or RST (retail sales tax) as being charged on the invoice, you will want to follow-up and ask for a revised invoice.  It must be clear that ORST/PST/RST is not being charged.  It may be that HST is being charged, but it must be clear so that an auditor is not confused.

On that point, HST is supposed to be a single combined tax.  The vendor is not supposed to separate the charges into GST and HST on the invoice (except where the supplies are subject to the recaptured ITC rules).  As a result, in Ontario, the invoice should identify 13% HST and no 5% GST and 8% HST separately.

In addition, "The Chosen One" should review incoming invoices to ensure that HST is being charged where applicable.  As a result , you will need to determine when you must pay HST (not just when you must charge HST).  You will have to understand the HST place of supply rules as they apply to purchases.

Businesses outside the HST Zone will also have to have "The Chosen One" selected and briefed on the HST place of supply rules.  You should expect to see some invoices arriving from the HST Zone that will automatically charge HST at the applicable provincial rate of the supplier because that will be the safe default position.  Communication will be important after the implementation of HST to correct these types of errors.  When in doubt regarding the application of HST, the purchaser may obtain an advance ruling from the GST/HST Directorate of the Canada Border Services Agency.

Finally, non-residents of Canada that purchase goods/property and/or services from Canadian businesses also need to have "The Chosen One".  Many Canadian businesses have adjusted their billing systems with the implementation of HST.  There will be situations where previously zero-rated supplies (GST charged at 0%) will default in the computer systems to 12%, 13% or 15% HST depending on the location of the supplier.  A quick call to the supplier to notify them of the change would be in order so that the computer errors can be corrected.

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

Today is June 28, 2010 and there are only three more days left in pre-HST Ontario/BC.  Those in the service industry (where files are maintained for clients) should bill for services rendered before July 1, 2010.  Services rendered before July 1, 2010 are not subject to harmonized sales tax ("HST").  In addition, many services are not subject to Ontario retail sales tax ("ORST") - only "taxable services" as defined in the Retail Sales Tax Act (Ontario) are subject to ORST in Ontario.

I offer this advice to help not confuse an auditor - close any dormant files on Monday-Wednesday  (June 28-30, 2010) (pre-HST period).  Send those files to records (and you will not have to pay HST on the service fee of the moving company if the service is performed before July 1).  Hire a temporary worker to provide assistance in the pre-HST period and save the HST.  Both GST and HST are payable of the services provided by temporary employees services.  If your employee (that is, he or she is on your payroll and is not a third party service provider or employed by a third party service provider) provides the assistance in closing the files in the computerized system and putting the files in boxes, then his/her employment related services are not subject to wither GST/HST.

You will both clean your office and save the HST at the same time.  More importantly, you will have documentation to show that the files were closed prior to HST.  You will have additional proof to give an auditor that you took steps to make a clear division for the purposes of the application of the HST transition rules. The easier you make it for the auditor, the easier you make it for yourself.

In addition, if that client comes back and needs more work performed by you post-HST, you can open a new file, gather the new information for your HST decision tree and start fresh (and start charging HST where applicable).

The Toronto Post-G20 Clean Up and HST

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

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

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

Tip on Pre-HST Billings

Many service providers (such as lawyers, accountants, marketing gurus, consultants, advisors, custom computer  software programmers, certain graphic designers, etc.) do not currently charge Ontario retail sales tax (ORST) on their services.  Starting on July 1, 2010, these service providers must charge harmonized sales tax (HST).

The HST transition rules provide that if services are commenced prior to July 1, 2010 and continue after July 1, 2010, the supplier will be required to allocate between the pre-HST period and post-HST period and not charge HST on the pre-HST period and charge HST on the post-HST period. An allocation is required (except if 90% or more of the services are provided prior to July 1, 2010).

Suppliers need to maintain evidence to provide to Canada Revenue Agency auditors.  While it is incorrect to say that all auditors are difficult idiots, I often tell clients to assume that such an auditor will show up on their doorstep in the future to conduct an audit.  What evidence and documentation are you going to have to prove your point to the auditor?  With respect to not charging HST on pre-July 1, 2010 supplies of services, what evidence are you going to be able to present?

Good documentation will include docket entries, time sheets, employee punch cards, etc.  What will also be helpful are invoices issued in June 2010 billing the client for pre-July 1, 2010 services that have been performed.  I often refer to this as "blowing out your WIP (work in progress).  If you issue a bill and it is recorded in your computer system prior to July 1, 2010, it must be that the the services recorded as being provided before July 1, 2010 were actually provided. Note that if you are billing in May/June 2010 for services to be rendered on or after July 1, 2010, HST will be applicable.

I have one caveat that I have to highlight - you need to ask whether it is likely your client will pay the invoice. If a supplier issues an invoice prior to July 1, 2010 and must charge GST (that is, the supply is not zero-rated or exempt), the supplier will be required to remit the GST to the Receiver General of Canada with the GST/HST return for the reporting period in which the invoice is issued (e.g., June 2010).  If the recipient does not pay the GST by the GST/HST return filing deadline, the supplier still must remit the GST.  As a result, there can be a cash flow issue.

If a supplier cannot issue an invoice, we are recommending a "WIP freeze".  This means that the supplier would generate a document that would evidence the pre-July 1, 2010 work in progress.  Depending on the circumstances, the document may evidence the number of hours worked and/or the value of the services rendered prior to July 1, 2010.  The document will need to be supported by some verifiable data (e.g. a date stamped printout of computerized records). The method must be able to withstand scrutiny and be reasonable in the circumstances.  What is communicated (and the words used) may be important as auditors assessment radar is often triggered by the words taxpayers use.

I would be pleased to provide services to help you generate evidence of the provision of pre-HST services.

I should also mention that it is better to do generate the evidence now as an employee may not be available at the time the auditor arrives. In other words, it is sometimes difficult to substantiate facts at a later point in time.

McGuinty Government Using Its Own Silly ORST Rules to Justify HST

On June 4, 2010, the Ontario Ministry of Revenue published a notice for taxpayers telling of the silly Ontario retail sales tax results that Minister Duncan/Premier McGuinty would not fix in the past.  The June 4th document is being used by the Ontario government as a justification for the harmonized sales tax.  I find that very funny.  As a sales tax lawyer, I know about the absurd positions taken by auditors.  I sometimes want to shout at auditors to use their discretion reasonably. I sometimes want to say more.  Anyway, here is the list of absurd results under the Ontario retail sales tax regime that were not fixed in the past that are the given as the Ontario government's justification for HST (start laughing now):

  • A restaurant could claim an exemption on after dinner mints served at the table, but not left by the cash register.
  • A business that supplies security systems could claim an exemption on surveillance cameras, but not on the brackets that hold the cameras.
  • A business could claim an exemption on a forklift used in the production line but not in the warehouse.
  • A business could claim an exemption on a computer used in manufacturing, but not for payroll.
  • Universities could claim an exemption on equipment used for research, but not in the classroom.
  • Hospitals could claim an exemption on toilet paper used in a patient's washroom, but not a public washroom.

 The list is actually longer and I have seen very strange decisions by auditors. Do you have examples to share?

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

Graphic Designers have experienced Ontario retail sales tax issues for the last 4-5 years as auditors have taken the position that their services are actually "taxable services".  As a result of the confusion, the Association of Registered Graphic Designers (Ontario) consulted with the Ontario Ministry of Finance and prepared materials for members.  A number of charts/continuums were prepared by the Association to provide to the Ontario Ministry of Finance to demonstrate that there are many different types of graphic design services.  The Association's tools set out information for 8 categories of graphic designers (categories for the purposes of communication with Ontario):

  • exhibit graphic design
  • environmental/architecture graphic design
  • editorial graphic design
  • identity graphic design/branding
  • web design/new media
  • package graphic design
  • advertising graphic design
  • corporate communication/promotional material graphic design

After the creation of these documents, the Ontario Ministry of Revenue released RST Guide 520 "Graphic Designers", in which Ontario recognized and provided guidance regarding the Ontario retail sales tax consequences for various categories of graphic design services.

