Canada Revenue Agency Issues Draft Policy On HST Self-Assessment & Seeks Comments

It is unusual for the Canada Revenue Agency (CRA) to seek public comments on a difficult harmonized sales tax ("HST") topic.  Take advantage of the opportunity to shape their future policy.

On September 9, 2011, the CRA released DRAFT GST/HST Notice 266 "Harmonized Sale Tax - Self-assessment of the provincial part of HST in respect of property and services brought into a participating province".  The deadline for filing comments is October 31, 2011.  This document is 77 pages in length, so it will take time to review and find what will not work in practice.

Financial services providers, financial institutions, multi-jurisdictional charities & non-profit organizations, universities & colleges with campuses in more than one province, long term care home providers operating in more than one province, residential real estate management companies operating in more than one province, doctors and medical professionals or management companies operating in more than one province and other exempt businesses would be affected by this draft policy.  Non-resident companies also should be mindful of the draft policy if they are active in Canada and make exempt supplies.

In addition, even though the HST provinces should realize that they import supplies, they may not think of the HST consequences.  Ontario, Nova Scotia, New Brunswick, Newfoundland/Labrador and British Columbia (until they stop being a participating province) should also consider how the policy will affect them.

While the policy is in draft, it will be applied going back to July 1, 2010.  Also, while it is draft now, it will be finalized in the future.  The CRA auditors will consider this policy to be an assessment road map.  Please take the time to make sure it reflects a workable solution.

While it is self-serving for me to say this: Ask a sales tax lawyer for help in reviewing the draft policy and writing your comments.  This is your chance to improve your future and you can save money in the long run if you fix the problems before the policy is engraved in stone.

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

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

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

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

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

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

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

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

Would You Like To Get On The HST Bandwidth Wagon?

The Canada Revenue Agency ("CRA") is looking at the characterization of telecommunication services provided by non-traditional means (such as Voice over Internet Protocol).  Which HST place of supply rule applies depends on the characterization.  What is important to know if that if the CRA does not have all the answers yet (which, it does not), you may not be charging HST properly if you do not ask them.

The CRA has already received a few advance ruling requests.  The CRA has indicated that they are looking at 4 different requests that deal with VoIP services:

  • supplies of VoIP services by a non-resident supplier where the communications are initiated outside Canada, but received in Canada;
  • supplies of VoIP service calling plans for a flat fee;
  • supplies of VoIP services provided where the communication are initiated in Canada, but received outside Canada; and
  • supplies of VoIP services provided by a non-resident where the communications are initiated and received outside Canada, but routed through a server located in Canada.

If you have similar questions, it may be wise to request an advance GST/HST ruling from the CRA.  It may take time (possibly years) before the CRA issues a policy statement based on the rulings it provides.  It also may take months or years for the CRA to publish the rulings it gives to those who have asked.  If you would like to receive your own binding ruling (that may be handed to a CRA auditor when they visit a supplier or a recipient of VoIP services), you will need to submit your own ruling request.

The great benefit of GST/HST ruling requests is that it demonstrates due diligence in the event that the CRA disagrees with you in the end.  Acts that count as "due diligence" can relive a director from a director's liability claim.

Tip: Service Providers Must Make HST Place of Supply Determination of an Invoice-by-Invoice Basis

Service providers should not make a determination of the place of supply for harmonized sales tax (HST) and applicable HST rate once at the beginning and not revist the analysis.  As a technical matter, the legislation requires that service providers make a determination for each billing period because the relevant facts may change from invoice to invoice.  For example, the types of services may change from billing period to billing period, which could affect the application of the HST place of supply rules.  If there is more than one office or home address provided by the client, the location most closely connected with the supply may change from invoice to invoice.

The advice is do not follow the Ronco advice "Set It and Forget It".  Canada Revenue Agency auditors are being trained to look into the details of each invoice and look at changes.

MUSH Sector Rebates

This Post is out-of-date

A registrant/non-registrant for GST/HST purposes which makes exempt supplies will not be entitled to claim input tax credits (unless the entity also makes taxable supplies). Some entities are not entitled to claim any rebates of the GST/HST paid on business inputs.  The MUSH sector may or may not be entitled to claim a rebate depending on the province in which the entity is located.

I have promised to share my MUSH sector rebate chart.

MUSH Sector Entities GST Portion  Rebate HST Portion Rebate - Ontario HST Portion Rebate - BC HST Portion Rebate - NS HST Portion Rebate - NB HST Portion Rebate - Nfld
Municipalities 100% 78% 75% 57.14% 57.14% No rebate
Hospitals 83% 87% 58% 83% No rebate No rebate
School Authorities 68% 93% 87% 68% No rebate No rebate
Universities & Colleges 67% 78% 75% 67% No rebate No rebate
Charities 50% 82% 57% 50% 50% 50%
Qualifying Not-for-Profits 50% 82% 57% 50% 50% 50%

This chart highlights many important problems for the MUSH sector. 

1. The lack of significant rebates for hospitals in British Columbia, Newfoundland/Labrador and New Brunswick will put a strain on provincial budgets due to the unrecoverable health care costs.

2. The lack of significant rebates for school authorities and universities and colleges in Newfoundland/Labrador and New Brunswick will put a strain on provincial budgets due to the unrecoverable education costs.

3. Nova Scotia was able to relieve some of its budget pressures when it signed a CITCA.

4. For Ontario, the effective unrecoverable GST/HST rates (what the entity will not be able to recover by way of a rebate) in respect of purchases for use in exempt activities are:

MUSH Sector Entity Effective GST/HST Rate after Rebate
Municipalities 1.76%
Hospitals 1.89%
School Authorities 2.16%
Universities and Colleges 3.41%
Charities 3.94%
Qualifying Not-For-Profits 3.94%

4. For British Columbia, the effective unrecoverable GST/HST rates (what the entity will not be able to recover by way of a rebate) in respect of purchases for use in exempt activities are:

MUSH Sector Entity Effective GST/HST Rate after Rebate
Municipalities 1.75%
Hospitals 3.79%
School Authorities 2.51%
Universities and Colleges 3.40%
Charities 5.51%
Qualifying Not-For-Profits 5.51%

 

A Thought About GST and Imports

Since the implementation of harmonized sales tax ("HST") in Ontario and British Columbia, the Government of Canada should re-think the imposition of goods and services tax ("GST") on imports of commercial goods. In connection with the implementation of HST, the CITCAs include provisions such that HST is not imposed on imported commercial goods.  What is the logic of continuing to impose GST on commercial imports? Wouldn't it be better for Canadian businesses and, in particular manufacturers, if the GST cash flow cost on imported commercial goods is removed?  If the Canada Border Services Agency can live with the HST regime for imports, why can't they also live with no GST on commercial goods and GST on non-commercial goods?  Wouldn't it be a more efficient use of government resources if the Canada Border Services Agency is no longer responsible for collection of GST on imported commercial goods and is not longer shares verification/audit functions with the Canada Revenue Agency?  For that matter, wouldn't it be better for businesses if they did not have to be subject to GST audits/compliance verifications by two separate government agencies who do not adequately share information and interpretations?  I am just saying ...

HST and Disbursements

Disbursements have been an issue under the goods and services tax (GST) and will become a more complex issue with harmonized sales tax (HST).  When I speak about disbursements, I am talking additional charges or expenses incurred by the service providers, such as parking, filing fees, photocopies, etc. that are billed to the client with the fees for services.

As a general rule, disbursements take on the same GST/HST character as the underlying supply of services.

In 2004, the Canada Revenue Agency (CRA)  reissued Policy Statement P-209R "Lawyer's Disbursements" and indicated that they took the position that there are two categories of disbursements that may be found on a lawyer's bill:

1) Expenses/disbursements incurred by the lawyer as agent for the client; and

2) Expenses/disbursements not incurred as agent for the client.

The expenses/disbursements incurred as agent may be passed on to the client without additional GST/HST (however, the service provider should not take an input tax credit and then not charge GST/HST as the GST/HST should be passed to the recipient).

