15 Stages Of A Canada Revenue Agency GST/HST Audit

If you have never been audited before, you probably have no idea what to expect.  Most audits follow the same 15 stages (more or less).  On the taxpayer's side of things, each stage is stressful.

  1. CRA Selection Process:  The taxpayer usually has no involvement in this process.  It all happens behind the scenes and the taxpayer can only guess why their name was selected. Sometimes the taxpayer is randomly selected.  Sometimes the taxpayer is selected as a result of the industry segment in which they operate.  Sometimes the taxpayer is selected because of something in a filing with the CRA.  Sometimes the taxpayer is selected because of a tip made to the CRA.
  2. The Audit Letter: The taxpayer receives a letter from the CRA notifying them that they are to be audited. Normally, the taxpayer is asked to contact the CRA auditor.  However, sometimes the auditor just shows up at the business premises.
  3. The CRA letter requesting certain documents:  Usually the CRA auditor will send to the taxpayer a letter indicating what documents need to be provided before the initial meeting at the taxpayer's premises or what documents must be available for the first day of the audit.
  4. Initial Meeting:  If the audit occurs at the taxpayer's premises, the auditor will have a meeting at the start of the audit.  The auditor explains what is expected during the audit.  The taxpayer should also communicate to the auditor what is expected.  The taxpayer may indicate that the auditor must deal with a specific person so that the entire organization does not end up working for the auditor.
  5. Fieldwork:  The on-site audit is the fieldwork stage.  The fieldwork can take place over a few days or over a lengthy period of time.
  6. Office work: Usually the auditor will take information back to the CRA offices and work on the audit from the CRA premises.
  7. Follow-up questions: It is common for the CRA auditor to contact the taxpayer after the fieldwork stage of the audit. Sometimes additional documents are requested.  Sometimes additional questions are asked.
  8. Preliminary Report: The CRA auditor will prepare a proposal and send it to the taxpayer for comment.  Usually a proposed assessment number is provided to the taxpayer.
  9. Response Letter: The taxpayer has an opportunity to change the minds of the CRA.  This is the best opportunity to stop an incorrect assessment from being issued.
  10. Notice of Re-assessment: The CRA auditor sends to the taxpayer the Notice of Reassessment setting out how much is being assessed.
  11. CRA Collections: As of the date of the Notice of Re-assessment, a debt is due to Her Majesty.  CRA Collections may start collection activities immediately after the Notice of Re-Assessment is issued.
  12. Notice of Objection: If a taxpayer disagrees with a Notice of Re-Assessment, the taxpayer can file a Notice of Objection.
  13. Objection: The taxpayer will communicate with a CRA Appeals Officer and the re-assessment will either be confirmed, amended to reversed.
  14. Notice of Appeal: Assuming that not all the issues are addressed in the objection stage, a taxpayer may file an appeal with the Tax Court of Canada.
  15. Day in Tax Court: A taxpayer will have their day(s) in the Tax Court of Canada if the appeal is not settled.  A Tax Court judge will listen to the parties and render a judgement.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information - Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.

How To Find Out What Is In The Canada Revenue Agency's Files About Your Audit

Wouldn't you like to know what is in the Canada Revenue Agency's ("CRA") files concerning your GST/HST audit? This information is very valuable in finding out where the CRA made a mistake or what is the basis for the misunderstanding about your taxes.  We recommend obtaining this information as soon as possible after an assessment is issued AND after an appeals officer makes a decision to confirm an assessment.  The information in your audit file may help you prepare a notice of objection or notice of appeal.  The information in your CRA files may also be very useful during an examination for discovery. During the examination for discovery, your lawyer may use the information to catch the auditor or appeals officer (the usual deponents for the CRA) in a misstatement.  The examination for discovery process sometimes leads to settlements. Most importantly, the information in the auditors own files may be used to contradict assumptions made in making the assessment.

You may obtain information in your CRA files by filing an Access to Information and Privacy (ATIP) request.  The ATIP requester must complete a Form RC378.  Where you may need the assistance of a tax lawyer is to ensure you are asking for the correct information.  If you have no idea for what to ask (e.g., the T2020 form completed by the CRA officer each time she/he spoke to you or a representative or someone in the CRA), you may miss requesting useful information.  This is the most common problem is not knowing what would be in the CRA's audit file.

The filing fee is only $CDN 5.00.

The CRA posts limited information on the Canada Revenue Agency web-site about making an ATIP request - see How to access information at the CRA.

The next problem that arises is that the CRA may withhold information.  There is the right of appeal should the CRA withhold certain information. This will be the subject of a subsequent blog post.

Based on our experience, the ATIP process often results in information being provided that an auditor will not often send to the taxpayer.  For example, if the auditor obtained an appraisal from the CRA, Real Property Appraisal Division, the auditor is often told not to give that document to the taxpayer.  The ATIP process usually results in the release of the appraisal.  Similar,y the auditor often will not share internal emails.  The ATIP process usually results in the release of the internal emails.  At the end of an audit, the auditor prepares a memo for the team leader/supervisor.  The ATIP process usually results in the release of the Auditor's file memo(s).

Based on our experience, it is important to file an ATIP request.  It is a small price to pay to possibly win the tax argument.  It is a small price to pay to potentially save the expense of a hearing at the Tax Court of Canada and years of fighting the tax dispute.  Finally, wouldn't you like to know what the auditor wrote in your file?

If you require assistance, please contact Cyndee Todgham Cherniak at 416-307-4168 or cyndee@lexsage.com.  We offer flat rates to file ATIP requests.

Certain Over-the-counter Remedies are Subject to GST/HST

Today I went to the pharmacy to fill an ophthalmologist's written order for lubricating eye drops.  I have Graves Disease Ophthalmopathy and carry my eye drops everywhere I go.  When my $66.00 eye drops came with an additional HST charge of $8.58, I thought I would investigate.

The GST/HST and Excise News No. 81 (August 2011) states:

"Supplies of drugs, medical devices and health care products that are not zero-rated


"Please note that zero-rating does not apply to all drugs, medical devices and health care products sold in pharmacies or medical supply stores. Examples of drugs, medical devices and health care products that are subject to the GST at the rate of 5%, or the HST at the rate of 12%, 13% or 15% (depending on the province where the supply is made) are:
• over-the-counter medications such as sinus and nasal preparations, acetylsalicylic acid, and acetaminophen;
• eye drops;
• many vitamins and minerals;
• cold remedies and cough medicine such as syrup and cough drops;
• medicated shampoos; and
• personal health products such as bandages and ankle and knee supports.


These goods are available to the general public without a prescription through retail outlets and are intended to treat the symptoms of minor illnesses that do not require the advice or intervention of a health professional. Regardless of whether they are prescribed by a medical practitioner or by an authorized individual, these goods are generally not zero-rated. For example, an over-the-counter acetylsalicylic acid product purchased at a drugstore would not qualify for zero-rating, even if the purchaser has a prescription for acetylsalicylic acid and shows it to the pharmacist, unless the product is also dispensed by the pharmacist."

What this means is that certain therapeutic goods that are prescribed by medical practitioners are subject to HST.  It does not matter if the goods are medically necessary.  It does not matter if the goods serve a medical purpose.  It does not matter what ailment the goods treat.  What matters is where the goods are located in the pharmacy and whether the goods can be purchased without a prescription.

If price is a factor, the patient should obtain a prescription for the drug/therapy.  Depending on the pharmacy dispensing fee, the price point for getting a prescription would be be around $75.00 in Ontario (assuming the dispensing fee is $9.95).  The higher the dispensing fee, the higher the GST/HST included price you might be willing to pay.  It does create a discrepancy between harmonized and non-harmonized provinces (e.g., Alberta, British Columbia, Saskatchewan and Manitoba).  When traveling to non-harmonized provinces, you may want to stock up on taxable pharmacy items.

The Canada Revenue Agency Advises Charities About Political Activities

On August 20, 2015, the Canada Revenue Agency ("CRA") posted on its web-site an "Advisory on partisan political activities" by charities. The CRA "gently" "reminded" charities that "registered charities that they are prohibited from devoting any of their resources to partisan political activities."  However, the CRA failed to remind charities that should the CRA take the position that their resourced were allocated to partisan political activities, they might revoke their charitable status.  If the CRA revokes a charity's charitable status for income tax purposes there are many negative consequences, including GST/HST consequences.

Charities are entitled to claim certain public sector rebates of GST/HST paid on business inputs.  If charitable status is revoked, the entitlement to claim public sector rebates would be affected.

Certain supplies by charities are exempt from GST/HST.  However, if charitable status is revoked and another exemption is not applicable, the supplies may be taxable.  If the charity does not collect GST/HST on supplier that transition from exempt to taxable status, the charity may be assessed for failure to collect GST/HST.

In other words, the business model o the charity will be affected and potential GST/HST liabilities may result.

