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.

What Is The Best Defense to A Purchase Side Audit?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Did you have difficulty reconciling various reports? Fix it. 

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

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

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

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

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

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

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

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

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

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

Would you like to find MONEY in your Business?

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

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

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

I will share one tip today. 

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

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

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

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

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

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

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

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

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

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

Registrant Purchasers of Real Property Should Update Certificates

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

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

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

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

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

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

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

Will ORST Refunds Be Another TFSA Miscommunication?

Many businesses may be entitled to a refund of Ontario retails tax (ORST) paid in respect of goods and/or "taxable services" paid for before July 1, 2010 where the goods and/or "taxable services" are provided after July 1, 2010. 

The best examples I can give are annual subscriptions/licenses of computer software and leases of goods (however, there are other situations).  Please review your invoices to see if you paid an annual or other periodic amount of ORST before July 1, 2010 and set aside those invoices that relate, in part, to the period after July 1, 2010.

As a matter of law, it may be that the Canada Revenue Agency expects to receive harmonized sales tax (HST) for the portion o the supply that occurs after July 1, 2010. The HST transition rules may require an allocation between the pre-HST period and the post-HST period.  It also may be that as a matter of law, you were required to pay ORST on the full invoice at the time it was paid and things changed. You may entitled to receive a refund of ORST paid pre-HST in respect of the post-HST period.  I know that this may sound silly, but tax changes sometimes have silly effects/results.

I have reviewed the Canada Revenue Agency web-site for some guidance on this issue and have found nothing (so far).  I have also reviewed the Ontario Ministry of Revenue web-site for some guidance on this issue and have found nothing (so far).  It is for this reason that I am saying that the HST may be a source of confusion, like tax free savings accounts.  It would be helpful for businesses to be told clearly what is expected of them.

I will give an example in order to clarify: 

For example, some businesses and MUSH sector entities may an annual license for computer software in May 2010 and paid Ontario retail sales tax in addition to GST and the lump sum annual lease price.  In this example, computer software was licensed for a year for $120,000 and GST would have been $6000 and ORST would have been $9600. However, the ORST portion would be in respect of software that could be used post HST and, therefore, the purchaser must pay HST is respect of the period after June 30, 2010.  10 of 12 months would be subject to HST instead of ORST.  As a result, the purchaser would have to self-assess and remit HST on $100,000 = $8,000.  The business would be entitled to a refund of ORST from the Ministry of Revenue in the amount of $8000.

The self-assessment would occur on the GST/HST return for the first reporting period after July 1, 2010.  There is a line on the GST/HST return for self-assessed GST/HST.

The refund application would not be filed with the CRA, but, rather would be filed with the Ontario Ministry of Revenue. Here is the general refund application form - it is difficult to find on the Ontario Ministry of Revenue web-site.

This may sound silly - robbing Peter in order to pay Peter (and Paul). Some businesses for some purchases may pay both HST and ORST and will have to wait to get the ORST back.  These same businesses have audit risk under both the ORST and HST tax regimes.  The business has paid the correct amount of tax initially and then has a problem and can be assessed for failing to ensuring the tax was paid to the right person. 

You will not be able to say that ultimately Ontario received its money because technically under the HST regime, the HST goes into a pot of money and that money is allocated according to formulas, which are not based on the place of supply.  The formulas do not allow for a matching of HST to a particular province.

In a more perfect tax system, there would be a joint CRA and Ontario Ministry of Finance form that would allow a business to identify payments of ORST in the pre-HST period that cover the post-HST period.  In a more perfect tax system, the governments would ask for a copy of the invoice and make the corrections for you.  In a more perfect tax system the governments would waive interest and penalties when there is not intention to underpay sales taxes.  It should be easy for businesses to comply with sales tax laws, but sometimes it is not simple or easy.

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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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.

HST Will Cost Municipalities

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

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

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

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

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

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

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

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

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

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

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

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

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

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Ontario Releases HST Tips for Public Service Bodies

On April 19, 2010 the Ontario Ministry of Revenue issued Tax Tip #5 "Public Service Bodies" to give guidance to public service bodies about how harmonized sales tax implementation will affect them.  It is important to note that the document itself says it was issued in "April 2010", which is technically correct - but it may be misleading in 2 years or more when an auditor wishes to use this document against a PSB in the context of an audit.  I  am looking into my crystal ball and see an auditor telling a PSB that they had an entire month before the May 1, 2010 transition rule date to read the document.

This tax tip is for PSBs, which includes charities, municipalities, universities, public colleges, school authorities, hospital authorities and non-profit organizations.  These entities provide exempt supplies (at least in part) and are not entitled to claim full input tax credits to recover goods and services tax (GST) and harmonized sales tax (to the extent that it is applicable on their purchases).  That being said, these entities may be entitled to claim certain public service body rebates:

Type of PSB Federal Rebate Percentage (of GST) Ontario Rebate Percentage (of HST)
Municipalities 100% 78%
Universities and Public Colleges established and operated on a non-profit basis 67% 93%
School Authorities established and operated on a non-profit basis 68% 93%
Hospital Authorities (only for activities of operating a public hospital), Hospitals (for eligible activities other than the operations of a public hospital) and facility operators and external providers (for eligible activities) 83% 87%
Charities and Qualifying Non-profit Organizations 50% 82%

It is important to note that the provincial rebate percentage in other provinces in the HST Zone (e.g., British Columbia) are different.

What this chart means is that if a charity makes a purchase for $100, it will pay $5 in GST and $8 in HST.  The charity is entitled to a PSB rebate of $2.50 of the GST and $6.56 of the HST.  The charity does not recover $3.94, which is an unrecoverable expense.  When the charity completes its GST/HST return, it must claim the rebate amounts and fill out all the necessary paperwork to recover the $2.50 and $6.56.  While recovery of otherwise unrecoverable amounts is good - there are administrative costs that need to be acknowledged (for which compensation is not available).

Tax Tip #5 covers the mere basics regarding (1) registration (including the small supplier threshold), (2) charging HST, (3) self-assessment (including the transition period between October 14, 2009 and May 1, 2010 - but does not give much assistance), (4) rebates, (5) quick method accounting, (6) special net tax calculation for charities, etc.

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Make An HST CheckList

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

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

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

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

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

This list is not all-inclusive.

Preparing for Harmonized Sales Tax

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

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

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

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

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

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

  • (c)    Certain automobiles and road vehicles; and

  • (d)   Meals and entertainment expenses.

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

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

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

Type of Supply

Consideration Due or paid after July 1, 2010

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

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

Sales of Tangible Personal Property

HST applies

HST applies – registered vendors should begin collecting

HST applies re certain businesses required to self assess

Leases and Licenses Tangible Personal Property

HST Applies

HST applies – registered vendors should begin collecting

HST applies re certain businesses required to self assess

Services

HST Applies

HST applies – registered vendors should begin collecting

HST applies re certain businesses required to self assess

Sales of  real property (not residential)

HST Applies

NO HST

NO HST

Sales intangible property

HST Applies

NO HST

NO HST

Type of Imported Supply

Consideration Due or paid after July 1, 2010

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

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

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

HST applies

HST applies

HST applies re certain businesses required to self assess

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

HST Applies

HST applies

HST applies re certain businesses required to self assess

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

HST Applies

HST applies

HST applies re certain businesses required to self assess

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

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

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

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

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

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

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

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