British Columbia issued SST Bulletin 128 for graphic designers in British Columbia (before the Ontario Guide).

With harmonized sales tax (HST), graphic designers will continue to have serious characterization issues.  The HST place of supply rules are based upon (divided into categories) based on the characterization of the supply.  FOR HST PURPOSES, THERE ARE MANY DIFFERENT PLACE OF SUPPLY RULES THAT MAY APPLY FOR GRAPHIC DESIGNERS BASED ON WHAT TYPE OF GRAPHIC DESIGNER SERVICES/DELIVERABLES THEY PROVIDE.

Some graphic designers would apply the general HST place of supply rules for services.  Some graphic designers would apply the HST place of supply rules for services in respect of real property.  Some graphic designers would apply the HST place of supply rules for services in respect of tangible personal property. Some graphic designers would apply the HST place of supply rules for services in respect of photographic -related goods.  Some graphic designers would apply the HST place of supply rules for computer-related services.  Some graphic designers would apply the HST place of supply rules for intangible property. Some graphic designers would apply the HST place of supply rules for intangible property in respect of real property. Some graphic designers would apply the HST place of supply rules for intangible property in respect of tangible personal property. Some graphic designers may apply a combination of HST place of supply rules.

Any graphic designer in Ontario who does not charge the 13% HST rate in Ontario will have to justify not charging the 8% HST portion.  The same holds true for graphic designers in British Columbia if they do not charge the 7% HST portion.  Yes, both graphic designers in Ontario and British Colombia may compete with U.S.-based graphic designers who are not charging HST. That is another issue altogether. 

Graphic designers who sell only to businesses/clients/consumers in their province will not have place of supply issues as they will charge their provincial are on all invoices.  The graphic designers who have businesses/clients/consumers in more than one province will have to characterize their services/deliverables and apply the correct place of supply rule.  I would be pleased to help.

Gift Certificates and Gift Cards and GST/HST

Yesterday, I was asked a question about gift certificates.  A vendor is selling gift certificates in June for use in June 2010 or on or after July 1, 2010.  The question is what happens for GST/HST/ORST purposes when one sells the gift certificate and when one redeems the gift certificate for goods/services.

Before I go too far, it is important to pin-point what I mean when I say "gift certificates" (or rather what the Canada Revenue Agency (CRA) thinks is a gift certificate).  In CRA Policy Statement P-202 "Gift Certificates", the CRA states:

A gift certificate is a "device" (e.g. voucher, receipt, ticket) which,

1) has a stated monetary value,

2) can be redeemed on the purchase of property or a service from a particular supplier; that is, the supplier agrees to accept the device as consideration, or a part hereof, in respect of the purchase of property or a service,

3) for which consideration is given in the amount of the stated value, and

4) which has no intrinsic value.

The determination of whether property, which otherwise would qualify as a gift certificate, has an intrinsic value will require a certain degree of judgment on the part of departmental officials applying this policy. Generally, the value inherent in the property will be evident from the circumstances surrounding its sale. If the purchase of the property is promoted as something more than a device which may be used as a partial payment towards a future purchase, the possibility that the property has value in itself, should be examined.

Pursuant to section 181.2 of the Excise Tax Act (Canada) (the "GST/HST Legislation), the issuance or sale of a gift certificate for consideration (e.g., money) shall be deemed not to be a supply and, when given as consideration for a supply of property or a service, the gift certificate shall be deemed to be money. 

This means that when a vendor sells or issues a gift certificate, no GST or HST is payable because the GST/HST Legislation says no supply has occurred.  If there is no supply, there is no event that results in the application of GST/HST. 

HOWEVER, when a person uses that gift certificate to purchase goods and/or services, the gift certificate is money. The redemption of the gift card for goods or services is a supply for GST/HST purposes.  If the supply (e.g., a DVD) is a taxable supply and, therefore GST/HST is collectible, then the gift certificate should be used to pay the purchase price plus GST/HST.  In other words, a the time of the supply that is a purchase of goods and/or services is the moment when the vendor needs to ask about GST/HST consequences and charge the correct amount of GST/HST/

This is important because I also saw a flyer yesterday for the sale of gift cards in June 2010 to save HST.  This flyer was wrong in the context of what was being sold and when. A vendor would collect (let's say $100 in cash) for a $100 gift certificate in June 2010.  When the consumer redeems the gift card for services (or property), the vendor will determine whether to charge GST and/or HST on what is purchased.  If the gift card is redeemed in June 2010, then the vendor would collect GST (and possibly ORST) in respect of the purchase if the supply is in Ontario.  If the gift card is redeemed on or after July 1, 2010, then the vendor would collect GST and HST if the supply in in an HST province.

For example, if the gift card is for a spa treatment (e.g., a manicure), if the services take place in June 2010, the vendor would charge for the manicure ($20) and charge GST ($1).  If the gift card was for $25, the vendor would apply $21 against the gift card and the person could keep the $4 credit for the next visit or could take the cash.

If the manicure takes place in July 2010, then the vendor would charge $20 for the manicure, $1 GST and $1.60 HST (assuming the manicure services were provided to an individual in Ontario).  In July 2010, the vendor would apply the $22.60 against the gift card and the individual would have $2.40 remaining.

Even though there isn't a similar explicit rule for Ontario retail sales tax purposes, Ontario has the following statement on an official web-site:

Consumer Alert – Gift Cards - Retailers Charging Sales Taxes

Retailers must not charge consumers provincial Retail Sales Tax (RST) and/or federal Goods and Services Tax (GST) when buying gift cards.

The Ministry of Consumer Services advises consumers to check their gift card receipts to ensure they are not charged sales taxes when buying gift cards.

Sales taxes should only be applied on goods or services when purchased using the gift card as the payment option.

Based on this official statement, it appears that the position of the province of Ontario is that Ontario retail sales tax is not collectible at the time of a sale or issuance of a gift certificate/gift card.

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

Yesterday, I was speaking with a friend who manufactures custom designed jewelry for customers/clients.  She is in the process of updating her computer system to charge the appropriate amount of Canadian sales taxes (as at July 1, 2010).  The applicable rates in Canada (as at July 1, 2010) are:

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

It is important to note that the tax rates can change (often in the Spring at the time budgets are tabled).

If a supplier is registered for GST purposes, they will have to charge (1) GST in respect  of taxable sales in Canada and (2) HST at the applicable HST rate if the HST place of supply rules deem a supply to be made in a participating province.

The rules may be different on when a vendor must register for provincial sales tax purposes and charge provincial sales tax on a sale of goods in a province or on services in respect of tangible personal property.

HST Means No More ORST Purchase Exemption Certificates

I received the following question today:

I am a furniture manufacturer who works with interior designers.  When I invoice, if an item is being re-sold by the designer then I do not invoice the Ontario retail sales tax (ORST).  The designer will invoice ORST directly to the client. How will this change with the HST?  Will my clients be exempt if they are re-selling an item?   Also, when I purchase materials for manufacture many items such as wood, screws glue etc are PST exempt when I purchase them and get added into the cost once sold to the customer?  How will the HST deal with this?

The answer is that the furniture manufacturer will be required to charge HST when he/she sells to the interior designer.  The interior designer is no longer entitled to provide an ORST purchase exemption certificate to be exempted from payment of sales tax.  The interior designer will pay the GST/HST and claim an input tax credit (if he/she is registered for GST/HST purposes.  The interior designer will charge the final consumer GST/HST.

In addition, the furniture manufacturer will no longer purchase his/her inputs using an ORST purchase exemption certificate.  In other words, the furniture manufacturer must pay GST/HST on all materials and components used in the manufacture of the furniture.  The furniture manufacturer would be entitled to claim an input tax credit if he/she is registered for GST/HST purposes.