If you are a charity, please review the CRA's advisory to ensure that you do not cross the lnies that have been drawn.  The advisory states:

"Since we are in an election period, we remind registered charities that they are prohibited from devoting any of their resources to partisan political activities. A partisan political activity is one that involves the direct or indirect support of, or opposition to, any political party at any time, whether during an election period or not, or a candidate for public office.

The prohibition on partisan political activity is a long-standing requirement under the Income Tax Act. Charities are responsible for their resources, and must devote these resources to exclusively charitable purposes. Since they are well placed to study, assess, and comment on government policies that relate to their charitable programs, charities can engage in a limited amount of non-partisan political activities. However, charities that devote any resources to partisan political activities may no longer be eligible for registration. A charity’s resources include funds, property, and personnel (volunteers, employees, and directors).

Partisan political activity may include, but is not limited to:

  • providing financial or material contributions to a political party or candidate
  • making public statements (oral or written) that endorse or denounce a candidate or political party
  • criticizing or praising the performance of a candidate or political party
  • organizing an all-candidates meeting or public forum in a way that could be seen to favour a political party or candidate
  • inviting candidates to speak at different dates or different events in a way that favours a candidate or political party
  • posting signs in support of, or opposition to, a candidate or political party
  • distributing literature or voter guides that promote or oppose a candidate or political party explicitly or by implication
  • explicitly connecting its views on an issue to any political party or candidate

The restrictions on partisan political activities do not prevent volunteers, employees, or directors of charities from:

  • helping in a political campaign, as long as they do this in their personal capacity and do not suggest they represent a charity
  • making partisan political comments in public (including on social media), as long as they make it clear they are speaking in their personal capacity and not as a representative of a charity

Charities that use the Internet or social media to post information should ensure the information does not contain partisan political statements. Also, the information should not link to statements made by a third party that support or oppose a candidate or political party.

When a charity invites comments on its website, blogs, or on social media, it should monitor them for partisan political statements and remove, edit, or moderate such statements within a reasonable time.

For more information on political activities, go to Resources for charities about political activities, including Policy Statement CPS-022, Political Activities, and Partisan political activities, or call our Client Service Section at 1-800-267-2384."

The ABCs of Harmonized Sales Tax

Canada's federal harmonized sales tax ("HST") is complicated - even for the practitioners who practice in the area.  Here is a fun post about some of the common terms used in HST parlance.

A = Auditors - We hope they do not call.  When they do call, we hope they do not want to come for a visit.  When they come for a visit, we hope they do not stay long.  We are worried about the cost of their visit.

B = Budget - In the federal budget, the Department of Finance often includes changes to the Excise Tax Act (Canada) (the HST legislation).

C = Canada Revenue Agency - The Canada Revenue Agency enforces laws and regulations relating to HST.

D = Due Diligence - You want to have documentary evidence to show that you attempted to comply with the HST laws.  Directors can avoid personal liability for unremitted HST of a corporation is the director can show they took steps to prevent the corporation's failure.

E = Exemptions - Some supplies are exempt from GST/HST.  This means that no GST/HST will be applicable.  It also means that the person making the supply cannot claim certain input tax credits.

F = Fairness - If you could not comply with Canada's HST laws due to circumstances beyond your control (e.g., the Alberta flood 2013, the Ontario ice storm 2013), you may be able to apply for fairness.

G = Goods and Services Tax (GST) - GST is a component of HST. The GST rate is currently 5%.

H = Harmonized Sales Tax (HST) - HST is GST + PVAT and is applicable to supplies made in participating provinces,  The HST rate depends upon the province in which the supply is made.

I = Input Tax Credits - If your are a registrant and are engaged in commercial activities, you may be entitled to claim an input tax credit to recover GST/HST paid in connection with business inputs.  Individual consumers cannot claim input tax credits. Input tax credits are good (and a hot audit issue - which can be bad).

J = Judicial Reviews - If you disagree with the CRA (e.g., with a fairness decision), you may be able to file a judicial review to the Federal Court of Canada (which is different than an appeal to the Tax Court of Canada).

K = Keep Records - I cannot stress enough the importance of keeping records.  Auditors, the appeals branch and the Tax Court of Canada all need records and evidence in order to agree with you.

L = Limitation Periods - Always know the limitation period.  Missing a limitation can cost you money or the right to object to or appeal a decision.

M = Misrepresentations - A simple mistake can be considered to be a misrepresentation.  If a person makes a misrepresentation attributable to neglect, carelessness or willful default, the Canada Revenue Agency may assess beyond the 4 year limitation period.

N = Non-residents = Persons outside Canada who may need to know about and comply with Canada's HST laws.

O = Objections - If you disagree with an assessment made by a CRA auditor, you must file a Notice of Objection within 90 days after the Notice of (Re)Assessment.

P = Participating Province - Canadian provinces that have adopted the HST are called participating provinces.  British Columbia, Alberta, Saskatchewan and Manitoba are not participating provinces.

R = Registrants - Registrants are persons who are registered for GST/HST purposes or are required to be registered.

S = Supply - A supply is the provision that is subject to GST/HST. Since not all transactions are "sales", the term used is "supply".  A barter transaction and supplies for no consideration are still supplies for GST/HST purposes.

T = Tax Court of Canada - Appeals of CRA decisions concerning objections are filed with the Tax Court of Canada, which is a specialized court.

U = Underground economy - Many businesses do not register for GST/HST purposes and participate in the underground economy.  Small suppliers are not required to register for GST/HST purposes.  If a consumer hires a contractor and pays the contractor under the table in order to save the HST, they are contributing to the underground economy - which is bad.

V = Voluntary Disclosures - If a business makes a mistake, it may may a voluntary disclosure to correct the mistake.  Usually, the CRA requires the HST and interest to be paid - but will waive the penalty.

W = Written Ruling - If you are unsure about the application of the HST legislation to a particular situation, you can write to the CRA for a written ruling.  A written ruling may be binding if it is an advance ruling and not an interpretation.  In order to obtain a written ruling, it is necessary to provide the CRA with the facts.

X = X-director = A person who was a director of a corporation and ceased to be a director may be held personally liable for the GST/HST liability of the corporation up to 2 years after the person ceased to be a director of the corporation.

Y = Year-End - Most registrants have a calendar year end (but not all).  Businesses may have to self assess GST/HST in connection with year-end adjustments (it all depends).

Z = Zero-rated - Certain supplies are zero rated.  This means that the supply is subject to GST/HST at the rate of 0%.  The supplier should be entitled to claim input tax credits.

Lawyers Receive Revised PST Guidance from British Columbia

On March 19, 2013, British Columbia issued revised PST Bulletin 106 "Legal Services", which provides guidance to lawyers about the new provincial sales tax ( BC PST) rules for lawyers and law firms.  Under the new BC PST rules for lawyers, legal services are subject to BC PST at a rate of 7%. This does not give much time to get ready and may cause some concern with respect to transactions not completed before April 1st (this may be a busy week for lawyers).

PST Bulletin 106 "Legal Services" is only three pages in length and provides limited guidance.  That being said, it raises a few red flags for law firms outside of British Columbia.  For example, PST indicates that legal services provided by any law firm with respect to "acting as legal counsel in negotiations, including settling terms of a business purchased in BC", are subject to the new BC PST. This could translate into exposure of lawyers and law firms outside British Columbia who act in a national sale of a business, including assets in British Columbia.  There is an audit risk for failure to register for BC PST purposes and failure to collect BC PST with respect to legal fees.  By the way, the bundling rules in the Provincial Sales Tax Act (British Columbia) add to the value of the risk because the auditors may try to argue tax is payable on the legal fees for the non-BC components of such a national/multi-provincial transaction.

PST Bulletin 106 "Legal Services" contains a short (but broad) list of legal services provided outside British Columbia that are considered to be subject to BC PST.  The list of legal services outside BC that are subject to BC PST includes the following (provided that a specific exemption does not apply):

  • legal services that relate to real property situated in BC
  • legal services that relate to tangible personal property that is ordinarily situated or brought into BC
  • legal services that relate to the ownership, possession or right to use any other property in BC
  • legal services that relate to a court or administrative proceeding in BC
  • legal services that relate to the incorporation of a company under the Business Corporations Act or Societies Act
  • legal services that relate to the registration of an extra-provincial company or society under the Business Corporations Act or Societies Act
  • legal services that relate to the interpretation or application of an enactment as defined in the Interpretation Act, or a former or proposed such amendment
  • legal services that relate to a contract or covenant (or the contemplation of a contract or a covenant) related to a physical or legal presence, activity or transaction in BC, or the contemplation thereof
  • legal services that relate to the interpretation or application of any enactment, or a former or proposed enactment of any jurisdiction, or the analysis or application of any law, if it relates to
    • a physical or legal presence in BC
    • any activity or transaction in BC
    • the contemplation of a presence, activity or transaction in BC
  • any other matter that relates to BC

Auditors have wide discretion take the position that they may assess a lawyer/law firm outside British Columbia under administrative policy or statutory provisions.  Canadian lawyers and law firms are at risk, as well as U.S. lawyers and law firms and lawyers/law firms outside North America.