The same two categories apply to other service providers.  However, depending on the nature of the services, it may be that for other service providers expenses are not normally incurred in the context of an agency.  As a result, it is important to understand the CRA's administrative position:

The phrase “incurred as agent” indicates that the disbursement described is generally incurred in a lawyer's capacity as agent for a particular client. As such, no GST/HST is exigible on the subsequent reimbursement by the client. The phrase “not incurred as agent” indicates that the disbursement described is generally incurred otherwise than in a lawyer's capacity as agent for a particular client. As such, GST/HST is exigible on the subsequent reimbursement by the client (to the extent that GST/HST is exigible on the consideration for the service provided by the lawyer to the client). The characterization of each disbursement is based on the application of the principles of agency to a typical transaction involving that disbursement.Policy statement P-182R, Agency was used as the basis for this analysis.

In 2010, there have been two important court cases that provide additional guidance on the issue of disbursements (Merchant Law Group v The President of the Canada Revenue Agency (FCA); Roberge Transport Inc. v. The Queen (TCC).  Both cases give guidance that a court will consider as relevant whether the parties had an agency agreement (or some statement concerning the expenses being incurred as agent) in place to support the arguments that the expenses where incurred in the context of an agency. The Roberge Transport case is important to review because it is written by Justice Steven D'Arcy, who was one of the leading GST lawyers in the country before joining the bench in 2009.

Service providers, therefore, should follow the existing policy statement and add what may be taken from the cases.

There are many complex situations where the HST treatment of disbursements will become relevant.

Example 1:  A service provider pays a filing fee to a municipality in circumstances where the filing fee is exempt for GST/HST purposes.   The service provider may be required to charge HST when it bills the disbursement when the service provider is not an agent for the client.

Example 2: A service provider in an HST province (e.g. Ontario) retains a service provider on a sub-contract basis in a non-HST province (e.g., Manitoba) and pays the service provider's invoice and includes the disbursement on the Ontario service provider's invoice to the client.

Example 3: A trucking company providers trucking services to a Canadian manufacturer and incurs inter-provincial fuel taxes that it invoices the client as a disbursement. If the trucking company is not acting as an agent, there may be HST on the incurred taxes depending on the facts.

The answers re whether HST must be charged in respect of a particular disbursement will depend upon the facts.  I can tell you that businesses need more clarification regarding this subject.

My best advice is to read the Policy Statement on "Agency" and "Lawyer's Disbursements" and clearly state in retainer letters and contracts which expenses and disbursements will be incurred as agent for the client.  The list will depend on the business activities and usual disbursements.  You should seek help compiling the "Incurred as Agent" listing.

In addition, it is better to be consistent in your approach to billing disbursements. A billing policy is helpful and should be provided to all sales and billing staff.  Arguments will have greater persuasive value if it can be shown that a particular type of expense is always treated in a certain manner (usually as incurred as agent in order to not charge GST/HST).

Gratuities as Added Consideration For the Supply

I was at an event last night hosted by Women's Post and a woman entrepreneur in the audience who was in the events planning business in Ontario asked why harmonized sales tax (HST) was charged being charged on gratuities (she had noticed this since the implementation of HST).  She noticed that venues and caterers were quoting (1) the charge for the room and/or (2)  the food/beverages and (3) a mandatory gratuity and that HST was being charged on all charges, including the gratuity.

The answer is that the Canada Revenue Agency (CRA) considers the mandatory gratuity to be extra consideration for the supply (say, of the venue.food/beverages/etc) rather than a contribution towards the salary (non-taxable) of the employees that will be working the event. The CRA had taken this position with the goods and services tax (GST).  GST/HST is payable on the consideration for the supply and since the gratuity is considered by the CRA to be additional consideration, it goes into the calculation/formula.  As a result, the CRA takes the position that GST/HST is payable on the added consideration that is the gratuity portion.

I have seen the same analysis used by CRA when they look at gratuities paid on restaurant meals, resort vacation packages, hair salon services, spa services, etc - whenever there is a mandatory gratuity OR when the gratuity is included in credit card payment (that is the recipient pays adds a gratuity to a credit card payment).  For example, when I go to the hair salon, I pay by VISA.  Before I indicate my PIN number when I use my chip card, I am asked whether I wish to add a tip or gratuity and I usually add 15%-20% of the tax-excluded price for the services rendered.  The CRA when auditing such service providers/venues, adds the gratuity amounts to the consideration for the services and calculates the GST/HST owing.

Based on the cases I have seen, often the service provider does not charge the GST/HST on the gratuity portion and has to dip into their pockets to pay a substantial assessment.

The morale of the story is that when possible, recipients should give waitresses/waiters and service providers cash tips when they are adding an amount to the bill for the exceptions services performed by the individual to the recipient.  If the gratuities are in the invoices or in the credit card payments 13/113 of the amount in Ontario (12/112 in BC, 15/115 in NS, 113/113 in Nfld/Lab. and NB) will not go to the waitress/service provider and will be remitted to the Receiver General of Canada.  This is unfortunate because the individuals affected are making low hourly wages and rely on the gratuities as employment income (to make ends meet).

I have been involved in structuring the payments so that more money goes to the real people who work very hard for the additional employment income - it is possible if a business plans in advance of the CRA visit.

File Opening Forms May Provide Useful Information to Auditors

I am a big fan of anticipating a problem during a Canada Revenue Agency audit and solving the problem before it happens.  File opening forms may provide useful information to a CRA auditor.  The first thing they do is they inform the CRA auditor that you are diligent.  You took your GST/HST compliance responsibilities seriously.  You tried to ask the right questions in order to bill correctly.

A file opening form can be useful in recording the information that will allow you to determine whether the harmonized sales tax (HST) place of supply rules apply and at what rate you should be charging HST.

There isn't a single form that will work for all businesses - in other words, you would be wise to work with an HST lawyer or expert to develop the form and learn how to analyze the information on the form in a diligent manner.  If you have a billing policy, then you are more likely to get the answer right.

Some of the information that may be included on a file opening form (and I want to make it clear that this is not an all inclusive list) is:

  1. Date
  2. The correct legal name of the client/customer
  3. If the client is incorporated, the jurisdiction of the corporation and the incorporation number
  4. If the client is a partnership, the jurisdiction of the partnership and the partnership registration number
  5. The head office address or the address at which the individuals are located who provide instructions to you
  6. Name of the prime contact who will be giving instructions
  7. The normal location of that person
  8. Telephone number of the prime contact
  9. Fax number of the prime contact
  10. Email address of the prime contact
  11. If different than 6, the name of the person who hired you
  12. If different than 7, the normal location of the person who hired you
  13. If different than 8, the telephone number of the person who hired you
  14. Will you be providing (a) goods, (b) services, (c) real property, (4) intangible property, or (e) other
  15. A short statement of the proposed work
  16. If you are selling goods, the address to which goods will be shipped
  17. If you are providing services in respect of real property, the address at which you will be providing the services or the location of real property at issue
  18. Your client's/customer's GST/HST registration number

We would be willing to create a special file opening form for your business (for a fee to be determined based on the work involved - e.g., simple business would be $250 plus all applicable taxes).  We will ask more detailed questions about your business and add prompts for information that you will need to apply the HST place of supply rules (and ward away assessments).  We will teach you how to read the information so that you can charge the right amount of HST given your unique circumstances.  To prepare upfront, at the time of file opening, will in all likelihood be less expensive than a CRA assessment.

For more information, please contact me at 416-760-8999.  I am a Canadian sales tax lawyer.

HST = Haveto Sum Together

I have been asked many times over the last few days about reporting of harmonized sales tax (HST) on GST/HST returns.  One question was posed by a retailer who sells paintings across Canada.  He said that in the month of July (so far) he has sold paintings (and delivered the paintings in Ontario, British Columbia and Nova Scotia.  He has asked how he must report the GST/HST to the Canada Revenue Agency (CRA) on his GST/HST return.