This will result in cost flow issues for both the manufacturer and the interior designer (the two businesses in the example).  The businesses will have to fund the GST/HST portion when paying invoices and will be able to claim input tax credits (and offset GST/HST collected) on their GST/HST returns for the period during which the supply occurred.  I am told that some businesses may need to increase their lines of credit in order to fund the HST component that was previously ORST exempt by virtue of the purchase exemption certificate.

To be clear, on July 1, 2010, purchase exemption certificates will be invalid for purchases after July 1, 2010.  The days of the sales tax relief will over gone for good.  The Canada Revenue Agency auditors will be auditing the entire supply chain to make sure that GST/HST was paid at each step in the supply chain.

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

The Canada Revenue Agency (CRA) has issued GST/HST Info Sheet GI-073 "Ontario and British Columbia: Transition to the Harmonized Sales Tax - Payment of the GST/HST by Ontario and B.C. Government Entities (May 2010) and the examples provided put the government entities in Appendix A outside the HST transition rules. So, I have to warn suppliers to the Appendix A government entities to be careful because CRA auditors may try to apply the transition rules.  I find it funny and sad that the Governments do not follow their own transition rules to save the HST (when businesses and consumers do not get the same breaks).

Example 3 in GI 073 provides as follows:

In may 2010, an Ontario ministry, which is listed on schedule A to the RTA, orders and pays for furniture, but the furniture will not be delivered and ownership will not be transferred to the Ontario ministry until August 2010.  The furniture is acquired in the name of the Province and the Ontario ministry provides a Crown funds exemption request or certification clause to the supplier.

Because the Ontario ministry is listed on Schedule A to the RTA, and the consideration for the supply of the furniture is paid before July 1, 2010, the Ontario ministry will continue to claim an exemption from GST/HST.  Therefore, the supplier does not charge GST/HST on the consideration for the supply of the furniture to the Ontario ministry.  In this case, the supplier may accept the Ontario ministry's Crown funds exemption request or certification clause requesting relief from both the GST and the HST as the consideration for the supply was paid before July 1, 2010.

The HST transition rules applicable to everyone else were released on October 14, 2009. The HST transition rule for tangible personal property (goods) provided that if tangible personal property was purchased after May 1, 2010 and consideration was paid between May 1, 2010 and July 1, 2010 and the tangible personal property was delivered on or after July 1, 2010, HST would be applicable.  To save the HST, the tangible personal property would have to be purchased before May 1, 2010 and the consideration paid before May 1, 2010. As a result, the Ontario and B.C. Governments have beneficial treatment not available to others. 

The other interesting issue relating to Example 3 is that Ontario retail sales tax or B.C. social service tax would be payable if the furniture had been delivered before July 1, 2010.  So, it looks like (according to the CRA's GI-073) the rules applicable to Ontario and B.C. provide the Government entities with a tax holiday between May 1, 2010 and June 30, 2010.  How is that fair?

All I can say is for suppliers to the Ontario Government and BC Government to beware.  This does not seem correct.

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.

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

On May 19, 2010, the federal Department of Finance released "Financial Institution Rules for the Harmonized Sales Tax (HST)", which is a rather long and complicated document. The good news is that only financial institutions (including de minimis financial institutions) must figure out how this document changes their way of doing business and imposes new obligations.  The bad news is that financial institutions may charge higher service fees to cover their compliance costs / assessment risks.

The released document provides information on changes to rules for selected financial institutions (also known as SLFIs).  The changes include changes to the test for determining whether an entity is an SLFI.  As a result, it will be important for entities to apply the new test to see whether they are still SLFIs and whether they are now considered to be a SLFI.  The release states:

British Columbia and Ontario's decision to join the HST, effective July 1, 2010, will significantly increase the number of FIs that are SLFIs. For example, a bank with branches in Ontario and Manitoba and in no other provinces would become an SLFI only as a result of Ontario harmonization.

This statement suggests that some entities (were not considered to be SLFI before and are considered to be a SLFI now) now have a lot of work to do to prepare before July 1, 2010.

The released document also provides information to financial institutions about the "special attribution method" (friendly name "SAM") that they are required to use.  This complicated formula will likely appear in the coming weeks in regulations and, therefore, will not be subject to scrutiny by opposition MPs and the Canadian Senate.

The SAM attribution methods are briefly discussed for:

i. banks

ii. insurance corporations

iii. trust and loan corporations

iv. investment plans and segregated funds

v. other corporations, individuals and trusts

The publication also covers the following topics:

  • information requirements
  • penalties
  • MTFs that are ETFs
  • timing of PVAT (provincial HST component) determination under SAM
  • compliance rules
  • transitional rules for SLFIs re Ontario and BC
  • recapture of ITC rules for SLFIs
  • SLFI transition installment base
  • Imported supplies - non resident trusts
  • SLFI rules respecting deemed pension supplies and pension rebate
  •  

 

Ontario Will Still Require Section 6 Certificates After Harmonization

When a owner of a business in Ontario is registered for Ontario retail sales tax purposes, he/she/it must obtain a purchase exemption certificate pursuant to subsection 6(1) of the Retail Sales Act (Ontario) when it disposes of a stock of goods to which the Bulk Sales Act (Ontario) applies.  If the vendor does not obtain a purchase exemption certificate,  and does not provide the purchase exemption certificate to the purchaser, the purchaser may be pursued for the unpaid sales tax debts of the vendor.

After harmonization on July 1, 2010, section 6 of the Retail Sales Tax Act will continue to be applicable.  Representatives of the Ontario Ministry of Revenue confirmed this today at the Southern Ontario Commodity Tax Group meeting at the Toronto Board of Trade.

Section 6 of the Retail Sales Tax Act has not been repealed.  The Ministry of Revenue will continue to enforce the provisions of the Retail Sales Tax Act after harmonization.  As a result, auditors will be busy little beavers running around auditing vendors under the Retail Sales Tax Act.  The Ministry of Revenue is not going to let go of the mechanism that allows it to pursue purchasers for unpaid retail sales tax liabilities of vendors when the vendors no longer have the assets.

Section 6 of the Retail Sales Tax Act provides:

(1) No person shall dispose of his, her or its stock through a sale in bulk to which the Bulk Sales Act applies without first obtaining a certificate in duplicate from the Minister that all taxes collectible and payable by such person have been paid or that such person has entered into an arrangement satisfactory to the Minister for the payment of such taxes or for securing their payment.

(2) Every person purchasing stock through a sale in bulk to which the Bulk Sales Act applies shall obtain from the person selling such stock the duplicate copy of the certificate furnished under subsection (1), and, if the person who is purchasing the stock fails to do so, that person is responsible for payment to the Minister of all taxes collectible or payable by the person who is disposing of the stock through a sale in bulk.

(3) The issuance of a certificate by the Minister under subsection (1) does not affect any liability under this Act of the person in respect of whom the certificate is issued.

What this means is that asset purchase agreements should continue to include a clause requiring the vendor to obtain the Retail Sales Tax Subsection 6(1) Clearance Certificate.  Since there is no specific limitation period within section 6 of the Retail Sales Tax Act, this contractual provision may be required for some time.

It should be noted that as a practical matter, when a vendor requests a purchase exemption certificate, the request is an invitation to conduct an audit.  The vendor is saying to the Ministry that he/she/it is going to sell his/her/its assets and the Ministry better come in an conduct an audit and find any non-compliance while they have chance.  Audits can often slow down the process of obtaining the clearance certificate (because the issuance of the certificate is delayed until the end of the audit and payment of any taxes owing).  As a result, contractual provisions need  to allow some flexibility relating to the provision of the certificate and vendors need to ask for the certificate well in advance of the closing date.

Ontario Finally Lets Suppliers Know They Have To Start Charging HST

Is it a coincidence that today I had a discussion with an accountant who asked about whether a client must start charging GST and HST on July 1, 2010 (or starting on May 1, 2010 if the transition rules apply) and the Ontario Government comes out with Tax Information Notice 6 "HST Notice for Suppliers of Taxable Property and Services to the Ontario Government"?  Probably it was a coincidence.