Canada & Quebec May Sign HST Agreement Tomorrow

The Globe & Mail is reporting that Prime Minister Harper & Premier Jean Charest may sign a Comprehensive Integrated Tax Coordination Agreement (CITCA) (also known as an HST Agreement) on Friday, September 30, 2011.  In an article entitled "Ottawa, Quebec poised to ink $2.2 billion HST deal", it appears that the agreement promised during the election campaign has been negotiated.

The question for sales tax practitioners is: How different is this CITCA going to be from the model version used with Ontario, British Columbia and Nova Scotia?  It appears that Canada has agreed to a significant change.  Revenue Quebec will continue to collect the tax in Quebec.

However, will Quebec loose the QST and adopt the HST?  In other words, will Quebec lose its naming rights?

When is the implementation date?  Businesses will need time to make necessary changes.

Also, will the HST rate go up, go down or stay the same? One benefit of harmonization is that QST should no longer be payable on the GST included amount.

What point of sale rebates (provincial exemptions from PVAT) will be selected by Quebec?  Will Quebec be restricted to point of sale rebates on only 5% or will they be permitted a higher percentage of coverage for point of sale rebates?

What will happen to zero-rated financial services?  Currently, under the QST regime, many financial services are zero-rated.  Under the GST regime, many financial services are exempt.  Zero-rated is better than exempt because the intermediary financial institutions are entitled to full input tax credits on inputs purchased for use in commercial activities (including zero-rated activities). A shift from zero-rated supplies to exempt supplies will have a significant effect on financial institutions.

Continue Reading...

U.S. May Breach Most-Favoured-Nation Rules If It Imposes GST/HST Protectionist Measures

Yesterday I shared with you the Bloomberg Businessweek article "Buy American and Fairer Trade Can Solve Job Woes: Alan Tonelson".  In this article, Alan Tonelson suggests that the United States should impose additional duties at the border on goods coming from a country with a value-added tax.  Canadians should be concerned because under the goods and services tax ("GST") and harmonized sales tax ("HST") regime, most exported goods are zero-rated. 

If the United States Administration followed Mr. Tonelson's advice, they would arguably be in breach of their most-favoured-nation (MFN) obligations at the World Trade Organization ("WTO") and in the North American Free Trade Agreement (NAFTA).  Simply put, the MFN concept focuses on non-discrimination.  In particular, goods at the border must be treated the same.  As a result, the United States cannot impose higher tariffs on some goods at the border and lower tariffs on other goods (except there may be lower duties if there is a free trade agreement that satisfied the requirements of GATT Article XXIV).

The U.S. is not allowed to charge a 13% tariff on all goods from Ontario, a 12% tariff on goods from B.C., a 5% tariff on goods from Alberta, a different tariff on goods from the EU, a different tariff on goods from Australia, etc. in retaliation of zero-rating. The U.S. is not allowed to increase its tariff rates on goods from some countries (VAT countries) and not raise tariffs on goods from other countries (non-VAT countries).  To be clear, under the GATT, 1947, the United States cannot increase tariffs from their current MFN bound levels against any WTO country. Under the NAFTA, the United States cannot raise tariffs against Canadian goods above the levels agreed in the NAFTA (most NAFTA tariff rates for Canadian goods are now duty-free or 0%).

There are rules in the WTO Subsidies and Countervailing Measures Agreement  ("SCM Agreement") that would allow the United States to impose countervailing duties, but only after a trade remedy process. However, any attempt to impose countervailing duties against Canadian good as a result of zero-rating would undoubtedly lead to a challenge at the WTO under the Dispute Settlement Understanding.

The United States should be mindful of its international obligations while dealing with its domestic financial issues.  Options that breach international obligations must be taken off the table as trade wars with each and every country that imposes a VAT will not be helpful to global recovery efforts.

New Buy America Initiative Takes Aim At Zero-Rated Exports

In an recent article in Bloomberg Businessweek printed online on September 18, 2011 entitled "Buy American and Fairer Trade Can Solve Job Woes: Alan Tonelson", Canadians are put on notice that the U.S. is taking aim at value-added tax ("VAT") regimes that do not charge VAT on exported goods. Canada's goods and services tax ("GST") and harmonized sales tax ("HST") regime zero-rates exports.  Zero-rating means that Canada imposes GST/HST at the rate of 0% instead of the applicable GST/HST rate on domestic transactions.  This means that Canada may soon have a significant Buy America problem.

Alan Tonelson's article has a subtitle "VATs Are Protectionist", which is a signal that what follows is not going to be friendly.  Some of the points made by Tonelson are:

  • New tariffs should be imposed on countries with VATs;
  • VATs contribute to U.S. trade deficits;
  • VATs raise the price of imports because they are imposed on domestic consumption 9thereby making U.S. goods more expensive);
  • VATs subsidize exports (because governments do not impose VAT on exports); and
  • NO exceptions from the new import tariffs should be allowed for products made by U.S. trading partners who have a VAT regime.

If this idea moves into law, Canada and the EU countries, Australia, New Zealand and a number of other significant trading partners would be affected.

While I hope that this latest protectionist rhetoric does not go anywhere, Canadian businesses need to be concerned about this issue.  Canadian businesses need to communicate their concerns with the Canadian government and become engaged on this topic. In addition, businesses need to prepare and diversify their export base because it is clear that the U.S. market may become more unfriendly to Canadian manufactured goods.

What Does A Seller Do When Someone Refuses To Pay HST?

This is a problem now and the problem will occur more regularly in British Columbia after the referendum results are misstated and people believe the HST should not be charged.  The answer that vendors, sellers & service providers do not want to hear is the only answer to give.

GST/HST registrants are tax collectors for the government.  They must charge, collect and remit the HST or risk an assessment plus interest and penalties.  During an audit by the Canada Revenue Agency ("CRA") will assess the registrant for failure to collect HST or a failure to remit the HST.  This means that if the vendor does not charge the purchaser HST (when he/she should), the CRA will assess the vendor.  If the vendor does charge the HST on the invoice and the buyer does not pay the HST, the vendor must remit that HST to the government with its GST/HST return for the period during which the transaction took place (regardless of whether the money was actually received).  If a vendor fails to remit HST, it will be assessed.

There are special rules for bad debts that do not apply to only the HST portion.  There are also special rules that allow a registrant (seller) to sue a recipient (vendor) for HST, however, these rules only kick in after an assessment by the CRA.

The CRA auditors will not be sympathetic when a vendor does not follow the rules.  Telling an auditor that the buyer refused to pay the HST will fall on deaf ears.  The auditors will not care that the vendor would have lost the sale and the profits related to the sale.

Vendors in British Columbia should post a sign in their shops telling buyers that HST will be collected until the transition date (currently said to be March 2013).  This includes service providers who provide in person services (such as hair salons).  Other vendors and service providers should include a statement in quotations that:

 "Harmonized Sales Tax ("HST") is payable in respect of any property or services provided prior to the date established by the Province of British Columbia and Federal Government of Canada to transition to a provincial sales tax (the "Transition Date").  HST will continue to be charged after the Transition Date if required by law.  All applicable provincial sales taxes are payable in respect of property and services provided after the Transition Date."

This statement may be added to contracts for property or services.

If a buyer does not pay the HST after the property or services are provided, the vendor may pursue the buyer in Small Claims Court or the provincial court for breach of contract.  However, in respect of point of sale refusals, the vendor will have to make a business decision whether to meet refusal with a refusal to make the sale. Service providers and restaurant owners who have provided the service and experience the refusal at the cashier are in a very difficult position and may have no other option but to call the police before the person dashes (while being careful to avoid a false imprisonment claim made against them).

In any event, document any situation where there is a refusal to pay the HST and provide as much detail as possible..  Even if an unsympathetic CRA officer will not accept the information, the Tax Court of Canada may sympathetically suggest that a remission order would be appropriate.

What Will Happen If The "Yes" Vote Wins In British Columbia?

The most important document to study will be the "hard-to-read" Comprehensive Integrated Tax Coordination Agreement between British Columbia and the Government of Canada signed in November 2009 (called the CITCA by tax geeks).  The second most important document to read is the amendment letter to the CITCA signed in March 2010.  A review of the original Memorandum of Understanding may also be helpful. There will be other relevant documents that will be made public voluntarily and through access to information requests to the Government of Canada and the Government of British Columbia.  These documents will need to be reviewed carefully to determine the best plan to move forward.