My response is that he must add all the GST and HST together and report the combined amount on a single line of his GST/HST return.  I will give an example to help explain:

This is an example that I have made up and does not use the numbers I have been given by any person.  Let's assume we are already at the end of July for the purposes of my example.  The painter sold the following paintings, to the following destinations, and has collected the following amounts of GST and HST:

Painting Destination Value GST Collected HST Collected
Painting 1 British Columbia $10,000 $500 $700
Painting 2 Ontario $20,000 $1000 $1,600
Painting 3 Ontario $10,000 $500 $800
Painting 4 Alberta $30,000 $1,500 0
Painting 5 Nova Scotia $10,000 $500 $1000

The amount of GST/HST that must be reported on a single line on the painter's GST/HST return will be $8,100.  For reporting purposes, it will make no difference how many sales were made in each HST province.  The total combined GST/HST is reported on as a single number.  Believe it or not (agree or not), the governments thought that this approach would be easier and a basis for selling the HST to businesses as a simple tax.

Many ask at this point how each province gets their respective HST.  The payments to provinces go into a big pot of money and are allocated according to complicated formulas in the Comprehensive Integrated Tax Coordination Agreements (CITCAs)  I will not bore you with the details.

One final point is that the supplier's records must be auditable.  The CRA auditor will know the combined total and will ask how that number was determined.  The details remain relevant and suppliers should keep records that are easy for the auditors (and then the audits are less painful for the suppliers).

Businesses that Sell Goods Must Charge HST Based on Delivery

I have been asked many times over the last few days questions about the HST place of supply rules for goods. 

  • Does a retailer in Alberta have to charge HST (Ontario rate) on goods sold to a Ontario resident?

Answer: Yes

  • Does a wholesaler in Ontario have to charge HST (Ontario) on goods shipped to Quebec?

Answer: No

The HST place of supply rules for goods is:  HST is applicable to tangible personal property (goods) if the goods are delivered by the supplier (seller) to the recipient (buyer) in an HST province.

For the purposes of the HST place of supply rules for goods, property (a good) is deemed to be delivered in a particular province (e.g., Ontario) by a supplier (seller) and is deemed not to be delivered in any other province by the supplier (seller) if the supplier (seller):

(a) ships the property to a destination in the particular province (e.g. Ontario) that is specified in the contract for carriage of the property or transfers possession of the property to a common carrier or consignee that the supplier has retained on behalf of the recipient (buyer) to ship the property to such destination; or

(b) sends the property (good) by mail or courier to an address in the particular province (e.g., Ontario).

This means that:

  • If an individual comes into a retail store in Ontario and purchases a widget and the retailer gives the widget to the buyer in the store, GST/HST is payable at the combined rate of 13%.
  • If an individual goes into a store in British Columbia and buys a coat and asks the retailer to ship the coat to Ontario, GST/HST is payable at the combined rate of 13%.
  • If an individual goes into a store in British Columbia and buys a coat and takes the coat with him/her, GST/HST is payable at the combined rate of 12%.
  • If an person buys a painting from an artist in Alberta and has the painter ship the painting to Nova Scotia, GST/HST is payable at the rate of 15%.
  • If an Ontario based wholesales/distributor sells goods to a retailer in Quebec and ships the goods to Quebec, GST is payable at the rate of 5%.
  • If an Ontario based wholesales/distributor sells goods to a retailer in Quebec and the retailer sends his own truck to pick up the goods, GST/HST is payable at the rate of 13% because the goods were delivered on Ontario and could be given to another person in Ontario.

HST and Actors/Actresses - Will HST Cause Actors/Actresses to Avoid Canada?

More actors and actresses are concerned that Ontario's and British Columbia's decisions to implement harmonized sales tax (HST) will affect them --- and they should be concerned.  If they do not consider the issue of HST, the cost may be 13% of the contract in Ontario or 12% in British Columbia.  Since an actor/actress may make millions of dollars filming a movie in Canada, we are not talking about small numbers.

Subsection 143(1) of the Excise Tax Act (Canada) provides that:

For the purposes of this Part, a supply of personal property or a service made in Canada by a non-resident person shall be deemed to be made outside Canada, unless
(a) the supply is made in the course of a business carried on in Canada;
(b) at the time the supply is made, the person is registered under Subdivision d of Division V; or
(c) the supply is the supply of an admission in respect of a place of amusement, a seminar, an activity or an event where the non-resident person did not acquire the admission from another person.

If this provision applies, then an actor/actress would not have to register for GST/HST purposes and would not have to charge collect and remit GST/HST on their services performed in Canada.

On the other hand, subsection 240(1) of the Excise Tax Act (Canada) is the provision relating to registration and provides that:

"Every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered for the purposes of this Part, except where
(a) the person is a small supplier;
(b) the only commercial activity of the person is the making of supplies of real property by way of sale otherwise than in the course of a business; or
(c) the person is a non-resident person who does not carry on any business in Canada."

If a person must register for GST/HST purposes, they must charge, collect and remit GST/HST (if applicable) in respect of services performed in Canada (and a participating province).

Assuming that the actor/actress is a non-resident of Canada, the key question is whether they are "carrying on business" in Canada.  There is no definition of "carrying on business in Canada" in the Excise Tax Act.  As a result, whether a particular actor/actress is carrying on business in Canada will depend on the specific facts.  There are many factors specific to the work/life of the actor/actress, their background and their activities in a year that may cause the Canada Revenue Agency (Canada's IRS) (the "CRA) to conclude he/she is carrying on business in Canada as opposed to carrying on business outside Canada and visiting Canada (briefly) in connection with that outside business.

The CRA has issued a policy statement concerning the factors they consider when determining whether a person is carrying on business in Canada --- but none of the examples relates to actors/actresses. Policy Statement P-051R "Carrying on Business in Canada" was last updated in 2005.

It is important to note that getting GST/HST correct may mean that the actor/actress (or their production company) would charge GST/HST on the portion of their services performed in Canada and the payor would recover that GST/HST by way of an input tax credit.  If they do not ask the question, it may result in auditors, assessments and a bad & costly experience.

It is important to note that the GST/HST test is not connected to a permanent establishment in Canada like the Canada-United States Income Tax Treaty. In other words, an individual may not have to pay Canadian income tax and may be entitled to register for GST/HST purposes and charge GST/HST on a contract for services.

Canadian commodity tax lawyers can help apply the CRA's "carrying on business" test and provide opinions that are subject to solicitor-client privilege.

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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Service Providers That Make Presentations May Have to Rethink Venue

There are many types of service providers who make presentations to audiences.  Sometimes the audience is the public (e.g., business people who want to learn how to benefit from Facebook). Sometimes the audience is employees a a particular company (e.g., a law firm brings in a marketing guru t talk about business and sales plans, a nursing home operator brings in service providers to lecture bout ways to improve delivery of services, a bank brings in a security expert to talk to employees in a lecture hall, etc.).

The general HST place of supply rules may not apply to these types of transactions.  There is a special HST place of supply rule for services in connection with a location specific event. 

Section 28 of the New Harmonized Value-added Tax System Regulations provides:

"A supply of a service in relation to a performance, athletic or competitive event, festival, ceremony, conference, or similar event is made  in a province if the service is to be performed primarily at the location of the event in the province."

This means that if a service provider makes supplies of such services, they would charge HST at the rate of 13% if the event is held in Ontario (assuming the  50%"primarily" test is satisfied). if a service provider makes supplies of such services, they would charge HST at the rate of 12% if the event is held in British Columbia (assuming the  50%"primarily" test is satisfied). Similarly, if a service provider makes supplies of such services, they would not charge HST (but would charge GST) if the event is held in Alberta, Quebec, Saskatchewan, Manitoba or PEI.

The "primarily" test would be most often applicable if the person providing the service is from a different province than the province in which the event occurs.  If an Alberta-based marketing guru gives a presentation in Ontario, it is possible that HST would not apply to his/her speakers fee.  Based on my own experience giving presentations, it takes a significant amount of time to prepare the presentation and a short amount of time to deliver a presentation.  Based on my experience, out-of-HST province service providers may be able to demonstrate that HST is not applicable on a case-by-case basis.  that being said, if a service provider does not charge HST in relation to services provided in an HST province, they should maintain documentation regarding that decision.