Tax Information Notice 6 states:

Under the sales tax harmonization agreement between the Government of Ontario and the Government of Canada, the Canada-Ontario Comprehensive Integrated Tax Coordination Agreement (CITCA), Ontario has agreed that, effective July 1, 2010, all Ontario government ministries, agencies, boards, commissions and Crown corporations ("Ontario government entities") will pay Goods and Services Tax (GST) / Harmonized Sales Tax (HST) on their purchases of taxable property and services. Property could be goods, real property or intangible personal property such as trademarks, rights to use a patent, and digitized products downloaded from the Internet.

What this means is that existing contracts where suppliers do not charge goods and services tax (GST) and/or Ontario retail sales tax (ORST) may be subject to GST and HST after May 1, 2010.  It used to be that Ontario Government ministries, departments and crown corporations told suppliers that they are GST-exempt.  This was not the correct term: the Ontario Government ministries, departments and crown corporations were not exempt under a provision of the GST legislation (a.k.a, the Excise Tax Act (Canada)).  The correct term is that the supplies were not taxable (but were not in the non-taxable importations schedule to the GST Legislation).  In simple terms, the federal government could not request that the provincial government pay tax and entered into a reciprocal taxation agreement.

Tax Information Notice 6 goes on to state:

Ontario government entities that are currently paying GST, as well as those that are currently claiming an exemption from GST (i.e., ministries and other provincial entities listed on Schedule A of the current Canada-Ontario Reciprocal Taxation Agreement (RTA) – see Appendix for list of entities, will pay GST/HST on their purchases of taxable property and services effective July 1, 2010. (Emphasis added)

Suppliers to the Ontario Government need to revisit existing contracts and change their invoicing and record keeping.  More importantly, the suppliers may need to educate their Ontario Government clietns/customers that they need to pay GST and HST. Information Notice 6 contains a warning not to be fooled by Ontario Government clients/customers:

Accordingly, suppliers must generally charge and collect GST/HST on any consideration that becomes due on or after July 1, 2010 in respect of a taxable supply to an Ontario government entity. In these cases, suppliers should not rely on or accept any Crown funds exemption requests or certifications requesting GST/HST relief at the point-of-sale.

Can you imagine the conversation between suppliers and their Ontario Government customers/clients where the Ontario Government customers/clients say they do not have to pay the GST/HST and the supplier must "respectfully disagree"?

I have to warn you about the May 1, 2010 - June 30, 2010 period.  The Ontario Government is telling suppliers in Information Notice 6 that if they currently have to pay GST (because they are not in Appendix A), they have to continue to pay GST.  If they currently are not required to pay GST (because the client/customer is listed in Appendix A), they do not have to pay GST during the May 1, 2010 to June 30, 2010 transition period (but will after July 1, 2010).  If they have to pay HST during the May 1, 2010 to June 30, 2010 transition period (and Appendix A does not apply when one talks about OHST), they must pay such OHST. Thanks for clearing up that up! 

Some suppliers who are not currently registered for GST purposes (because they only make non-taxable supplies to the Ontario Government) will have to get registered for GST/HST purposes.  Some suppliers who are not collecting and GST will have to adjust their record keeping to charge GST and HST on invoices and record such collections in their accounting records.  In addition, such businesses who have not been claiming input tax credits will need to record input tax credits in accounting records in connection with purchases.  Large businesses may be affected by the restricted input tax credits rules and cannot claim all OHST paid on business inputs. Some suppliers will need to file GST/HST returns electronically and be in a position to retrieve information from accounting records with respect to GST/HST collected, GST/HST invoiced and collectible, and input tax credits on purchased inputs. There is a lot more suppliers to the Ontario Government need to do to prepare for HST.

One last word of warning is that suppliers to the Ontario Government should prepare to be audited after implementation of HST.  They will be "low hanging fruit" for Canada Revenue Agency auditor as some will be making mistakes.  These changes are big changes.

Beware: Some Tips to Save HST Are Wrong

On May 12, 2010, the Globe and Mail ran a print article entitled "Tips for cheating the harmonized sales taxman".  Some of the tips provided in the origin version were incorrect and have been removed in the online version.

Printed Version:

Tip 1 "Buy Now, Use Later

Even if you prepay, you still pay HST on services used after July 1.  But products aren't subject to that rule.  So if you know the purchase of some durable product (e.g. washing machine, fall wardrobe, camping gear) is in your near future, buy it before July 1, even if it sits unused.  In fact, since HST adds 8 per cent and you can borrow money at a much lower rate, do this even if you save to take a short term loan to do so."

This advice is INCORRECT.  First, durable goods, including washing machines, fall wardrobes and camping equipment, are subject to Ontario retail sales tax (ORST) at the rate of 8%.  So, if a consumer buys goods before July 1, 2010, they will be paying a combined sales tax rates (GST and ORST) of 13%. Second, the transition rule applies to services and goods.  If you buy a good to be delivered before July 1, 2010, ORST and GST are payable.  If you buy a good before July 1, 2010 and the good is delivered after July 1, 2010, the good will be subject to GST and HST.

Printed Version:

Tip 2 "Get to Know the Internet

Look for retailers in Alberta and other "tax havens". They won't charge you HST or even PST if you have an out-of-their province shipping address.  Even after paying shipping and handling, you'll save money."

This advice is also INCORRECT.  Due to the HST place of supply rules for goods (also known as tangible personal property), a GST registrant in Alberta would be required to charge, collect and remit HST if the goods are shipped to an address in the HST Zone (Ontario, British Columbia, Nova Scotia, New Brunswick or Newfoundland/Labrador).  if you buy goods in Alberta and pay for shipping to Manitoba, you will not be required to pay HST.  However, if you live in Ontario, you will have to pay for someone to ship the goods from Manitoba to Ontario.  This second shipping may wipe out any HST savings.  Further, the transshipment may add risk of loss or damage to the transaction.

Printed Version:

Tip 5 "Get on the Internet

The government has a rebate program and the exempted products and services are many and varied.  You can't adjust your spending until you know where the tax applies and doesn't"

Continue Reading...

Landlords Not Happy about HST and are Asking Tenants to Leave

One of the benefits of The HST Blog is that I receive information from followers and can share their real life stories about living with harmonized sales tax (HST) and the negative effects of HST.

I have received an email from a follower, B, about her mother being asked to leave a rented condominium unit by a landlord.  B has informed (and I have changed a few details to protect B [look for brackets]):

My mother has rented a condo for the last 3 1/2 years in [Ontario]. She does not have a lease but merely an agreement with the landlord to pay monthly [rent]. The landlord showed up for the rent check on Sat May 1, 2010. At that time he informed her that [the landlord's] family would be moving into the condo and he gave her a brief letter and he signed it. He gave her 2 months notice that she has to be out by (coincidentally) June 30, 2010.

I have heard that landlords can only increase rent by a certain percent (2.1% ?) but this is how some landlords can get around that. I started looking for some rentals in [Ontario] online as soon as my mother informed me about this [meeting with her landlord]. I did phone one person that was advertising a sublease for 3 months for $1100.00 per month. He informed me that after the sublease the rent was being increased to $1270.00 per month.

What this real life story tells us is that HST is affecting the decisions of landlords and negatively impacting tenants (already).  Rentals of residential real property are not subject to Ontario retail sales tax (ORST) or British Columbia social services tax (BCSST). Rentals of residential real property are exempt for goods and services tax (GST)/HST purposes. This means that landlords are not entitled to claim input tax credits and cannot recover GST/HST paid on purchases.  HST (and GST) would be payable on landlord's costs such as electricity, heating fuel, landscaping, snow removal, repairs, management fees (paid to third parties), security, supply and install fixtures (carpets, paint, cabinets, etc.), etc.