What exactly will happen will happen in response to a "Yes" vote is yet to be determined.  What we know is that many will not like the plan.  The elimination of the Harmonized Sales Tax ("HST") in British Columbia will not happened immediately on August 26, 2011 if the "Yes" (anti-HST) vote is the successful side.  People celebrating at bars and restaurants will see HST on their bills after the announcement.

Businesses will need time to adjust.  This would be fair to the businesses who are, in reality, the tax collectors from the public.  The businesses will need to know what to do and the mechanisms to collect another tax (even if it is the British Columbia social services tax) will have to be put in place.  Businesses throughout Canada and not just British Columbia will need to adjust their record-keeping systems.  As with HST implementation, a change will involve a lot more work than just changing a tax rate in the computer.

Businesses inside and outside British Columbia will also need to register to collect the replacement tax.  The government will need to launch a new education campaign to communicate the obligations on businesses.  Also with the "To Do List', the government will need its own "To Do List", which will include setting a time line, passing legislation, education of the public (and duck as the tomatoes are thrown), hire people in the Consumer Taxation Branch, train the new employees, prepare policies and bulletins, talk with the Federal Government about repayment, enforcement and other process matters, etc.

If the "Yes" vote wins, GST registrants in British Columbia will still be required to charge, collect and remit HST when they sell to an HST province.  They will still be obligated under the Excise Tax Act (Canada) and regulations thereto to file a GST/HST returns in the future.  The HST Place of Supply Rules will still apply to certain transactions.  So, HST will not be elimniated fully under any change plan.

The rules relating to claiming refunds, rebates and credits under the HST tax system will need to be clarified for B.C. businesses.  There is a possibility that there may be a deadline set for amounts a business or consumer is entitled to receive from the Government of Canada.

If the HST is going to be eliminated, businesses who are registered for GST/HST purposes and entitled to claim input tax credits will take the opportunity to purchase goods and services before the change.  Those businesses that will have to pay unrecoverable provincial sales tax after the change may decide to undertake the expenditures at a time when they can recover HST by way of an input tax credit.  Businesses will take prudent steps to save money while the change occurs. 

Consumers, on the other hand, may delay purchases until after the change occurs when they are purchasing an exempt good, real property, intangible property or services that are not subject to provincial sales tax.  This will most negatively affect the real estate market and the service sector.  There will be transition rules for the change that will need to be developed and communicated.

Consumers outside the province of British Columbia may delay purchases of goods from British Columbia until after the change (or at least after the date of the announcement of the plan for the replacement tax).  The place of supply rules may change and give rise to opportunities to save sales tax.

In the meantime, the Government of British Columbia will undoubtedly talk about repayment of the monies received from the Government of Canada to implement the HST.  There will be talk of new taxes that were not in place in British Columbia before July 1, 2010.  As sure as night follows day, if the "yes" vote is the majority, the blame game will start.

We will continue to watch and report on this developing story - if it develops into a story.  Nothing much will happen if the "No" vote is the majority.

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.

The HST Place of Supply Rules for Conferences May Not Apply to Sponsorships

Many associations hold their conferences or meetings in Canada and/or HST provinces (Ontario, British Columbia, New Brunswick, Nova Scotia and Newfoundland/Labrador).  For example, the American Bar Association recently hosted their annual meeting in Toronto, Ontario.  I was asked whether a sponsorship by a U.S.-based law firm would be subject to harmonized sales tax ("HST").

The answer is "It all depends".  There are two HST place of supply rules that need to be considered.  In section 28 of Part I of the New Harmonized Value-Added Tax System Regulations, there is a specific rule for "location specific events" (like a conference).  For this rule to apply, there must be a direct connection between the service being performed (e.g. the service of giving recognition) by the supplier and the event (e.g., the conference).

Depending on what exact services are being provided in return for the sponsorship, the Canada Revenue Agency may not consider the connection to be direct.  An example of an indirect service is advertising services (such as including the firm's name in promotional materials).  If this is the case, the general place of supply rule would apply and not the specific rule relating to location specific events.  The general place of supply rules for services is found in section 13 of Part I of the New Harmonized Value-Added Tax System Regulations.

In the example given, the U.S. law firm (if it does not have any offices in Canada) would not receive a service in an HST province.  As a result, HST would not apply to the consideration paid for the sponsorship. 

If the U.S. law firm had offices in the united States and an office in Canada, an analysis of the location "most closely connected with the supply" would be required.

If the U.S. law firm received admission tickets to the event as part of the sponsorship package, it may be that the CRA would consider that the supplier provided a multiple supply and a portion of the consideration paid would be subject to HST.

For more information, please contact Cyndee Todgham Cherniak, a sales tax lawyer in Ontario at 416-760-8999.

I Did Not Stay Extra Time in Nova Scotia Because of 15% HST

I was in Nova Scotia for the Canadian Bar Association convention in Halifax.  I could have stayed an extra few days to enjoy the scenery and experience a "vacation".  However, after days of seeing 15% HST charged on my bills, I decided to go home to Ontario.  I admit it, I was turned off by the higher HST rate.  I knew that many goods and services are less expensive in Nova Scotia, the higher tax rate still affected my decision - rightly or wrongly.

I went into the Baton Rouge restaurant on a Monday night at 8:30 PM and it was virtually empty.  It was almost empty on a nice night in the summer.  This is a symptom of a bigger problem. 

When I purchased goods in Nova Scotia, it bought things that I could not find in Ontario.  I bought super seven crystal (and other hard to find crystals) at Little Mysteries bookstore.  I bought a Buddha Board (I love this purchase) at a neat little store on Grafton. I did not buy clothes or goods that could be purchased at home.

Why am I writing this on my blog?  Someone needs to provide evidence that the higher HST rate affects decisions.  Nova Scotians commented to me that the economy is struggling in Nova Scotia and the recent times have been difficult for people. 

Nova Scotians - please provide comments so that your storied (good and bad) are available for your elected representatives to read.  Please use clean language as I do not publish words that I would not say to my Grandmother.

Deregistered Charities Face GST/HST Issues

When I say "deregistered charities", I am referring to deregistration as a charity and not deregistration for GST/HST purposes.  If a charity that was a registered charity is deregistered as a charity (no longer considered to be a charity by the Canada Revenue Agency (CRA)), that entity will face a number of assessments, including GST/HST, if they do not make changes.

If an entity is deregistered as a charity, it would have to determine if the supplies made by it are exempt or taxable for GST/HST purposes.  Many supplies made by charities are exempt pursuant to Part V.1 of Schedule V to the Excise Tax Act (Canada).  A key pre-condition to the exemption may not be satisfied after deregistration.  If the exemption is no longer available and the entity does not change its invoicing (charging) practices, it may be assessed for failure to collect GST/HST.

If supplies become taxable (when a charity no longer makes exempt supplies), the entity must determine if they may claim input tax credits paid by it on business inputs.  The accountants and book-keepers will have to undertake a careful review.  If the entity does not claim input tax credits, it may lose its opportunity.

If an entity is deregistered as a charity, it would no longer be entitled to claim public service body rebates to recover otherwise unrecoverable GST/HST paid on business inputs.  Charities may claim a public service body rebate of 50% of the GST portion.  Depending on the province(s) in which a charity operates, the charity may claim another rebate for the PVAT (provincial) component.  If the charity is deregistered, a key pre-condition of entitlement will no longer apply.  If the entity does not change the way it completes its GST/HST return, it may be assessed to draw back rebates improperly claimed.

There are many other changes that may be experienced by specific charities.  For example, certain charities take advantage of the election in section 211 of the Excise Tax Act (Canada) and that benefit would no longer be available.  Certain volunteer reimbursements and allowance rules would not longer be available. Certain charities could deregister for GST/HST if they are below the small supplier threshold for charities. 

If the CRA is talking about deregistration of an entity as a charity, that entity needs to address the issues in that discussion.  If they ignore the CRA during the deregistration process and do not take steps to revisit all elements of charging GST/HST and taking advantage of entitlements, there may be costly assessments against the former charity and/or the directors of the charity.

The Canada Revenue Agency Has Released A New Guide For Non-Residents Doing Business In Canada

Non-residents who are doing business in Canada and would like to comply with Canada's Goods and services tax (GST) and harmonized sales (HST) tax laws should review this new gide published by the Canada Revenue Ageny on June 15, 2011. "Doing Business in Canada - GST/HST Information for Non-Residents" is an important document to read.  It is over 38 pages on information that may or may not answer the questions that the non--resident may have about their GTS/HST obligations.

Whether or not a non-resident is actually doing business in Canada is a factual test.  There is no definition of "carrying on business in Canada" in the GST/HST laws.  Pages 7-8 of the CRA's document address the basics and a Canadian sales tax lawyer can help apply the CRA's test in a particular case.