I will predict that border cities (that is, cities on the border between an HST province and a non-HST province) will see a decrease in conferences.  Many conferences previously held in places like Ottawa will move to alternatives, such as Gatineau, Quebec.

Finally, MUSH sector and exempt businesses will consider venues for corporate events and internal training.  if an entity cannot claim full input tax credits and recover HST, if may be less expensive to hold events outside HST provinces.  That being said, the travel costs and costs associated with being away from the office might outweigh the HST costs.  That being said, if Paradise Island, Nassau, Bahamas offers great deals, we may see more winter/spring events outside HST provinces.  That being said, the Canada Revenue Agency might take a close look at taxable employee benefits.

Canada Border Services Agency Publishes Fact Sheet on HST & Imports

The Canada Border Services Agency has published a Fact Sheet entitled "The Canada Border Services Agency's Implementation of the Ontario and British Columbia Harmonized Sales Tax" (June 2010), which sets out some of information importers should know about HST.

In short, HST will be applied in respect of non-commercial goods (a.k.a things individuals import for personal use).  The "official definition of a "non-commercial good" is: "Non-commercial goods" means "all goods, other than goods imported into Canada for sale, or for any commercial, industrial, occupational, institutional, or other like use."

Beginning July 1, 2010, the importation into Canada of non-commercial goods by or for a consumer that is a resident of Ontario or British Columbia, will be subject to the HST. The HST will apply to non-commercial goods destined for Ontario and British Columbia, regardless of where the goods enter into Canada. NOTE: Goods destined for Nova Scotia, New Brunswick, and Newfoundland/Labrador are also subject to HST.

MORE IMPORTANTLY - As is the case today, the provincial component of the HST will not generally apply to commercial goods that are imported by an HST registrant for consumption, use or supply exclusively in the course of the commercial activities of the registrant.

For more information, please see the Fact Sheet.

We Now Have Place of Supply Regulations And More

In the June 9, 2010 Canada Gazette, the final HST place of supply regulations are published as SOR/2010-117 - now called "New Harmonized Value-added Tax System Regulations". Also included in the regulations are the HST anti-avoidance rules (Part 2), the HST transition rules (part 3), repeal of Place of Supply (GST/HST Regulations (Part 4) and application rules (Part 5).

It is about time that the nuts and bolts of the HST law is being made available to businesses in harmonized provinces. However, much is still missing, such as the real property rules and transition rules for builders of residential complexes. 

As at June 5, 2010 the Final HST Place of Supply Rules Have Not Been Promulgated

I have been watching the Department of Finance web-site and, to date, the final version of the HST Place of Supply Rules Regulations have not been promulgated.  We are 25 days away from the implementation date for HST in Ontario and British Columbia and we do not have the final version of the applicable rules.  How is this easier for businesses?  Businesses are the ones who will be assessed by Canada Revenue Agency auditors for mistakes.  It will be an penalty on businesses.

On April 30, 2010, the Department of Finance issued draft Regulations in Respect of the Place of Supply of Property and Services for public comment.

On June 3, 2010, the Canada Revenue Agency reissued its Technical Information Bulletin 103 (June 2010) on "Place of Supply Rules for Determining Whether a Supply is Made in a Province".

Canada Revenue Agency Reissues Revised Technical Information Bulletin 103 Regarding HST Place of Supply Rules

On June 3, 2010, the Canada Revenue Agency reissued a revised version of Technical Information Bulletin 103 "Place of Supply Rules for Determining Whether a Supply is Made in a Province".

This Technical Information Bulletin is 53 pages in length.  It has been updated to reflect changes to the HST place of supply rules in the draft regulations (drafted after the first release of the HST place of supply rules in February 2010). It contains 127 examples to assist businesses.  Some of the examples are helpful and others do not reflect common situations that businesses will experience.  That being said, the Canada Revenue Agency has released a document that all businesses should read as soon as possible.  If a business cannot find the answer in the Technical Information Bulletin, they should seek a ruling from the Canada Revenue Agency.

 

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"

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What Are The HST Place of Supply Rules For Services

Businesses in the HST Zone (Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador) will have to use the newly released harmonized sales tax (HST) place of supply rules, some of which are different from the existing place of supply rules (for Nova Scotia, New Brunswick and Newfoundland/Labrador). The applicable HST rates are:


• Ontario: 13% (5% GST and 8% provincial HST component)
• British Columbia: 12% (5% GST and 7% provincial HST component)
• Nova Scotia: 15% (5% GST and 10% provincial HST component starting July 1)
• New Brunswick: 13% (5% GST and 8% provincial HST component)
• Newfoundland/Labrador: 13% (5% GST and 8% provincial HST component)


In addition, some businesses outside the HST Zone will be required to charge, collect, and remit HST to Canada’s federal government in accordance with the place of supply rules when the place of supply is within the HST Zone.


On February 25, 2010, Canada's Department of Finance released an administrative document containing its proposed HST place of supply rules which will be used to determine whether a supplier must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient must pay HST in connection with an acquisition or importation and at what rate. The Canada Revenue Agency subsequently issued, simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.


The HST place of supply rules for services have evolved from the existing rules to reflect the addition of the larger economic provinces of Ontario and British Columbia to the HST Zone.
The first question to ask when applying the HST place of supply rules is: What is being supplied or sold? Is it property (tangible personal property, real property or intangible property) or a service? If the supplier is supplying or providing a service, then the HST place of supply rules for services should be used.


On April 30, 2010, the Department of Finance released Draft Regulations in relation to Place of Supply for Property and Services.


The next question is whether one of the specific place of supply rules applies or the general place of supply rules for services. Determine whether any of the following types of services are being provided and, if so, go to the specific place of supply rule:


• personal services (e.g., a hair cut)
• services in relation to real property (e.g., constructing a house);
• services in relation to intangible property (e.g., designing a trade mark)
• computer-related services and Internet access;
• telecommunication services;
• premium rate telephone services;
• services in relation to a location specific event (e.g., participation in a conference);
• passenger transportation services;
• services supplied on board conveyances;
• baggage charges;
• services of child supervision;
• services related to a ticket, voucher or reservation;
• freight transportation services;
• postage and delivery services;
• customs brokerage services;
• air navigation services;
• repairs, maintenance, cleaning, alterations and other services relating to goods;
• service of a trustee in respect of a trust governed by an RRSP, RRIF or RESP.


If the supplier is not providing any of the above listed specific services (and note the devil may be in the details), then the general place of supply rules for services will apply. There are 5 general place of supply rules for services, which must be applied in the following order. Rule 1, 2 and 5 are the fundamental rules. Rules 3 and Rule 4 are tie-breaker rules
 

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What Are The HST Place of Supply Rules For Customs Brokers?

On February 25, 2010, the Department of Finance released a News Release summarizing the proposed harmonized sales tax (“HST”) place of supply rules and shortly thereafter the Canada Revenue Agency released a GST/HST Technical Information Bulletin setting out its administrative position. On April 30, 2010, the Department of Finance released “Draft Regulations in respect of the Place of Supply of Property and Services” (the “Draft Regulations”). There is a separate HST place of supply rule for customs brokerage services.


Section 24 of the Draft Regulations sets out the HST place of supply rules for customs brokerage services:


24.(1) Where a supply of a service is made in respect of the importation of goods and the service is the arranging for their release (as defined in subsection 2(1) of the Customs Act) or the fulfilling, in respect of the importation, of any requirement under that Act or the Customs Tariff to account for the goods, to report, to provide information or to remit any amount,


(a) if the goods are accounted for as commercial goods (as defined in subsection 212.1(1) of the Act) under section 32 of the Customs Act, the supply is made in the province in which the goods are situated at the time of their release;
(b) if paragraph (a) does not apply and tax, calculated at the tax rate for a participating province, is imposed under subsection 212.1(2) of the Act, or would be so imposed if subsections 212.1(3) and (4) and section 213 of the Act did not apply, in respect of the importation, the supply is made in that participating province; and
(c) in any other case, the supply is made in a non-participating province.