As a result, if a landlord's costs of operating the property increase due to HST, then the landlord will want to pass those increased costs on to the tenants.  However, the landlords may not be able to pass on the costs to existing tenants (under the landlord-tenant laws).  Some landlords are asking the existing tenants to leave so that they may charge new tenants a higher amount of rent.  Under the law, landlords are limited in the reasons for asking a tenant to leave.  One of the acceptable reasons for asking a tenant to leave is that the landlord is moving into the residential real property unit.

What we are learning is that HST may result in homelessness of individuals as landlords ask tenants to leave.  HST is negatively affecting some seniors on fixed incomes who have been asked to leave their rented homes.  It may not be easy for individuals to find new affordable housing.  In addition, moving ones possessions requires friends/family or a moving company (which costs money).

What we might see is landlords increasing rents and tenants having to accept the higher costs (if they can afford the higher rent) even if the rent increase is contrary to the law.

These negative effects cannot be solved by a one-time cheque.

British Columbia Government Restructures Itself To Save HST Costs

The Globe and Mail newspaper is reporting in an article entitled "B.C. alters health structure to avoid $3.5 million HST bill" published on May 7, 2010 that the British Columbia is undergoing a restructuring. The B.C. Ministry of Health Services and the CEOs of the provincial health authorities have agreed to tuck the Shared Services Organization, which provides services such as computer support and bulk purchasing for the health sector, under one of the health departments / crown entities.

The reason for the reorganization is that the Shared Services Organization would otherwise be required to charge HST on supplies made to the Government of British Columbia and other provincial health entities AND cannot recover all of the HST by way of input tax credits or public service bodies rebates.  Hopefully we will get more detailed about the reorganization to learn whether the changes create exempt supplies (instead of taxable supplies) or non-taxable labour.  This will help us identify other HST savings opportunities.

The question that taxpayers should be asking is whether the Ontario Government and the B.C Government have undertaken a complete analysis of their internal operations in order to address all situations where the provincial government must pay #HST (and GST) on supplies made in the province (or to businesses in HST provinces) that is not recoverable.  We should be asking if HST is going to cause provincial budgets to balloon.  We should be asking whether those who are implementing HST recognize the cost effects associated with HST.  Proof of understanding the cost effects is the government itself taking steps to minimize the negative effects within the government spending structure.

I would guess that the Ontario Government has not asked each and every government employee and manager and Deputy Minister to go over their budgets to identify unrecoverable HST costs within Ministry, department and Crown entity budgets.  Let's wait for the NDP and Conservative opposition parties to find what the governing HST Liberals have overlooked.  I will predict a few big budget line items increasing due to unrecoverable HST.  This will be a topic for discussion and accountability into the future (after HST implementation).  I wonder if the Ontario Ombudsman is going to be busy looking at HST issues.

The other side to this story is that if the BC and Ontario governments must reorganize due to HST,: what about businesses?  Both Ontario and British Columbia have said that HST will reduce administrative costs for business.  Well, here is an example within the BC Government that shows an INCREASE in administrative costs resulting from the implementation of HST.  The reality is that HST will increase administrative costs for certain businesses (especially where amounts are paid for services and other goods and services not subject to provincial sales tax).

The tax officials' counter-argument is that businesses (like the BC Government) can reorganize to avoid increased HST administrative costs.  That is correct.  Steps may, in certain cases, be made to minimize HST costs.  However, the restructuring of business organizations will cost businesses money - legal fees, accounting fees, advisors fees, etc.  So, businesses must spend money during the worst economic recession in recent years in order to save HST in the future.  In addition, any business that reorganizes will have to ask questions whether their restructuring may be challenged by the Canada Revenue Agency using the GST/HST general anti-avoidance rule.  It may not be so simple.

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...

An HST Calculator - What a Useful Tool!

The British Columbia New Democrats have posted an HST calculator and so has the Ottawa Citizen.   I think that this is a good idea and allows individuals to calculate what the implementation of a harmonized sales tax (HST) will mean to their family.  This very useful tool may be used by families in British Columbia and Ontario.

The areas covered by the HST calculators are:

  • gas for automobiles
  • electricity
  • natural gas/heating oil
  • home renovations/repairs
  • Internet services
  • Children's sports activities
  • air, train and inter-city bus fees
  • professional fees (lawyers, accountants, real estate, etc.)
  • landscaping/snowplowing
  • membership fees (gym, golf, tennis, yoga, pilates, etc.)
  • veterinary care
  • green fees/lift tickets
  • haircuts/manicures/spa
  • restaurant meals/takeout
  • tax preparation services
  • movie/theater tickets
  • newspapers/magazines
  • taxi fare
  • home telephone and cable
  • dry cleaning
  • bicycles
  • other

It is important to note that newspapers will be subject to a point of sale rebate in Ontario and certain telephone and telecommunications services and restaurant meals were subject to Ontario retail sales tax (ORST).  It is also important to note that lawyers services are subject to British Columbia social service tax (BCSST).

In order to expand the list of items, it is important to remember that provincial sales tax is payable on most goods (unless an exemption exists) and a limited number of services (has to be in the definition of "taxable service").  As a general rule, provincial sales tax is not payable on real property and intangible property.

In order to calculate what HST will mean to your family budget, you will need to focus on items that were not subject to provincial sales tax and, after July 1, 2010, will be subject to HST.

A good starting point is your invoices/bills for the January - April 2010 period.  Take the invoices out of the files, drawers, purses, wallets and wherever else they may be.  Look at the invoices to see what was subject to goods and services tax (GST), but not provincial sales tax.  Make a list of these items and the amounts you paid.

Then cross off that list any items that will be subject to a point of sale exemption (books, newspapers, prepared food under $4.00, children's clothing, etc.)

Then add to the list expenditures that occur in the year that did not happen in January - April (e.g., a vacation, travel for Christmas or Thanksgiving holidays, summer theater tickets, propane for the barbeque, landscaping, renovations, etc.)  If you need to look at a short list of items that were previously not subject to ORST and will be subject to HST, go to the recently released Ontario Government publication on what is taxable and what is not taxable.

After undertaking this exercise using the HST calculator, how mush over/under the Statistics Canada average of $792 per family per year?  We are searching for a copy of the Statistics Canada report and are currently are relying on new reports of its existence.

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

The Canada Revenue Agency has released a new Web Cast on harmonized sales tax transition rules for intangible personal property, admissions to places of amusement and transportation passes - some of the hot topics on April 29 & 30th.

Under the Ontario retail sales tax (ORST) regime, intangible personal property and transportation passes are not subject to ORST.  However, admissions to places of amusement are subject to ORST unless exempted (e.g. theaters with less than 3200 seats).  As a result of HST, previously non-taxable tickets are subject to 13% (5+8) tax.

Passenger transportation passes, memberships, and admissions have special transitional rules.

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

The Canada Revenue Agency has released a WebCast on harmonized sales tax (HST) transition rules for supply and install contracts that straddle the July 1, 2010 HST implementation date.  This WebCast is intended to help supply and install businesses in Ontario and British Columbia.

An example in the WebCast relates to the installation of a home theatre system.  However, the example presumes that the equipment is delivered to the home on June 30, 2010 and installed on July 2, 2010.  This is not a typical scenario supply & install contract.

Another example relates to the provision of a computer program on June 15th and training is supplied in July 2010.  Again, not a typical supply and install situation in an Ontario retail sales tax context.

Under the ORST regime, some businesses in Ontario and British Columbia currently do not charge ORST or BCSST because in their business tangible personal property becomes real property upon installation.  A carpet installer would supply installed carpet and no ORST is payable (but the installer pays ORST on its purchases and builds it into the price of the installed carpet).  A kitchen design store/contractor may supply installed kitchen cabinets, kitchen counters, a sink, tiles and appliances and not charge ORST to the homeowner (but the supplier pays ORST on its purchases and builds it into the price of the installed kitchen).  These scenarios are not adequately addressed in the WebCast.