The CRA document addresses many issues, including:

1. Should a non-resident register for GST/HST purposes?

2. How is GST/HST calculated?

3. What are the GTS/HST return filing requirements?

4. What are the place of supply rules for charging HST?

5. How is GST/HST applied on imported goods?

6. How is GST/HST applied on imported services and intangible property?

7. How is GST/HST applied on exported goods, services and intangible property?

8. What are drop shipments and how do the drop shipment rules work?

9. How do non-residents recover GTS/HST by way of a rebate?

Federal Court of Appeal Rules That Suppliers Cannot Stop A GST Assessment Using Judicial Review

On March 8, 2011, the Federal Court of Appeal allowed an appeal by the Canada Revenue Agency (CRA) in Canada Revenue Agency v. Tele-mobile Company Partnership et al. and granted a motion by the Canada Revenue Agency (CRA) in a judicial review to strike the application on the the ground that it is plain and obvious that the application has no possibility of success.  The Federal Court had previously dismissed the CRA's motion to strike.

In short, a number of Telus entities (Telus) filed a judicial review to prohibit the CRA from issuing assessments against Telus for goods and services tax (“GST”) on the international roaming fees charged by Telus to its customers from October 2004. Telus asserts that if it is assessed for GST, unfair and onerous obligations and financial hardships would be visited upon it. 

Justice Stratus held:

" We note that if prohibition is granted because of these alleged consequences, the Minister cannot issue an assessment – in effect, as a matter of law, the Minister will be obligated to forgive a tax liability that he believes is present, solely because of alleged hardships that the taxpayer will suffer.

In our view, that cannot be. The Court cannot stop the Minister from carrying out his statutory duty under the Excise Tax Act, R.S.C. 1985, c. E-15, subsection 275(1) to assess GST payable by law merely because doing so will impose unfair and onerous obligations and financial hardships upon the taxpayer.

To the extent that CRA has exercised its discretion in a manner that has improperly caused TELUS damage, TELUS may have other recourses available to it. To the extent that the exercise of discretion affects the amount of tax owing, TELUS may challenge the assessment in accordance with Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15. Alternatively, it may apply for a remission order under section 23 of the Financial Administration Act, R.S.C. 1985, c. F-11. Further, it may be able to bring an action in tort to obtain compensation for any damages that were caused by CRA."

On May 5, 2011, Telus filed a leave application with the Supreme Court of Canada (SCC File 34244).  Please stay tuned.

This is an important case for taxpayers and I hope the Supreme Court of Canada grants leave.  Under the Excise Tax Act, a debt due to Her Majesty as the result of a GST/HST assessment is immediately due and payable.  Large (and small) assessments must be paid and collections actions are not halted pending the outcome of an objection and appeal.  This means that companies can suffer financial hardship if the Canada Revenue Agency is incorrect in its interpretation of the law. While a taxpayer has other expensive legal options to pursue the CRA if they make a mistake, it the mistake causes financial hardship and the company disappears or an individual taxpayer loses everything important in life, the fact that the battle with the tax man is ultimately successful is of little consolation. 

What is important to remember is that suppliers engaged in commercial activities are not the party ultimately responsible for paying the GST/HST (consumers are).  The suppliers collect the GST/HST from recipients and remit the GST/HST to the Receiver General of Canada.  However, this group is the target of most audits. Telus fits within this group in the case at issue.  A supplier (such as Telus) may have tried to comply with the law and may or may not have made a mistake while acting as the government's collection agent.  There should be a mechanism to stop the CRA from potentially large incorrect assessments of suppliers engaged in commercial activities (including zero-rated activities).

Canada Revenue Agency Provides List of Exempt and Taxable Health Care Service Providers

In the recent Excise and GST/HST News No. 80 (Spring 2011)  (GST/HST News 80) published by the Canada Revenue Agency (CRA), the CRA puts on notice a list of health care professionals that it considers to offer TAXABLE services.  Many of these health care professionals are likely not charging goods and services tax (GST) or harmonized sales tax (HST).  This means, if these categories of health care professionals are audited by the CRA, it is likely that assessments will be issued.  In the HST provinces (Nova Scotia (15%), Ontario, Newfoundland/Labrador, New Brunswick (13%), British Columbia (12%)), the assessments may add up to large amounts.

GST/HST News 80 puts health care professionals on notice. 

The CRA's position is:

General Rule: Any basic health care service rendered to an individual by a health care professional that is specifically identified in Part II of Schedule V to the Excise Tax Act are exempt.  In other words, you find the category of health care service or health care professional in that Schedule by name or description.

According to the CRA, the following services by the following provincially regulated (licensed or otherwise certified) health care professionals rendered to individuals/patients are specifically identified in Part II of Schedule V to the Excise Tax Act are as a general rule exempt:

  • physicians,
  • dentists and orthodontists,
  • registered nurses, registered nursing assistants, licensed or registered practical nurses, registered psychiatric nurses,
  • optometrists,
  • chiropractors,
  • physiotherapists,
  • chiropodists,
  • audiologists,
  • speech-language pathologists,
  • occupational therapists,
  • psychologists,
  • podiatrists,
  • midwives,
  • dieticians,
  • social workers, and
  • dental hygienists.

Exception to General Rule: Any health care service provided by other therapists and health care workers are TAXABLE.  If you cannot find a category of health care professional or health care worker in Part I of Schedule V to the Excise Tax Act, their service re likely taxable.

While these other therapists and workers may be professionals in their fields and they may be certified in  their province or territory, they are not identified in the Part II of Schedule V to the Excise Tax Act. Therefore the Act’s exemptions do not apply to their services even where, for example, the service is similar to a service performed by an identified health care provider, such as a nurse or physiotherapist. Some examples of therapists and other health care workers whose
services are generally considered by the CRA to be taxable for GST/HST purposes are (this is not an exhaustive list):

  • assistants such as physiotherapy and occupational therapy assistants
  • social service workers (this is a separate profession from social workers)
  • laboratory technicians;
  • psychometrists;
  • nursing care aides;
  • polysomnographic technologists;
  • acupuncturists;
  • kinesiologists;
  • massage therapists;
  • naturopaths;
  • reflexologists;
  • homeopaths;
  • reiki therapists;
  • sports therapists;
  • rolfing therapists;
  • traditional Chinese medicine providers;
  • phlebotomists;
  • personal support workers.

Exception to Exception: Certain services provided by an health care professional or health care worker listed above may qualify as exempt when provided to an individual in an exempt health care setting. For example, supplies made by the operator of a nursing home of services rendered by nursing care aides are exempt when they form part of an exempt institutional health care service rendered to a resident of the nursing home. In addition, services similar to those rendered by the providers listed above may be exempt when rendered by an identified exempt health care provider. For instance, if physiotherapists are entitled under the provincial law that regulates physiotherapy services to perform acupuncture on their clients in the course of
providing physiotherapy services, then their physiotherapy services that involve acupuncture would be exempt.

There are many other exceptions to the general rule.  For example, health care services provided by the exempt list of professionals to corporations (not rendered to individuals or patients) are taxable.  Also, certain services (e.g., cosmetic procedures, teeth whitening, etc.) are taxable even when provided by a licensed professional.

GST/HST News 80 has been provided because the CRA auditors need tools when going to audit health care professionals.  There is an increased likelihood that health care professionals will be in the CRA national priority list for audits this year and in the coming years.

If you are not sure whether you are required to charge GST/HST or not, you should contact a GST/HST lawyer or professional. You may also write the CRA for a GST/HST ruling.

Canada Revenue Agency Says Beneficiary (NOT Bare Trust) Should Be GST/HST Registered

It has been the Canada Revenue Agency's position for a long time (since 1993) that a bare trust should not register for GST/HST purposes.  Instead, the beneficiary or beneficiaries should register for GST/HST purposes.

This CRA's position is set out Technical Information Bulletin TIB-068 "Bare Trusts". The CRA believes the following:

  • a bare trust (also referred to as a naked trust) exists where a person (the trustee) is merely vested with the legal title to property and has no other duty to perform, responsibilities to carry out, or powers to exercise as trustee of the trust property;
  • the sole duty of a bare trustee will be to convey legal title to the trust property on demand by and according to the instructions of the beneficial owner(s);
  • the bare trustee does not have any independent power, discretion or responsibility pertaining to the trust property;
  • someone other than the bare trustee controls the property, carries on the commercial activity that relates to the property, and is the "real owner" of the property;
  • the person or persons with the real ownership of the property may be a "beneficiary", or a "settlor" under trust law;

The CRA states the following administrative policy:

Where a trust is viewed by the [CRA] as a bare trust, all powers and responsibilities to manage and/or dispose of the trust property would be reserved to the beneficial owner. As a result, the beneficial owner, rather than the bare trust, would be involved in commercial activities relating to the trust property. Unless the beneficial owner qualifies for small supplier status pursuant to section 148 of the Act, or under one of the exceptions listed in subsection 240(1) of the Act, registration for purposes of the GST would be required. Where there is more than one beneficial owner within the trust arrangement, the small supplier's threshold will be calculated on an individual basis, each beneficial owner being a separate person under the Act, unless the beneficial owners are associated persons for purposes of the Act.