(2) Subsection (1) does not apply to the supply of any service provided in relation to an objection, appeal, redetermination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing.


This means that:


Rule 1: If commercial goods are imported into Canada, the place of supply of the customs brokerage and related services is in the province in which the goods are released. Therefore, if the goods are released at Toronto Pearson International Airport, the Ontario HST (13%) would apply. If the goods are released at the Vancouver Port, then British Columbia HST (12%) will apply. If the goods are released at the Halifax Port, the Nova Scotia HST (15%) will apply after July 1, 2010.

 

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HST Place of Supply Rules for Litigators and Those Who Provide Litigation Services (Revised)

The harmonized sales tax (HST) place of supply rules include a specific rules for "services rendered in connection with litigation". These rules apply to lawyers, process servers, transcription service providers, those who provide expert opinions in connection with litigation, etc.

Section 26 of the Draft Regulations in respect of Place of Supply for Property and Services released on April 30, 2010 sets out the proposed specific place of supply rules for services in relation to litigation:

"A supply of a service rendered in connection with criminal, civil or administrative litigation (other than a service rendered before the commencement of such litigation) that is under the jurisdiction of a court or other tribunal established under the laws of a province, or in the nature of an appeal from a decision of a court or other tribunal established under the laws of a province, is made in that province."

More simply put, the rules are:


Rule #1: The general place of supply rules for services will apply to criminal, civil or administrative litigation services provided prior to the commencement of such litigation.
For example, if a person hires a lawyer to discuss whether the facts warrant litigation, the general rules apply. If a person hires a lawyer to sue an opponent and discussions lead to a settlement before a statement of claim is filed with the Court, the general place of supply rules would apply.
 

Rule #2: The general place of supply rules will apply to services in connection with litigation that is under the jurisdiction of a Court or other Tribunal established under the laws of Canada (rather than the laws of a province).


Rule #3: The general rules for services will not apply to litigation services rendered after the commencement of litigation. If the services are in connection with litigation that is under the jurisdiction of a court in an HST province (Ontario, British Columbia, Nova Scotia, New Brunswick or Newfoundland/Labrador) or is in the nature of an appeal from a decision of a court or other Tribunal established under the laws of an HST province, then HST applies.


If litigation has commenced (e.g., there is an initiating document such as a statement of claim) and Rule 3 applies, a supply of a service rendered in connection with criminal, civil or administrative litigation in an HST province, the supply will be regarded as being made in that HST province. In other words, if the litigation is in the Ontario Superior Court of Justice and you have a court file number assigned, HST at the rate of 13% applies.


Rule #4: If litigation has commenced (e.g., there is an initiating document such as a statement of claim), a supply of a service rendered in connection with criminal, civil or administrative litigation filed with a court under the laws of a non-HST province (e.g., Alberta), the supply will be regarded as being made in that non-HST province. In other words, if the litigation is in Alberta and you have a court file number assigned, HST will not be applicable to the services in connection with the litigation (however GST will be applicable).


Rule #5: If a supply of services in respect of litigation is supplied to a non-resident of Canada, the zero-rating provisions may apply to both the GST and HST component. The HST place of supply rules do not override the zero-rating provisions for exported services and professional services.
 

An unanswered question is whether an arbitration is "litigation" under the place of supply rules and, therefore, subject to the specific place of supply rule discussed above. If the Canada Revenue Agency takes the position that an arbitration is caught by the rules, arbitration centres in the HST Zone may not be popular with Canadian parties. Also, business law lawyers and in-house counsel may have to reconsider contractually stipulating that Ontario or British Columbia as the place of arbitration in contracts.


Lawyers should consider whether their clients can save HST based on the place of filing and should start asking the questions as part of their litigation strategy now --- given that litigation filed today will likely continue after HST implementation.


Lawyers and service providers should also recognize that the place of supply rule for pre-filing services is different than post-filing litigation services. Therefore, one file might involve a change in the HST rate. When this happens, it is best to open a new file at the time of the filing of the initiating document
 

Canada's Department of Finance Has Released Draft HST Place of Supply Rules Regulations

On April 30, 2010, Canada's Department of Finance released "Draft Regulations in respect of the Place of Supply of Property and Services".  Section 33 states that the Place of Supply (GST/HST) Regulations are to be repealed and replaced by the Regulations in respect of the Place of Supply of Property and Services.  Even though these regulations have been released in draft form, the will apply to supplies made (a) on or after May 1, 2010 and (b) after February 25, 2010 and before May 1, 2010 unless any part of the consideration for the supply becomes due or is paid before May 1, 2010.

It is very important to note that the place of supply rules have changed slightly in certain cases.  For example. the place of supply rules for services in connection with litigation have changed from:

February 25, 2010 version: "A supply of a service rendered in connection with criminal. civil or administrative litigation in a particular province will be regarded as being made in that province.

to:

April 30, 2010 version: A supply of a service rendered in connection with criminal, civil or administrative litigation (other than a service rendered before the commencement of such litigation) that is under the jurisdiction of a court or other tribunal established under the laws of a province or in the nature of an appeal from a decision of a court of other tribunal established under the laws of a province, is made in that province.

The HST Blog raised concerns about the draft place of supply rule for litigation services and may have influenced the change.

There are other changes to the draft regulations that will be discussed in future blog posts. Please note that draft regulations trump administrative announcements.

HST Place of Supply Rules for Customs Brokers

On February 25, 2010, the Department of Finance released a News Release about what will be the HST place of supply rules after regulations are promulgated. Interestingly, the Department of Finance is going to create a separate rule for customs brokerage services. "Customs brokerage services" are currently understood to mean:

"a service of arranging for the release of imported goods, or fulfilling, in respect of the importation, (whether before, at the time of or after the release) any accounting,, reporting or information requirements imposed under the Customs Act or the Customs Tariff Act or any requirements under either of those Acts to remit any amount."

Since I wrote on March 17, 2010 about the HST rules for imports, I thought I should share the funny little place of supply rules for customs brokers services.

In the February 25, 2010 News Release, the Department of Finance wrote:

Under the current rules, the place of supply of a service of arranging for the release of imported goods, or fulfilling, in respect of the importation, (whether before, at the time of or after the release) any accounting,, reporting or information requirements imposed under the Customs Act or the Customs Tariff Act or any requirements under either of those Acts to remit any amount is in a province if the goods are situated in that province at the time of their release.

It is proposed that this rule continue to apply in respect of commercial goods. However, in the case of non-commercial goods, generally if the provincial component of HST for a participating province is imposed in respect of the importation of the goods, the supply of the customs brokerage service will be regarded as made in that participating province.

The above rules will not apply to the supply of any service provided in relation to an objection, appeal, re-determination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing. These types of services will continue to be subject to the place of supply rules for services described in other parts of this document.

The changes to the Excise Tax Act or the Regulations still have to be made public and must undergo the applicable legislative steps to become law.

The CRA clarifies the place of supply rules in GST/HST Technical Information Bulletin B-103 "Harmonized Sales Tax: Place of suppy rules for determining whether a supply is made in a province" as follows:

Rule #1: If the importation is commercial goods (for which HST is not collected), the place of supply of the customs brokerage and related services is in the province in which the goods are released. Therefore, if the goods are released at Toronto Pearson Airport, the Ontario HST would apply. If the goods are released at the Vancouver Port, then British Columbia HST will apply.

However, if goods are placed in a bonded warehouse in Montreal, HST would not be applicable to the brokerage charges.

Rule #2: If the customs brokerage services relate to an objection, appeal, re-determination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing (called herein "post-importation customs brokerage services"), Rule #1 does not apply. The general place of supply rules for services would be applicable.

The 5 main place of supply rules for services are applied in the following order:

(a) If the recipient's address or the address most closely connected with the supply in in the HST Zone, the applicable HST rate would be applied to the post-importation customs brokerage services;

(b) If the recipient does not have a Canadian address, the post-importation customs brokerage services will be considered to be supplied in the province in which the greatest proportion of the services is performed. For example, if the customs broker is located in Ontario and a customs broker in Ontario completes the B2 adjustments/appeals, then Ontario HST would apply.