Ontario Government Email Alert at 5:02AM Today About HST Starting

At 5:02AM this morning I received an email alert from the Ontario Ministry of Revenue about harmonized sales tax obligations starting today.  First, I must say "Thank you for the notice".

Here is the contents of the emailed "Revenue Alert:

Reminder: Helping Businesses Transition To The Harmonized Sales Tax


What You Need To Know For May 1
On July 1, 2010, the retail sales tax will be replaced with a more modern, value-added tax that will be combined with the federal GST to create a harmonized sales tax for Ontario.
To help ease the transition to the HST, Ontario released general transitional rules in October 2009. Some of these rules take effect May 1.


What You Need to Know
 

• As of May 1, the HST will generally apply on pre-payments for products and services that are going to be provided or performed on or after July 1.
• The HST should not be charged for any goods received or services performed before July 1.


These transition rules are consistent with the approach used in the Atlantic provinces and Quebec. They are also similar to the transition rules that were used for the GST. BC has also largely adopted these transition rules.
The HST and cuts to business taxes will cut Ontario's marginal effective tax rate on new investment in half. Ontario will be providing $4.6 billion in tax relief over three years, including Corporate Income Tax cuts starting July 1, 2010.


• Find out more about the General Transitional Rules for Ontario HST
• Read about the Canada Revenue Agency's HST transitional rules
• Read more about What You Need to Know to prepare for the HST
• Get the list of Important Dates to Remember
 

Not the most helpful.  There were no attachments (but there were the four links that I am able to click on).

The Ontario Ministry of Revenue is not asking the most important question "How can the Government of Ontario help businesses comply with the HST rules that result from our tax reform decisions?"  The Ontario Government should do more to make it as easy as possible for Ontario businesses and businesses selling to people in Ontario to be able to comply with the new HST rules.

The fact that this is a similar approach to the approach in Nova Scotia, New Brunswick, Newfoundland and Labrador is irrelevant to the business owner who is struggling in the current economic climate.  The fact that marginal rate rates may be lower and may encourage new businesses to come to Ontario is also not important to the existing businesses.

Business owner wants someone to help them understand what they have to do to keep auditors happy.  No business owner wants auditors to find mistakes.  No Ontario business owner wants to be assessed in 1-2-3-or 4 or more years.

What is glaringly missing from today's email is basic instructions.

1) If you take on order after April 30, 2010 to sell a good AND will deliver the good after June 30, 2010, HST is collectible.  if you take an order after April 30, 2010 to sell a good AND deliver the good before July 1, 2010, HST is not collectible.

2) If you enter into a lease after April 30, 2010 to lease a good AND the lease term extends beyond June 30, 2010, HST is collectible on the part of the lease that takes place after June 30, 2010, but not the part before July 1, 2010).

3) If you enter into a verbal or written contract after April 30, 2010 to provide services AND the services are to be performed in whole or in part after June 30, 2010, HST is collectible in respect of services to be performed after June 30, 2010 (unless 90% of the services are performed before July 1, 2010 and certain other conditions are satisfied).  if you enter into a contract after April 30, 2010 to provide services and the services are performed in whole before July 1, 2010, HST is not collectible.

4)  If you entered into a written agreement of purchase and sale for residential real property in Ontario into after June 18, 2009, AND both ownership and possession are transferred after June 2010, HST is collectible.

5) If you sell a subscription to a magazine or periodical or newspaper and receive payment for the subscription in full before July 1, 2010, then HST is not collectible. If you sell a subscription to a magazine or periodical or newspaper and receive payment for the subscription in full after June 30, 2010, then HST is collectible.

6) I you collect HST before July 1, 2010, DO NOT add it to your GST/HST return until after July 1, 2010.  DO NOT include the HST in tax collected on your GST/HST filed in May or June 2010.  Include the HST in GST/HST return after July 1, 2010.

7) If your situation is not covered by the above rules because your business activity straddles the pre-July and post-HST periods, consult with an expert or the Ontario Ministry of Revenue (and take notes of who you spoke with and the advice they gave in case you need a due diligence defence in the future).

Vendors in Ontario and BC Face Audit Risk If Fail To Follow HST Transition Rules

Many businesses in Ontario and British Columbia are not prepared for harmonized sales tax (HST) transition, which starts on May 1, 2010.  Yes, July 1, 2010 is the official implementation date for HST.  However, the transition rules require businesses that deliver property and/or render services after (or lease goods beyond) July 1, 2010 to collect and remit HST with respect to consideration paid after May 1, 2010.  In other words, any contracts entered into after May 1, 2010 where consideration is paid after May 1, 2010 for property delivered or leased or services rendered after July 1, 2010 would be subject to HST.  The two key facts to remember for the HST transition rules at issue are (1) delivery/provision/rental after July 1, 2010 and (2) payment received after May 1, 2010.

It is not clear why the Governments decided to implement this transition rule - except the concern that consumers and exempt businesses would somehow circumvent HST in the months of May and June 2010.

In the end, it is businesses that are most at risk.  If a vendor makes a mistake and fails to charge HST, they may be audited and assessed a penalty for failure to collect HST.  When this happens, the HST is an unrecoverable cost to the business (unless the business can pursue the consumer).

If you consider goods, this is where the vendor may get hit hard.  The vendor of goods would likely collect both GST and Ontario retail sales tax (ORST) (unless the goods are exempt from ORST) in May or June because most goods are subject to ORST.  However, a Canada Revenue Agency auditor can come along and reassess the vendor for HST if the transition rules apply.

For example, if a vendor enters into a contract to sell a $200,000 motor home on May 15, 2010 and receives payment in full, he/she may collect GST in the amount of $10,000 and mistakenly collect ORST in the amount of $16,000.  If the motor home is delivered in August 2010 (because it needed to be manufactured), the vendor should have collected HST and not ORST.  If the vendor remits the GST to the Receiver General of Canada and the ORST to the Minister of Finance in Ontario, a Canada Revenue Agency auditor may assess the vendor for failure to collect and remit HST (or may even take the position that the ORST was actually HST and that the vendor collected and did not remit HST).  The vendor may be assessed the $16,000 and interest and a penalty for making a mistake.  This mistake could require the vendor to pay over $20,000 depending on when the audit occurs (taking into account interest and penalties).

If more than one mistake is made between May 1, 2010 and July 1, 2010, the amounts could really add up.

The HST transition rules are flawed.  The vendor may face a catch-22 situation.  If the vendor promises to deliver the motor home on June 25, 2010 and collects the $200,000 on May 15, 2010, the vendor would believe the $16,000 is ORST.  The vendor must remit the ORST with its May ORST return that is due on June 23, 2010.  If the motor home is not available by June 30, 2010 and the motor home is delivered after July 1, 2010, the HST transition rules would turn the ORST into HST.  Under the HST transition rules, the vendor would be required to remit the HST with it GST/HST return for July 2010, which is due on August 30, 2010.  In other words, the vendor is required to keep the HST a little bit longer and remit the amount to the Receiver General of Canada instead of the Minister of Finance.

It will be easy for an auditor to come along in 2012 and say what a vendor should have done in the circumstances.  The auditor may not be sympathetic to the fact that the vendor did collect the right amount of sales taxes and that the Government of Ontario actually was not out any money.

Where the Government of Ontario would be out money is with respect previously non-taxable services and previously exempt goods.  With respect to the ORST exempt goods, Ontario taxation policy effectively changes on May 1, 2010 (e.g., custom computer software, bicycles, manufacturing and production equipment, etc.).

With respect to services, this is really the focus of the HST transition rules,  Here are some links to articles I have written that may help service providers:

 

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

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

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

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

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

Ontario Issues Publication on What is Subject to HST and What is Not

Ontario has posted a good/help (not entirely complete) publication "What's Taxable Under the HST and What's Not?".  It is a good first attempt at communicating with the public at large about what property and services will be subject to HST.