....

[I]n a bare trust situation, since the beneficial owners are considered to be engaged in the commercial activities relating to the trust property, they would be required to account for the GST to the extent of their share of the trust property, to file GST returns, and generally to comply with the obligations placed on registrants under the Act.

Many real estate transactions involve bare trusts.  Those who not aware of the CRA's position likely have made a structuring mistake.  These mistakes may be corrected by way of a voluntary disclosure.

I have been involved in many real estate acquisition transactions and rental activities in which the beneficial owners of real property want to hide their identity from the world at large.  This becomes complicated despite reasonable reasons for hiding.  For example, many years ago, a client knew that the sellers of a desirable piece of real estate would not sell to my client (for all the wrong reasons) and wanted to purchase the property using a bare trust. 

The issue for the CRA is that the bare trust has nothing.  As a result, if GST/HST mistakes are made, it is difficult to assess the GST/HST owed to the government.  Since bare trusts are often used in the context of real property, the property at issue involves greater amounts of GST/HST. 

When a professional looks at the competing interests, the middle ground shows up as a small area.  There are solutions to this problem in many cases if and only if the beneficial owner is not too demanding.  That being said, if the bare trust registers for GST/HST purposes, the CRA may conduct an audit and issue an assessment.  Their policy is clearly stated in TIB-068.  The policy is restated in many other GST/HST memorandum on real property.  "I did not know the law" is not an acceptable excuse.

Some Payments Made By Limited Partnership To The General Partner Are Subject To GST/HST

First, it is important to note that not all payments made by a limited partnership to the general partner are taxable from a goods and services tax (GST) / harmonized sales tax (HST) perspective.  The determination of whether GST/HST is payable/collectible can only be determined based on the facts. 

That being said, the belief that any and all payments from limited partnership to the general partner are outside the reach of GST/HST is incorrect.  The reason why it is important to consider the GST/HST status of such payments is that the general partner may be assessed by the Canada Revenue Agency (CRA) for failure to collect and remit GST/HST (or the limited partnership may be assessed by the CRA for failure to pay GST/HST) on certain amounts.  With the implementation of HST, the failure to consider the GST/HST status of payments increased from a 5% error in Ontario to a 13% error (from a 5% error in British Columbia to a 12% error and from a 13% error in Nova Scotia to a 15% error).

As discussed in my post on June 7, 2011 "Partners & Partnerships: Transfers Are Tricky", partners are required to charge, collect and remit GST/HST in respect of supplies of property or a service to the partnership otherwise than in the course of the partnership’s activities. Partners are not required to charge, collect and remit GST/HST in respect of supplies property or a service to the partnership that are provided in the in the course of the partnership’s activities.

The CRA takes the position that with respect to certain amounts of consideration paid by the limited partnership to the general partner, the general partner may be considered to provide property/services "otherwise than in the course of partnership activities".

The CRA also takes the position that the structuring of payments by the limited partnership to the general partner is important.  There are many payments/distributions/amounts of consideration that the CRA may look at in this context and it is beyond the scope of this blog article to address every one detail.  That being said, the CRA has seen structures whereby the general partner is paid amounts prior to the determination of profits and losses of the partnership and scrutinizes these payments.  The issue is whether any amount paid in such a manner is an expense for property provided or services rendered otherwise than in the course of partnership activities.

As discussed in my June 7, 2011 blog article, if a partner (in this context of this blog post, a general partner) performs a type of service in the marketplace or to more than one limited partnership/entity, the CRA may take the position that the services rendered otherwise than in the course of partnership activities.  For example, if a general partner provides management services to more than one entity, it may be considered to be a management services company and the amounts paid by the limited partnership to the general partner may be considered to be taxable.

General partners who did not seek GST/HST advice in connection with the structuring of the limited partnership may have missed this issue and should revisit the GST/HST status of the various payments of consideration.  This is especially important if the limited partnership/general partner operates in the financial services sector, health care sector, residential real estate sector or MUSH sector because it is less likely that the mistakes will be in the context of wash transactions (that is, there is an offsetting input tax credit to reduce the exposure).

A GST/HST Joint Venture Election Allows One Co-Venturer To Account For GST/HST

Section 273 of the Excise Tax Act (Canada) authorizes one participant in certain types of joint venture (called the "operator") to account for GST/HST on her behalf and on behalf of the other co-venturers.  For example, if A (25%), B (25%), C (25%) & D (25%) enter into a joint venture, they can appoint A as the operator and A charges, collects, and remits GST/HST and files GST/HST returns on behalf of the joint venture. A also claims input tax credits, refunds, rebates and other GST/HST relief in respect of the activities of the joint venture (to the extent permitted). If the joint venture election is not in place, A, B, C, and D would each have to charge, collect and remit 25% of the GST/HST, take 25% of the input tax credits and other relief, and file separate GST/HST returns.

The bad news is that not all joint ventures are entitled to take advantage of this election option.  Only oil and gas exploration joint ventures and prescribed joint ventures can benefit at this time.  That being said, the list of prescribed joint ventures was recently amended (after 20 years) and the Department of Finance is willing to consider making additions in the future.  The list of prescribed joint ventures is set out in the Joint Venture GST/HST Regulations:

  • the construction of real property, including feasibility studies, design work, development activities and the tendering of bids, where undertaken in furtherance of a joint venture for the construction of real property;
  • the exercise of the rights or privileges, or the performance of the duties or obligations, of ownership of an interest in real property, including related construction or development activities, the purpose of which is to derive revenue from the property by way of sale, lease, licence or similar arrangement;
  • the marketing by the operator of a joint venture, under any agreement between the operator and a co-venturer, of all or part of the co-venturer’s share of the output of the joint venture provided that the output arises from an activity conducted under the agreement referred to in subsection 273(1) of the Act;
  • the transportation of natural gas liquids by means of a pipeline that operates as a common carrier of natural gas liquids;
  • the operation of a facility that is used to generate electricity;
  • the operation of a transmission line that is used to transmit electrical power;
  • the processing of output (in this paragraph referred to as the “refinement”) that arises from the exploration or exploitation of a timber resource, including any jointly conducted exploration or exploitation activity of which the output is processed under the agreement referred to in subsection 273(1) of the Act in respect of the refinement and the marketing of the processed or unprocessed output that arises from that activity;
  • the production of a fertilizer and its marketing;
  • the disposal of waste, including the collection and transportation of waste that is in furtherance of that disposal;
  • the exercise of rights or privileges, or the performance of duties or obligations, of ownership of an interest in an animal for the purposes of deriving revenue from prizewinning, stud service fees or sale;
  • the maintenance of a road, other than maintenance that is an exempt supply;
  • the operation and maintenance of the North Warning System;
  • the operation of a farming business within the meaning of the Income Tax Act;
  • the production of liquid methanol from natural gas;
  • the generation and recording of seismic data; and
  • the operation of a lumber, plywood, shake and shingle, pulp, paper or similar wood processing facility.

With respect to commercial real estate, there are certain restrictions in the activities that are prescribed above.

There are a number of rules that must be followed.  Some of the most important (but not all the rules) are:

1. There MUST be a written joint venture agreement;

2. The co-venturers MUST complete the joint venture election forms (GST Form 21 and GST Form 355); and

3. The parties to the joint venture are jointly and severally liable for all GST/HST obligations of the joint venture.

The structuring of joint ventures can be complicated and meeting the requirements of the Canada Revenue Agency requires strategic planning.  There are great benefits, but also pitfalls.

Can A CRA Auditor Ask For Lawyer's Files When Taxpayer Deducts Lawyer's Bill As Business Expense?

The answer is contained in the recent Tax Court of Canada interim decision in Richard A. Kanan Corporation v. The Queen.  In this case, a tricky Canada Revenue Agency auditor would not allow deductions taken by a dentist for legal expenses because the invoices were stated to be "for services rendered" and the auditor was not allowed to see the entire file.  Judge Campbell tries to strike a balance in her decision between the divergent interests.  This case is a MUST READ for all lawyers who provide advice to businesses (especially all tax lawyers).

Judge Campbell considered two questions:

1) Can the Appellant meet its onus without disclosing privileged information?

2) If the Appellant relies on privileged information to meet its onus, will an implied waiver be found over its entire legal file?

The short answer is that the Appellant MUST provide information about the legal services in order to justify the deduction.  However, auditors CANNOT go on fishing expeditions through a lawyer's files.