(c) If 2 applies and the post-importation customs brokerage services are performed equally in two or more particular HST provinces, the HST province with the highest HST rate would be considered to be the place of supply.

(d) If 3 applies but a single HST province cannot be identified (same 13% rate in more than one province), the post-importation customs brokerage services will be subject to 13% HST.

(e) If the recipient does not have a Canadian address and the customs brokerage service is not performed primarily in an HST province or the HST Zone, then HST would not apply to the post-importation customs brokerage services.

Rule #3: If the importation relates to non-commercial goods, whether HST applies to the customs brokerage service will depend on whether the goods are subject to HST under the place of supply rules for goods. 

Proposed HST Place of Supply Rule For Real Property Is Relatively Straight-Forward

On February 25, 2010, Canada's Department of Finance released its proposed harmonized sales tax (HST) place of supply rules which will be used to determine whether a supplier (Seller) must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient (Buyer) must pay HST in connection with an acquisition or importation and at what rate. Simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.

The proposed place of supply rule for real property is relatively straight-forward. With respect to the place of supply rule for real property, the Department of Finance did not make any changes to the current rule applicable in Nova Scotia, New Brunswick, & Newfoundland and Labrador.

A supply of real property will be considered to be made in the province in which the real property is situated. If the real property being supplied is located in British Columbia, HST will be applicable at the rate of 12%. If the real property being supplied is located in Ontario, Nova Scotia, New Brunswick or Newfoundland and Labrador, HST will be applicable at the rate of 13%. If the real property being supplied is located in Quebec, Prince Edward Island, Manitoba, Saskatchewan, Alberta or one of the three territories, HST will not be applicable. However, GST would be applicable at the rate of 5%.

The Department of Finance provides the following example:

    A sale of a warehouse situated in Sarnia, Ontario will be subject to HST at a rate of 13 per cent (a 5 per cent federal component and an 8 per cent Ontario component).

Some other examples would be:

  • A sale of timber lands situated in British Columbia will be subject to HST at a rate of 12 per cent (a 5 per cent federal component and an 7 per cent British Columbia component).
  • A sale of vacant land situated in Goderich, Ontario will be subject to HST at a rate of 13 per cent (a 5 per cent federal component and an 8 per cent Ontario component).
  • A sale of a resource property (the land component) in Alberta, will not be subject to HST, but will be subject to GST.

In addition, the supply of an interest in real property is considered to be a supply of real property and the HST place of supply rules for real property would apply. For example, an option to purchase real property would be considered to be real property. If a recipient pays an amount for the right to purchase a leased factory in 10 years, the payment would subject to HST if the factory is located in the HST Zone (British Columbia, Ontario, Nova Scotia, New Brunswick or Newfoundland and Labrador.

The lease of real property is also considered to be a supply of real property. For example, a lease of office space in Toronto, Ontario will be subject to HST at a rate of 13 per cent (a 5 per cent federal component and an 8 per cent Ontario component).

If a company in Ontario leases a commercial office building in British Columbia, the supply of real property will be considered to be made in British Columbia. As a result, HST would be imposed at a rate of 12 per cent (a 5 per cent federal component and an 7 per cent British Columbia component) despite the fact the company is incorporated under the laws of Ontario. The key fact is that the real property that is being leased is located in British Columbia.

There will be situations where a person owns real property in more than one Canadian province and transfers all or some of its assets to another person. For example, a large Canadian company with real property assets in Ontario and Quebec sells all of the assets of its business. In this case, it is proposed that the place of supply rules will deem there to have been separate supplies of real property in Ontario and Quebec. The transfer of the real property located in Ontario would be subject to HST at a rate of 13 per cent (a 5 per cent federal component and an 8 per cent Ontario component). The transfer of the real property located in Quebec would be subject to GST at a rate of 5 per cent and would not be subject to HST (would be subject to QST).

Conversely, a payment made to break a real property lease would be considered to be a supply of real property and would be subject to HST if the real property is located in the HST Zone.

HST Place of Supply Rules for Services

Warning: On April 30, 2010 the Department of Finance released draft place of supply rules regulations that supersede/override the information in this post.  Please do not rely on the information in this post.

Harmonized Sales Tax (“HST") will become a reality in Ontario and British Columbia on July 1, 2010. And some businesses are required to start collecting HST as of May 1, 2010.

Businesses in the HST Zone  - Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador - will have to use the newly released place of supply rules, some of which are different from the existing place of supply rules (for Nova Scotia, New Brunswick and Newfoundland/Labrador). The applicable HST rates are:

  • Ontario: 13% (5% GST and 8% provincial HST component)
  • British Columbia: 12% (5% GST and 7% provincial HST component)
  • Nova Scotia: 13% (5% GST and 8% provincial HST component)
  • New Brunswick: 13% (5% GST and 8% provincial HST component)
  • Newfoundland/Labrador: 13% (5% GST and 8% provincial HST component)

In addition, some businesses outside the HST Zone will be required to charge, collect, and remit HST to the Federal Government in accordance with the place of supply rules when the place of supply is within the HST Zone.

On February 25, 2010, Canada's Department of Finance released its proposed harmonized sales tax (HST) place of supply rules which will be used to determine whether a supplier must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient must pay HST in connection with an acquisition or importation and at what rate. Simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.

The HST place of supply rules for services have evolved from the existing rules to reflect the addition of the larger economic provinces of Ontario and British Columbia to the HST Zone.

The first question to ask when applying the HST place of supply rules is: What is being supplied or sold? Is it property (tangible personal property, real property or intangible property) or a service? If the supplier is supplying or providing a service, then the HST place of supply rules for services should be used.

The next question is whether one of the specific place of supply rules applies or the general place of supply rules for services. Determine whether any of the following types of services are being provided and, if so, go to the specific place of supply rule:

  • personal services (e.g., a hair cut)
  • services in relation to real property (e.g., constructing a house);
  • services in relation to intangible property (e.g., designing a trade mark)
  • computer-related services and Internet access;
  • telecommunication services;
  • premium rate telephone services;
  • services in relation to a location specific event (e.g., participation in a conference);
  • passenger transportation services;
  • services supplied on board conveyances;
  • baggage charges;
  • services of child supervision;
  • services related to a ticket, voucher or reservation;
  • freight transportation services;
  • postage and delivery services;
  • customs brokerage services;
  • air navigation services;
  • repairs, maintenance, cleaning, alterations and other services relating to goods;
  • service of a trustee in respect of a trust governed by an RRSP, RRIF or RESP.

If the supplier is not providing any of the above listed specific services (and note the devil may be in the details or the unpublished legislation or regulations), then the general place of supply rules for services will apply. There are 4 general place of supply rules for services, which must be applied in the following order. Rule #1 and Rule # 2 are the fundamental rules. Rules #3 and Rule #4 are tie-breaker rules.

Rule #1: If a supply of a service is made and, in the normal course of business, the supplier obtains a particular address of the recipient that is

(a) a home or business address in Canada of the recipient,

(b) where the supplier obtains more than one home or business address in Canada of the recipient, the home or business address that is most closely connected with the supply, or

(c) where the supplier does not obtain a home or business address in Canada of the recipient, another Canadian address that is most closely connected with the supply,

the supply will be regarded as made in the province in which the particular address is situated.

NOTE: The Canada Revenue Agency (CRA) has indicated that it will release additional guidance on how they plan to interpret the "most closely connected with the supply" requirement. The CRA plans on establishing a hierarchy of criteria to apply. The hierarchical criteria will be released in due course. However, we have been informed that the first criteria to apply are not the place of the billing address.

Rule # 2: If, in the normal course of business, an address in Canada of the recipient is not obtained by the supplier of a service, the supply will be regarded as having been made in a participating province if the part of the service that is performed in Canada is performed primarily in the participating provinces. In such instances, the supply will be regarded as made in the participating province in which the greatest proportion of the service is performed.