Broad categories that are broken down into sub-items are:

  • clothing and footwear;
  • food and beverages;
  • home services;
  • accommodation and travel;
  • around the house;
  • motorized vehicles;
  • home purchases;
  • health products and services;
  • memberships, entertainments and sports equipment;
  • leases and rentals;
  • electronics;
  • professional and personal services;
  • tobacco; and
  • banking and investments.

There document has been prepared more as a self-promotion piece than anything else.  as a result, it does not emphasize the multitude of services, real property and intangible property that will be subject to higher rate taxation.

That being said, a document such as this is needed and useful.

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

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

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

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

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

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

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

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

The ORST Audits Have Started

I have heard from two clients this week that I have not spoken to in about 3 years.  They both have informed me that they have been contacted by the Ontario Ministry of Finance, which has informed them that they are conducting a retail sales tax (ORST) audit.  They are being audited for the period 2006-2010 (a 4 year period).

Both clients had a prior audit experience.  Both clients asked me if they are being targeted.  I answered - the auditors are doing their jobs and that audits are a normal part of the HST plans.  Most Ontario vendors will be visited by ORST auditors in the next two years.

The good news for these two clients is that we implemented improved compliance procedures since the last audit and that we are comfortable that the audit will be quicker and less painful than the last time.

My advice to companies that have been audited (for ORST) in the past is to expect an ORST audit in the future.  Check your compliance procedures.  Test a month of documents to ensure that the problems previously discovered by the auditor have been corrected (have not reoccurred).  If errors have occurred, determine what you can do to bring yourself into compliance.  Take control over the audit experience by being prepared and ready.  Make sure your documents are in order.  Make sure your accounting records are in order.  Make sure you paid ORST where required on your purchases and you collected and remitted ORST where required on your sales.

A good audit is one that results in the auditor walking away without levying an assessment.  It is possible.

Consumers in Ontario and British Columbia Are Confused About HST

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

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

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

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

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

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

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

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

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

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

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

Here is the example provided by the Government of Ontario:

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

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

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

One quote in the Toronto Sun article struck my attention:

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

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

Here Is An Idea - Scheduled ORST Audits

The HST Blog is a forum where practitioners should be able to raise good ideas.  I have one to share with you - Since there must be audits, wouldn't it be nice if you could schedule an Ontario retail sales tax audit after July 1, 2010? Wouldn't it be nice to be able to be able say to the Ontario Government that you wish to invite them to your business to conduct the final Ontario retail sales tax audit so that you can put the assessment risk behind you?

Not all businesses would opt for a voluntary audit in the hopes that mistakes will become statute barred (the Retail Sales Tax Act contains a 4 year limitation period, which can be extended if there is a misrepresentation attributable to neglect carelessness or wilful default or fraud).  However, the businesses that have taken care to comply with the Retail Sales Tax Act and regulations thereto would have little to be concerned about and would line up early to close the ORST books.

if there were to be scheduled audits, the business people can arrange their schedules and have the relevant records ready for an auditors review.  This would be a fair approach.  This would be business-friendly approach.

So, Ontario - what do you say to a program where vendors and purchasers can call and schedule a retail sales tax audit at a convenient time?

Great Article About What Is Unconstitutional Provincial Indirect Taxation

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

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

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


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

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

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

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

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

Key HST Dates to Help With Preparation

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

Ontario

 

March 23, 2009

 

McGuinty Government announces plans to implement HST

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

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

Ontario businesses should be registered for GST/HST purposes

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

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

HST Implementation Date (13% HST applies)

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

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

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

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

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

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

 

British Columbia

 

July 23, 2009

 

Campbell Government announces plans to implement HST

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

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

BC businesses should be registered for GST/HST purposes

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

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

HST Implementation Date (12% HST applies)

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

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

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

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

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

January 23, 2011

Final British Columbia social service tax supplemental return is due

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

 

Ontario Retail Sales Tax Continues to Apply to Certain Forms of Insurance

On April 15, 2010, the Ontario Ministry of Revenue reminded Ontario businesses in Tax Tip #4 'Insurance Premiums" that the 8% Ontario retail sales tax will continue to apply to the insurance premiums previously subject to Ontario retail sales tax (ORST).

Tax Tip # 4 states, in part:

In the 2009 Ontario Budget, the government announced a comprehensive tax package that includes moving to an HST at a rate of 13 per cent effective July 1, 2010. Generally, insurance premiums are currently exempt from the federal Goods and Services Tax (GST) as financial services and the treatment under HST will be the same as under GST.
Ontario will continue its application of tax at a rate of 8 per cent on the same types of insurance premiums currently taxed under RST.
 

Tax Tip #4 does not provide information on what insurance is currently subject to ORST and what types of insurance are not currently subject to ORST.  The assumption is made (probably incorrectly, that residents of Ontario know what insurance is subject to ORST).

This posting is not going to set to the entire list of what is and what is not subject to ORST.  It will cover some of the highlights. 

ORST applies to premiums paid under certain contracts of insurance, group insurance plans, contributions paid into funded plans, and on benefits paid out of unfunded plans, casualty and property insurance (excluding auto), including amounts paid for:

  • A builder's risk policy: If a contractor takes out insurance on a building under construction, the insurance premium is subject to ORST. This type of policy is not the same as a performance or payment bond which is not subject to ORST.
  • Mortgage insurance: Mortgage insurance insures the life of an individual and is not insurance on property. If the insured is a resident of Ontario and the policy is group life insurance, ORST must be collected on the premium regardless of where the property is located. If the mortgage insurance is an individual life insurance policy, ORST is not payable on the policy. If a non-resident of Ontario purchases mortgage life insurance relating to property in Ontario, ORST is generally not payable.
     
  • Ontario property insurance: Premiums paid on property located in Ontario are taxable even if the purchaser of the policy is not a resident of Ontario.
  • Trip cancellation insurance: This insurance is taxable when sold to an Ontario resident.
  • Baggage insurance: This insurance coverage is taxable when sold to an Ontario resident.

There are many forms of insurance that are not subject to ORST.  Generally, ORST does not apply in respect premiums for:

  • reinsurance contracts;
  • contracts of insurance (other than contracts of group insurance or trip cancellation insurance) for the life, health or physical well-being of insured individuals. This can include individual life insurance purchased by a corporation or organization for creditor protection, buy-sell funding agreements, charitable donations, etc., that is payable to the corporation or organization on the death of the insured;
  • payments under annuity contracts;
  • an amount payable to obtain a surety;
  • a contract for the service, maintenance or warranty of tangible personal property;
  • property damage insurance in respect of property wholly outside Ontario, or other insurance (but not group insurance) in respect of risk, perils or events wholly outside Ontario;
  • trip interruption insurance. This insurance covers benefits and risks incurred totally outside Ontario, and is exempt if calculated and shown as a separate charge on the customer's invoice;
  • insurance contracts entered into by individual foreign representatives and officials located in Ontario who are members of diplomatic missions, consular posts and international organizations;
  • premiums, assessments or contributions paid under the:
    1. Canada Pension Plan
    2. Crop Insurance Act (Ontario)
    3. Employment Insurance Act (Canada)
    4. Workers Compensation Act;
  • a contract of life insurance that includes an individual insured and members of his or her family or any other individual related to the insured by blood or adoption, under a single policy; and
  • automobile insurance premiums.

Certain types of insurance are not subject to ORST if a valid purchase exemption certificate is provided.  If one relies on an exemption (as opposed to a purely non-taxable status), they would review the law to ensure that the exemption will continue after July 1, 2010.

Ironically, this non-harmonization of insurance premium helps Ontario businesses (other than insurance companies) because group policies often have agreed monthly or annual rates and, therefore, keeping the tax rate unchanged results in predictability for the remaining term of the policy.  In a discussion with a client last week (exempt business), we discussed how the expense would remain the same and adjustments to their budget for H2 2010 would not require changes regarding the property insurance and the employee group benefits.