With respect to the first question, Judge Campbell concluded succinctly in the end of the interim decision:

"When a taxpayer deducts an expense from his or her income, he or she may be called upon to justify that deduction – to convince the Minister, or failing that, the Court, that it is a properly deductible expense. Where the expense is a lawyer’s fee, the proof that is required will often be covered by solicitor-client privilege. While these Interim Reasons are not intended to provide the CRA with a licence to access privileged information, it is clear that a taxpayer who presents a claim for deductions in a return must also accept that at least some disclosure will be necessary to properly dispose of that claim."
 

With respect to the second question, Judge Campbell concluded succinctly at the end of the interim decision:

"...a taxpayer should not be forced to reveal the specifics of its legal advice, or to turn over the lawyer’s entire file. In addition to limited disclosure, the lawyer or the Court may edit documents to remove non-essential material, and the Court may impose conditions to ensure the confidentiality of the information. Further, taxpayers must be allowed to provide the proof that is required without the risk that they will be found to have waived the privilege entirely."
 

Judge Campbell has clearly recognized in her decision the importance of solicitor-client privilege.  She writes:

"To find otherwise would create an unreasonable and unacceptable rule. Taxpayers would effectively have the choice of foregoing a proper deduction for legal expenses or revealing to CRA the entirety of their lawyer’s files. Such a rule would be inconsistent with the status accorded to solicitor-client privilege as a substantive and fundamental civil right, and a privilege which must be as close to absolute as possible."

While the decision says nothing about non-lawyer consultants and accountants who provide tax advice to taxpayers, it is worth noting that the above decision would not cover such advisors.  With respect to non-lawyer advisors, the Canada Revenue Agency may ask for the entire file (with the exception of solicitor-client work product if the non-lawyer hired a lawyer in connection with the advice) to review regarding the deductibility of an expense.

While the decision does not relate to input tax credits for GST/HST purposes, the principles would likely be applied in a similar manner. 

GST/HST Taxable Independent Contractor vs Non-Taxable Employee

When I say "taxable", I am talking about goods and services tax (GST) and harmonized sales tax (HST).  I am not talking about income tax in this blog post when I say "taxable".

The recent Tax Court of Canada decision in Craigmyle v. M.N.R. reminds us that planning is required for a business to claim that a person who is paid by the business is an independent service provider and not an employee (or vice versa).  Generally speaking, in the context of GST/HST, it is better that an individual is an employee because labour of employees is not subject to GST/HST.  An employer does not pay GST/HST to the employee and the employee does not need to register for GST/HST purposes.  During an audit, the assessment exposure/risk does not include the salary accounts in the general ledger.

That being said, a business may decide to look at other legal requirements when deciding how to structure the business (the GST/HST does not operate in a vacuum).  Since an employer has Canada pension plan and employment insurance payment obligations and income tax withholding obligations in regards to employees, the business may choose to retain the services of independent service providers and pay GST/HST on invoices submitted by the independent service providers for their services (if they are registered for GST/HST purposes).  The business must make a business decision.

If the business hires independent service providers, it should to ensure that independent service providers who make taxable sales in excess of $30,000 (the small supplier threshold) register for GST/HST purposes and charge GST/HST.  The business will have to be mindful of its own GST/HST assessment exposure/risk as a purchaser for non-payment of GST/HST.

The Craigmyle case deals with Canada pension plan and employment insurance.  In this case, the Canada Revenue Agency determined that the individual was an employee and the Tax Court of Canada disagreed --- the individual was an independent contractor.

The Tax Court of Canada examined what the Courts have held to constitute a contract of service. Based on Wiebe Door Services Ltd. v M.N.R. (F.C.A.) [Wiebe Door], and accepted and expanded by subsequent cases, the following test is applied focusing on the total relationship of the parties with the analysis centered around four elements:

(a) degree of control and supervision;

(b) ownership of tools;

(c) chance of profit; and 

(d) risk of loss.

Each situation has unique facts because the issue is the characterization of a relationship. Each case must be decided on a case-by-case basis. 

Business that are engaged in exempt activities for GST/HST purposes are less likely to structure the business around independent service providers because the GST/HST cost is generally unrecoverable (in Ontario that would be 13% on the service provider's fees).  Businesses that are engaged in zero-rated or taxable activities can recover the GST/HST paid to independent service providers.  The focus would be on the assessment risk in the event that mistakes are made or the Canada Revenue Agency has a different opinion concerning the characterization of the expense.

Employment Services vs Independent Contractor Services

The services of an employee (a real employee) are not subject to goods and services tax ("GST") or harmonized sales tax ("HST").  The services of an independent contractor are subject to GST/HST if that person is not a small supplier.  A small supplier is a person who makes less than $30,000 per year - they do not need to register for GST/HST purposes and are not required to charge, collect and remit GST/HST.

Persons who are independent contractors and who make supplies that exceed $30,000 per year must register for GST/HST purposes and charge, collect and remit GST/HST.  This would include service providers from outside Canada who come to Canada to perform services. 

Persons who hire independent contractors must pay the GST/HST on the services.  If the person is engaged in exempt activities, they may not be able to recover the GST/HST paid to the independent contractor.  As a result, the GST/HST can represent an increase in the cost of the services.  If the person is engaged in commercial activities, the person may be assessed for failure to pay GST/HST if the independent contractor does not charge GST/HST when required. As a result, the business must be a watchdog in this area.

With the implementation of HST, the distinction between employees and independent contractors has become more important.  If a business wants a person to be an employee, they need to document the employment arrangement and make all necessary source deductions.  If a business wants a person to be an independent contractor, they should review income tax case law to ensure that the person meets the factual requirements associated with an independent service provider.  For example, an independent contractor uses his own tools to perform his/her trade. 

This area is more complicated than it seems.  Depending on the amounts at issue, it may be worth taking some time to structure the arrangements more carefully and clearly.

OECD Seeks Comments on "OECD International VAT/GST Guidelines: Draft Guidelines on Neutrality"

In December 2010, the Organization for Economic Co-Operation and Development (OECD) released for comment a document entitled "OECD International VAT/GST Guidelines: Draft Guidelines on Neutrality".  The deadline for filing comments is March 22, 2011.

Canada is a member of the OECD.  Canada imposes the goods and services tax (GST) and harmonized sales tax (HST), which are value-added taxes.  As a result, the OECD guideline may be incorporated into Canadian law in the future.  As a result, it will be important for Canadian businesses who operate multi-nationally and may be affected by the guideline to prepare thoughtful comments.

This document succinctly summarizes some of the important principles behind GST/HST style taxes and, therefore, may be VERY useful to litigants in explaining why an auditor's approach is incorrect.  I have considered its usefulness in the context of may GST/HST disputes. 

For example, proposed guideline No. 1 is "The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation."  This is a basic principle and I can hear you saying "YES".  I can hear you saying "Why did the auditor assess me as a supplier when I am engaged in a taxable business?"

Read this document!

A Snow Storm is Heading For Southern Ontario & Municipalities Pay More with HST

Fact: It snows in Canada.

Fact: Snow plowing services were not subject to Ontario retail sales tax and are now subject to HST at the rate of 13% (previously snow plowing services were subject to 5% GST).

Fact: Prior to July 1, 2010, municipalities received a 100% rebate of GST paid on outsourced snow plowing services.

Fact: After June 1, 2010, municipalities must pay HST (13%) and receive a 100% rebate of the GST portion and only 78% rebate of the HST/PVAT portion. 

This means that 1.76% is not recoverable.  This means that HST has resulted in increased costs to municipalities for snow removal.  Depending on a municipalities snow removal budget and use of 3rd party contractors, the cost could exceed $1 Million per season.

Environment Canada is telling us that snow removal services are going to be needed today and tomorrow. My opinion is that the winter of 2010/2011 will the politicians a lesson that snow removal services should be zero-rated as they are necessary in Ontario.  Alternatively, municipalities need a 100% MUSH sector rebate on the PVAT portion.

I always get often angry emails from people when I raise areas where the GST/HST regime can be improved. Guess I should expect some emails regarding this post.

Department of Finance Releases Modified HST Rules For Financial Institutions

On January 28, 2011, the Department of Finance released the long awaited harmonized sales tax (HST) rules relating to the calculation of the provincial component (known as the provincial value-added tax or PVAT) of the HST.  In what will be known as the January 28, 2011 Release, the Department of Finance provides a backgrounder, proposed amendments to the Excise Tax Act (which will have to be passed by the House of Commons and Senate) and proposed changes to regulations (which can be promulgated by the governor in Council).

These rules were initially announced in Department of Finance news releases dated May 19, 2010 and June 30, 2010.  The January 28, 2011 Release is said to incorporate modifications and changes as a result of consultations with the affected financial services industry.  A number of issues raised in the consultations require further research, analysis and stakeholder consultations, which will take place until March 31, 2011.