Rule #3: If (a) Rule #2 applies (i.e., no address in Canada of the recipient is obtained and the service that is performed in Canada is performed primarily in the participating provinces), and (b) a single participating province cannot be determined as being the participating province in which the greatest proportion of the service is performed because the service is performed equally in two or more particular participating provinces, then the supply will be regarded as made in the particular participating province for which the rate of the provincial component of HST is highest.

Rule #4: If Rule 3 applies, but a single participating province still cannot be determined to be the place of supply because the particular rate of the provincial component of the HST in two or more of the particular participating provinces is the same, the supplier will be required to charge HST by applying that particular rate. In other words, if 3 applies, but a single HST province cannot be identified (same 13% rate in more than one province), the services will be subject to 13% HST.

The application of the HST place of supply rules in any given situation may be a complicated legal task.

HST Place of Supply Rules for Litigators and Those Who Provide Litigation Services

Warning: On April 30, 2010 the Department of Finance released draft place of supply rules regulations that supersede/override the information in this post.  Please do not rely on the information in this post.

The HST place of supply rules include a specific rules for "services rendered in connection with litigation". These rules apply to lawyers, process servers, transcription service providers, those who provide expert opinions in connection with litigation, etc.

Rule #1: The general place of supply rules for services will apply to criminal, civil or administrative litigation services provided prior to the commencement of such litigation.  The general place of supply rule focuses on the billing address of the client and the place where the services are performed..  There is a hierarchy of 4 place of supply rules that are applied in order.

For example, if a person hires a lawyer to discuss whether the facts warrant litigation, the general rules apply.  If a person hires a lawyer to sue an opponent and discussions lead to a settlement before a statement of claim is filed with the Court, the general place of supply rules would apply. 

Rule #2: The general rules for services will not apply to litigation services rendered after the commencement of litigation. In other words, if there is an initiating document (such as a statement of claim) Rule 2 applies and Rule 1 does not apply.

Rule #3: If litigation has commenced, a supply of a service rendered in connection with criminal, civil or administrative litigation in an HST province will be regarded as being made in that HST province.  In other words, if the litigation is in the Ontario Superior Court of Justice and you have a court file number assigned, HST at the rate of 13% applies.

Rule #4: If litigation has commenced, a supply of a service rendered in connection with criminal, civil or administrative litigation in a non-HST province (e.g., Alberta) will be regarded as being made in that non-HST province.  In other words, if the litigation is in Alberta and you have a court file number assigned, HST will not be applicable to the services in connection with the litigation (however GST will be applicable).

Rule #5: If a supply of services in respect of litigation is supplied to a non-resident of Canada, the zero-rating provisions may apply to both the GST and HST component. The HST place of supply rules do not override the zero-rating provisions for exported services and professional services.

The HST place of supply rules do not currently distinguish between federal court litigation and provincial court litigation. As a result, it is not clear whether filing a Tax Court of Canada case in Alberta will save the litigants HST.  It is also not clear whether all pre-hearing meetings and the trial must take place in Alberta if the case is filed in Alberta.

It is also not clear whether all cases filed with the Canadian International Trade Tribunal, which is located in Ottawa, will be subject to Ontario HST at 13% even if the affected litigant is located in Alberta. The same confusion will hold true for many other administrative tribunals with all the powers of a superior court of record, such as the CRTC, the Competition Bureau, to name a few. There are a number of federal statutes that create administrative tribunals and a number of federal statutes establish appeal rights only to that federal tribunal that happens to be located in the nation's capital, Ottawa, which is located in the HST Zone. it will be interesting to watch whether access to justice issues are raised by persons (such as individuals) who cannot recover HST costs.

Another question is whether an arbitration is "litigation" under the place of supply rules and, therefore, subject to the specific place of supply rule discussed above that bases the application of HST on the place of the filing. If the Canada Revenue Agency takes the position that an arbitration is caught by the rules, arbitration centres in the HST Zone may not be popular with Canadian parties. Also, business law lawyers and in-house counsel may have to reconsider contractually stipulating that Ontario or British Columbia as the place of arbitration in contracts.

Lawyers should consider whether their clients can save HST based on the place of filing and should start asking the questions as part of their litigation strategy now --- given that litigation filed today will likely continue after HST implementation.

Lawyers and service providers should also recognize that the place of supply rule for pre-filing services is different than post-filing litigation services. Therefore, one file might involve a change in the HST rate. When this happens, it is best to open a new file at the time of the filing of the initiating document.

HST Place of Supply Rules for Goods: Suppliers Outside HST Zone Also Affected

On February 25, 2010, Canada's Department of Finance released its proposed harmonized sales tax (HST) place of supply rules which will be used to determine whether a supplier must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient must pay HST in connection with an acquisition or importation and at what rate. Simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.

The proposed HST place of supply rules for tangible personal property (goods) may surprise sellers of goods located in Alberta, Saskatchewan, Manitoba, Quebec and Prince Edward Island. Based on the Canada Revenue Agency's (CRA) views, some suppliers located in non-HST provinces may be required to charge, collect and remit HST. All suppliers of goods in Canada may need to consider whether they want to continue to ship goods to recipients in the HST Zone (and in particular Ontario and British Columbia). Some sellers of goods need to start working quickly to update their computer systems and accounting systems to account for HST on supplies of goods.

The proposed HST Place of Supply Rules to be in effect after July 1, 2010 are:

Rule #1: A supply of goods by way of sale is deemed to be made in a province if the supplier (Seller) of the goods delivers the goods or makes the goods available to the recipient (Buyer) in the province. For example, if an individual goes into a store in Ontario and purchases goods (e.g., a television), the store would charge HST at the rate of 13% (5% GST and 8% Ontario HST). The key fact is the place of delivery.

CRA Example: A supplier in Ontario agrees to sell to a purchaser in British Columbia. Based on the terms of delivery in the agreement for the supply of goods, legal delivery of the goods to the purchaser occurs in British Columbia.

CRA Position: The CRA takes the position that because legal delivery of the goods to the purchaser occurs in British Columbia, the supply of the goods is made in British Columbia and the supply will be subject to HST a rate of 12%.

CRA Example: A retailer in Ontario sells goods to a purchaser that is a resident of British Columbia and is visiting Ontario. The purchaser picks up the goods at the retailer's premises in Ontario and then transports the goods to British Columbia.

CRA Position: The goods are delivered to the purchaser in Ontario. The supply of goods is therefore made in Ontario and is proposed to be subject to HST at a rate of 13%.

Rule #2: A supply of goods by way of sale is deemed to be made inside the HST Zone (British Columbia, Ontario, Nova Scotia, New Brunswick, and Newfoundland and Labrador) if the legal delivery of the goods is made in that province. For the purposes of this rule, goods are deemed to be delivered in the HST Zone, and not outside the HST Zone, if the supplier either:

  • (a) ships the property to a destination in the HST Zone that is specified in the contract for shipment of the goods;
  • (b) transfers possession of the goods to a common carrier or consignee that the supplier has retained on behalf of the recipient (Buyer) to ship the goods to a destination in the HST Zone; or
  • (c) sends the goods by mail or courier to an address in the HST Zone.

Pursuant to this rule, Incoterms, such as F.O.B. (freight or board) or C.I.F. (cost, insurance freight) are important if the location stated is within the HST Zone.

CRA Example: A supplier in Alberta agrees to sell goods to a purchaser in Ontario. Based on the terms in the agreement for the supply of the goods, legal delivery of the goods to the purchaser occurs in Alberta. However, the supplier agrees to have the goods shipped to the purchaser in Ontario.

CRA Position: Although legal delivery of the goods to the purchaser occurs in Alberta, delivery of the goods to the purchaser is deemed to occur in Ontario because the supplier ships the goods to Ontario. The supply of goods is therefore made in Ontario and is proposed to be subject to HST at a rate of 13%.

CRA Example: A mail-order company located in Nova Scotia sells greeting cards to customers across Canada. The company places the packages of greeting cards in the mail for delivery to customers in Ontario and British Columbia.