Insurance companies, on the other hand, are disadvantaged because they will be paying HST on commercial rents, electricity, custom computer programs, contracted third party insurance appraiser services, etc. and are not able to recover the additional HST by way of input tax credit.  Eventually, costs will increase and those cost increases will be passed on to businesses.

 

Ontario Issues Page on HST Preparedness - But, Ontario Businesses Should Look For Alternative Sources of Guidance

On April 12, 2010, Ontario released "Preparing for the HST: What You Need to Know" (March 2010), which is a single page document that does help Ontario businesses understand what they need to do.  It states, in part:

  • The HST is basically the GST with a provincial component added to arrive at a 13% rate. If no GST applies now, no HST will apply after July 1, 2010. Provincial point of sale rebates mean that selected goods will only be taxed at 5%.
  • If you are already registered for GST, no further registration is required. If you are not required to register for GST, you do not need to register for HST.
  • Your HST reporting period will be the same as your GST reporting period. You will report both GST and HST charged and collected, and claim input tax credits and rebates in much the same way you have been for GST.
  • You should modify accounting, billing and invoicing systems, cash register and point of sale systems, including web interfaces and automatic payments, to switch to HST and remove RST. You should also ensure budgets remove the 8% RST cost from purchases after July 1, 2010 in accordance with the transitional rules. You should also update taxable benefit calculations.
  • Consult the transitional rules for transactions straddling the July 1, 2010 date. Ensure you charge HST, as appropriate, on any billings on or after May 1, 2010 for taxable goods, services or intangible property to be supplied after July 1, 2010. Familiarize yourself with the place of supply rules and the temporary restrictions on input tax credits.
  • Assess the impact of HST on budget and business plans to account for lower costs and shifts in business purchasing. Evaluate pricing strategies and scrutinize supplier quotes to ensure tax savings are passed on.
  • Your final RST return is due on or before July 23, 2010. Supplemental returns will be available for reporting RST amounts collected after July 1, 2010.
     

This Ontario publication does not provide businesses with useful information on what they should be doing to prepare for HST so that they may be in compliance on the implementation date, July 1, 2010.  Information about the actions that businesses must be taking in order to comply is really what businesses need to know.  It is not sufficient to tell businesses to figure it out themselves - in the next 2.5 months.

There are a number of more helpful resources prepared by non-governmental businesses:

 We will continue to provide more sources of HST Information.  Please refer to the HST Library (along the top bar of this blog), which links to various useful source documents.  There are only 2.5 months left to get systems in place --- which is not a lot of time.  It often takes months of careful planning and implementation to ensure compliance systems will work when needed.

 

The Music Industry is Blogging About HST

I came across an interesting post by Music Central News about the implementation of HST. What is interesting about this post to an HST specialist is:

1) That they have attended GST/HST seminars;

2) They are communicating to their audience the HST as they understand them; and

3) They are concerned about the HST having an impact on an increasing underground economy.

However, I am concerned about such posts - Unfortunately, the information is not prestinely accurate.  They write:

If you have already booked with us for a date after July 1, 2010 and paperwork has been sent out with just the G.S.T. then you will continue to pay just the G.S.T..  An advantage for booking early!

Actually, the transition rule for services to be performed after July 1, 2010 requires (1) the contract to be entered into before May 1, 2010 and (2) payment of consideration before May 1, 2010.  If the payment is received after May 1, 2010, then the services performed after July 1, 2010 would be subject to HST. If the contract is not signed and returned before May 1, 2010 (it is not sufficient for the quotation to be mailed), then the services performed after July 1, 2010 would be subject to HST.  A deposit is not considered to be consideration for the performance of a service. A deposit is treated as consideration for the supply at the moment in time that it is allocated to the supply. Also, the amount owing under the contract must be paid in full before May 1, 2010 to satisfy the HST transition rule.

Another unfortunate issue is the underground economy. Just because a person does not charge HST does not mean that they are bad and part of the underground economy. If a small supplier does not make taxable sales in excess of $30,000 per year, they are not required to register for GST/HST purposes and do not have to charge GST/HST. A business cannot get around the small supplier threshold of $30,000 by having more than one business - the threshold is calculated based on the related businesses. If a business does not register for GST/HST purposes, they will not be entitled to recover input tax credits regarding the GST/HST paid on business inputs.

My last point, and I really hate to bring this up when the Music Central news is trying hard to be helpful, highlights the problem with prepayments of deposits. When amounts are paid for services before they are delivered, it is possible that the services will not be provided. Is the risk of non-performance of services worth saving the 8% HST. I would rather have control over 100% the money for the services.

Would You Like To Play Audit Roulette In Ontario?

Last week at the Canadian Institute of Chartered Accountants Commodity Tax Symposium West in Calgary, a representative of Ontario stated to the audience that Ontario planned to conduct retail sales tax audits of most businesses in the next two years.

Pursuant to the Retail Sales Tax Act (Ontario), the normal audit period is four years. The audit period may be extended where there has been a misrepresentation attributable to neglect, carelessness or wilful default.

This is important to know because after the implementation of the harmonized sales tax (HST) on July 1, 2010, the Ontario Government will want to make sure that it has received all the retail sales tax required under the law as it was prior to HST. Just because we are moving to the HST, retail sales tax liabilities will continue. Auditors will continue to visit businesses (some would say plague businesses - but that is not very nice).

Businesses are now playing audit roulette. Will the auditor find the retail sales tax problems/mistakes that the business has been ignoring?

Businesses have three primary choices:

1. Continue to play audit roulette by continuing to ignore legacy retail sales tax problems;

2. Conduct an internal audit or control audit with a sales tax lawyer, accountant or consultant, identify the existing problems, and make a voluntary disclosure to report the mistakes to the Ministry of Revenue (come clean so to speak); and

3. Conduct an internal audit or control audit with a sales tax lawyer, accountant or consultant, identify the existing problems/mistakes and improved the processes and retroactively solve the problems to reduce exposure. For example, if a business sells goods that will be incorporated into goods for resale or will be resold by the purchaser, the business may ensure its purchase exemption certificates are in order. Another example would be that if a business should have collected tax on a transaction, they may send an invoice to the customer and remit the tax to the Ontario Government. Another example would be that if a business imported goods and failed to report and pay retail sales tax in respect of the importation, they may do so before an auditor knows on the door.

In addition, vendors and customers should communicate with each other about audits as the Minister is not entitled to impose a penalty on a vendor who failed to collect tax and assess the buyer for failure to pay tax on the same transaction --- the Minister cannot receive the same tax from both parties.

Audits take up the human resources of company officials and interfere with the operation of the business. Proactive steps by a business does save money, time and aggravation.

Ontario Has Passed HST Implmenting Legislation

The "Jaws" theme is playing in the background ....

In December 2009, the formal steps were taken to pass the harmonized sales tax ("HST") implementing legislation in the Ontario Legislature.

Ontario proposed in the 2009 Budget that, effective July 1, 2010, Ontario’s retail sales tax (RST) will be replaced with the HST. The HST will have a combined sales tax rate of 13 per cent (combining the existing five per cent federal goods and services tax (GST) and an eight per cent Ontario component). The HST will be administered by the Canada Revenue Agency. All businesses currently registered for GST will automatically be registered for the Ontario HST on July 1, 2010. 

On December 9, 2009, the Ontario Legislature, Bill 218 "Ontario Tax Plan for More Jobs and Growth Act, 2009" passed third reading and is law. passage occurred despite attempts by the official opposition, the Ontario Progressive Conservative Party, Opposition Leader Tim Hudak and HST Critic Lisa MacLeod to stop the bill.

Bill 218 implements the "Comprehensive Integrated Tax Coordination Agreement" between Ontario and the Federal Government and the original Memorandum of Agreement Concerning a Canada-Ontario Comprehensive Integrated Tax Co-ordination Agreement" between Ontario and the Federal Government, which started the HST plans in motion.