CRA Position: The supply of greeting cards mailed to Ontario is made in Ontario and is proposed to be subject to HST at a rate of 13%. The supply of greeting cards mailed to British Columbia is made in British Columbia and is proposed to be subject to HST at a rate of 12%.

Rule #3: Where a recipient of a supply of goods by way of lease, license or similar arrangement (Lessee) subsequently exercises an option to purchase the goods, the recipient lessee is deemed to take delivery by way of sale at the time and place at which the recipient lessee ceased to have possession of the property as a lessee and begins to have possession of the property as a purchaser. The key fact is the location of the goods at the time the option to purchase is exercised.

For example, if a person in Ontario leases a piece of manufacturing equipment from a lessor in Quebec and exercises an option to purchase the equipment at a late date when the equipment is in Ontario, HST will be applicable at a rate of 13% in respect of the option price.

The rate of HST will depend on which HST Zone province is the destination.

Rule #4: Where a supply of goods is made by way of lease, license or similar arrangement (other than a specified motor vehicle) (e.g. an equipment lease) for consideration that is attributed to a period (referred to as a "lease interval") and the lease, license or similar arrangement exceeds three months, the supply is deemed to be made in the HST Zone if the ordinary location of the property is within the HST Zone.

For the purposes of the place of supply rules, the ordinary location of the property is deemed to be the location where the supplier and the recipient mutually agree. This is a concession because the supplier may not be in the best position to know where the recipient has the goods. The CRA states that, "In other words, the mutual agreement of the supplier and the recipient will be determinative even where the property is actually located in a different place at the relevant time than what had been agreed upon."

The CRA will look to the contract and any subsequent amendments to agreements to determine the location of the leased goods.

A separate supply of the goods is deemed to be made for each lease interval of the earliest of the first day of the lease interval, the day on which the lease payment attributable to the lease interval becomes due and the day the payment is made.

Rule #5: Where a supply of goods is made by way of lease, license or similar arrangement (other than a specified motor vehicle) (e.g. an equipment lease) and the lease, license or similar arrangement does not exceed three months, the supply is deemed to be made in province in which the supplier delivers the goods or makes the goods available to the recipient. For the purposes of this rule, goods are deemed to be delivered in the HST Zone, and not outside the HST Zone, if the supplier either:

  • (a) ships the property to a destination in the HST Zone that is specified in the contract for shipment of the goods;
  • (b) transfers possession of the goods to a common carrier or consignee that the supplier has retained on behalf of the recipient (Buyer) to ship the goods to a destination in the HST Zone; or
  • (c) sends the goods by mail or courier to an address in the HST Zone.

New GST/HST Electronic Filing Requirements Announced

To little fanfare and no media attention, on January 4, 2010, The Honourable Jean-Pierre Blackburn, Minister of National Revenue and Minister of State (Agriculture and Agri-Food) announced proposed changes to electronic filing requirements for goods and services tax/harmonized sales tax (GST/HST) registrants beginning July 1, 2010.

The reason for the electronic filing requirements is that the Canada Revenue Agency needs to gather information so that the Department of Finance can communicate information to Ontario and British Columbia pursuant to the CITCAs (a.k.a. HST Agreements).

Currently, only GST/HST registrants who meet the criteria set by the Minister of National Revenue have the option to use electronic filing. As a result of the proposed changes, restrictions will be removed so that all registrants, including those registrants that file a return with Revenu Québec, will be able to file electronically.

Under the new proposed measures, the following groups will be required to file their GST/HST returns electronically:

  • GST/HST registrants with greater than $1.5 million in annual taxable supplies (except for charities); or
  • all registrants required to recapture input tax credits for the provincial portion of the HST on certain inputs in Ontario or British Columbia; or
  • builders affected by the transitional housing measures announced by Ontario or British Columbia.

In general, charities and most GST/HST registrants with annual taxable supplies of $1.5 million or less will not be affected by these changes, although the CRA is encouraging all GST/HST registrants, regardless of their filing frequency and reporting requirements, to use electronic services.

Regulations specifying the persons and classes of persons who will be required to file an electronic return will be available soon (government has been prorogued).

The CRA will offer several electronic filing options for GST/HST registrants. However, many registrants will not have an option and will be forced to use a particular electronic filing method.

  • GST/HST NETFILE
    • Netfile is a free Internet-based filing service that allows registrants to file their returns directly to the CRA over the Internet. To file using GST/HST NETFILE, registrants complete an online form, enter the required information and confirm that they want to file their return. Once the registrant hits <submit></submit></submit><//submit>a confirmation page will immediately be displayed containing the six-digit confirmation number.
    • It is proposed that the following GST/HST registrants would be required to file an electronic return using GST/HST NETFILE effective for the first reporting period that ends on or after July 1, 2010:
    • any registrants that are required to recapture ITCs on the provincial portion of the HST on certain inputs in Ontario or British Columbia (see below); and
    • builders that
      • make sales of grandparented housing where the purchaser is not entitled to claim a GST/HST new housing rebate or new residential rental property rebate;
      • make sales of housing that are subject to the HST where the builder purchased the housing on a grandparented basis;
      • are required to report a transitional tax adjustment amount; or
      • report provincial transitional new housing rebates (see below).
    • In conjunction with these proposed new filing requirements, the CRA will include new information fields on the GST/HST NETFILE return for these registrants.

  • GST/HST TELEFILE
    • Telefile allows eligible registrants to file their GST/HST returns using their touch-tone telephone and a toll-free number.
    • It is also proposed that each builder having greater than $1.5 million in annual taxable supplies that is not otherwise required to file using GST/HST NETFILE and that pays or credits a GST/HST new housing rebate amount to the purchaser and claims that amount as a deduction from the builder’s GST/HST liability would be required to file an electronic return using GST/HST NETFILE or GST/HST TELEFILE effective for the first reporting period that ends on or after July 1, 2010.

    • As a result of the proposed changes, the CRA will include new information fields on the GST/HST NETFILE and GST/HST TELEFILE returns for these registrants.

  • Electronic Data Interchange (EDI)
    • EDI is a computer-to-computer exchange of information in a standard format. Eligible registrants can use EDI to file their GST/HST returns and remit their GST/HST payments electronically.
  • GST/HST Internet File Transfer (GIFT)
    • GIFT is a new option that allows eligible registrants to utilize third-party CRA certified accounting software to file their returns electronically.
    • It is also proposed that all GST/HST registrants, other than those required to file using GST/HST NETFILE or GST/HST TELEFILE and with greater than $1.5 million in annual taxable supplies, excluding charities, would be required to file an electronic return using GST/HST NETFILE, GST/HST TELEFILE, EDI or GIFT effective for the first reporting period that ends on or after July 1, 2010.

The CRA provides the following chart:

 

 

Type of Business Filing Options

Businesses that:
a) are required to recapture ITCs for the provincial portion of the HST on certain inputs in Ontario or British Columbia; or
b) are builders who sell grandparented housing where the purchaser is not entitled to claim a GST/HST new housing rebate or new residential rental property rebate; or
c) are builders who sell housing subject to the HST where the builder purchased that housing on a grandparented basis; or
d) are builders who are required to remit the transitional tax adjustment on housing; or
e) are builders who are reporting provincial transitional new housing rebates.

GST/HST NETFILE

Unless required to file using GST/HST NETFILE, builders with greater than $1.5 million in annual taxable supplies that pay or credit a GST/HST new housing rebate amount to the purchaser and claim that amount as a deduction from their GST/HST liability.

GST/HST NETFILE
GST/HST TELEFILE

Businesses that are not required to file using GST/HST NETFILE or GST/HST TELEFILE and with annual taxable supplies exceeding $1.5 million, excluding charities.

GST/HST NETFILE
GST/HST TELEFILE
GIFT
EDI

All other businesses.

GST/HST NETFILE
GST/HST TELEFILE
GIFT
EDI
Paper Return

The businesses that I have spoken with suggest that there are complications that need to be considered.  It is necessary to communicate with the Canada Revenue Agency if there are any problems so that notes can be made in your file and accommodations can be discussed.