The HST rules for financial institutions remain very complicated.  It is not possible to summarize the 130 pages of new laws and regulations in this blog post.  Suffice it to say, each financial institution in Canada or engaged in business in Canada will need to take a look at the January 28, 2011 Release.  Many commodity tax specialists spent the week-end trying to get their heads around this new package.

 

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?

If GST/HST Registrant Buys Real Property, The Registrant Should Not Pay GST/HST to Vendor

I was recently called by a person who purchased a hotel property from a vendor.  The buyer paid GST/HST to the vendor.  The Canada Revenue Agency (CRA) has denied the input tax credit on the basis that GST/HST was not payable and, therefore, the GST/HST was paid in error.  The CRA has said that since the error was not discovered until after 2 years after the payment, they will not give a refund of tax paid in error.  This real property is used in commercial activities and the Government of Canada gets its GST/HST on accommodations, food sales, etc.

Here is the starting point of the analysis - Subsection 221(1) of the Excise Tax Act provides that every person who makes a taxable supply in Canada must collect GST/HST payable by the recipient in respect of the supply. BUT, paragraph 221(2) of the Excise Tax Act sets out important relief:

"A supplier (other than a prescribed supplier) who makes a taxable supply of real property by way of sale is not required to collect tax under Division II payable by the recipient in respect of the supply where ...  (b) the recipient is registered [for GST/HST purposes] and, in the case of a recipient who is an individual, the property is neither a residential complex nor supplied as a cemetery plot or place of burial, entombment or deposit of human remains or ashes."

What means that the supplier is not required to collect GST/HST when the buyer is registered for GST/HST purposes and purchases certain real property.

This blog post to is intended to help buyers not get themselves into the same mess.

The problem faced by this person should be fixed.  Since solutions are unique, you will have to continue to read The HST Blog to learn how.  When I hear of unfairness like this, I am inspired to help.

The Arguments of a Taxpayer is Not Enough, the Taxpayer Needs to Present Evidence

A common issue is highlighted in the recent Tax Court of Canada GST case, Paradigm Ventures, Inc. v. The Queen. Simply put, in this case, the Appellant presented its arguments to the Court and the Court asked to see the EVIDENCE.

Let me help you picture this - remember the movie Jerry McGuire when Tom Cruise was yelling "Show me the money!"  Now picture a judge at the front of a court, wearing black robes and yelling "Show me the evidence!"

The facts in the Paradigm Ventures case are unremarkable.  They key point was that in order to win, the Appellant needed to show that delivery of goods had taken place outside of Canada.  The court wanted to agree with the Appellant, but needed evidence that factually the goods were actually delivered outside Canada.

The representative for the Appellant made bald assertions that the contracts were for delivery outside Canada (without providing any contracts).  This frustrated the judge and prompted him to write in the decision "In effect, he seems to believe that the facts of this situation speak for themselves in the context of the intended relief ...".  The judge on to write:

"Given the background to the amendment and the assurances he received, the Appellant’s representative earnestly believes, in effect, that this acknowledgment of what the Appellant does is a sufficient basis for me to allow its appeal. My repeated cautions to him that such belief may not be a sufficient basis for me to allow the appeal made little impression on him..."

The judge further goes on to add:

"His pleas then for the Appellant’s appeal to succeed on the basis of what he essentially says was the spirit of the amendment, are simply unrealistic. The amendment was understood by most, it seems, as coming with conditions and burdens of proof."

 The judge's words are helpful because we often get caught up in what we want to be the result.

Continue Reading...

Would you like to find MONEY in your Business?

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

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

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

I will share one tip today. 

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

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

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

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

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

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

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

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

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

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

The ABCs of Harmonized Sales Tax

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

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

A is for Almost Everything - HST covers almost everything;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How Much is That Doggie in the Window?

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

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

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

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

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

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

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

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

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

Bequested Goods Are Not Subject to HST on Importation

I was sent a question as to whether harmonized sales tax (HST) will be imposed on imported goods that have been the subject of a bequest to the importer.  I wanted to answer this question since my own Grandmother passed away this year --- so this one is for Alice (and the writer of the question).

Goods that are classified under H.S. tariff item 98.06 may be imported as a non-taxable importation (in other words, no HST on importation).  H.S. tariff item applies to:

(a) Personal and household effects of a resident of Canada who has died (on the condition that such goods were owned, possessed and used abroad by that resident);

(b) Personal and household effects received by a resident of Canada as a result of the death or in anticipation of death of a person who is not a resident of Canada (on condition that such goods were owned, possessed and used abroad by that non-resident), or

(c) ll the foregoing when bequeathed to a resident of Canada.

It will be important to communicate effectively on the import documentation that the goods are the subject of a bequest (or belonged to a resident of Canada who passed away while outside Canada).  Please use H.S. tariff code number 98.06 on the Customs invoice. It will be helpful to name the deceased person and/or the estate of the deceased person.  If the goods are the subject of a bequest, be prepare to provide to a Canada Border Services Agency officer a copy of the Will or the Receipt and Release that identifies the goods that are the subject of a bequest. 

If the goods belonged to a Canadian resident who passed away abroad, the goods should be listed by the coroner or an official in the foreign jurisdiction as belongings of the deceased person.  There will be many situations where such documentation is not possible.  In such cases, a reasonable attempt should be made to corroborate that the criteria of the H.S tariff code have been satisfied.

Please remember that this H.S. tariff code has been misused by some and that is why your difficult time is going to be the subject of an inquiry by CBSA officers. 

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.

Communication of Zero-Rating, HST Point of Sale Rebates and HST on Sales Receipts is Problematic

Retailers are having difficulty communicating information to consumers on a single invoice.  Both large and small retailers are having to communicate a single blended HST charge and, at the same time, communicate when goods are zero-rated (HST is charged at 0%), exempt (no HST) and when they are offering an HST point of sale rebate (charging GST at 5%). 

The retailers have to segregate the information for consumers on the single piece of paper they provide at the time of sale (the sales receipt).  As a result, different lines of information may be shown on a sales receipt that may be confusing.  To a consumer that does not bring along a calculator, it may appear that the retailer is charging 13% + 5% tax or undercharged the 13% HST (in Ontario).

The more important problem is for the small retailers who may not be charging the HST correctly and may not be communicating the information correctly.  The smaller retailers may not have realized the extent of the systems changes that were required to implement HST.

Small retailers should know that some of the large retailers have been struggling with this issue --- you are not alone. However, both are expected to get it right.  Auditors will visit small retailers too.

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%

 

Bed Bugs and HST

The bed bug extermination business is thriving (not good for renters, home owners, hotel operators and others, but good for pest control service providers).This post is for the pest control service providers.  I was recently asked which place of supply rule applies to pest control services.  The person asking had incorrectly assumed that the general HST place of supply rule applied.

The correct answer is that the HST place of supply rule for services in respect of real property will apply to most (if not all) pest control services.  The service provider must go to a particular building to undertake the actions to rid the place of the bed bugs.  The service provider goes to a home, an apartment building, a hotel, a condominium building, a nursing home, or a theatre.  These places have particular locations.

Based on the HST place of supply rules, if the place is located in an HST province (e.g., Ontario), HST would apply to the amount charged for the service.  If the place is located outside an HST province (e.g., Quebec), HST would not apply (but GST would apply if the place is in Canada) to the amount charged for the service.  If the place is located on a reserve, then the point of sale rebate would apply.

Bed bug exterminators should clearly identify on their invoice the location at which the services were performed.  This will help the HST auditor apply the HST place of supply rules correctly and assess the correct rate of GST/HST.

For persons located in Ontario and British Columbia, pest control services were not taxable under the provincial sales tax regimes of either province.  Many persons who are recipients of pest control services are consumers and, therefore, are not able to recover the HST by way of an input tax credit.  Landlords, for example, cannot recover HST paid on pest control services in rental properties. Another good example is a home owners is the final consumer and cannot recover HST paid on bed bug removal - even if the bed bugs arrived from a foreign hotel.

Bed bugs and other pests may carry diseases and cause health issues, but the extermination services are not considered to be health care services.  People (and parents) must pay the HST to protect their families from bed bug bites and health issues.

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.

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

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

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

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

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

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

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

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

Ontario has a very short list including the following:

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

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

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

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

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

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

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

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

Continue Reading...

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.

Input Tax Credit Reporting 101

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

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

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

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

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

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).

I am Giving an HST Presentation for Graphic Designers on July 21

I am giving a webinar on July 21, 2010 at noon (EST) organized and hosted by the Association of Registered Graphic Designers - Ontario.  Members and non-members are permitted to register for the webinar.  I will spend time looking at the harmonized sales tax (HST) place of supply rules applicable to various types of graphic designers. I will also talk about things you can do to improve compliance with HST rules.  If you would like to register, please go here.

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.

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.

Many Government Purchasing Departments Are Reopening Contracts and Seeking Price Reductions

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

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

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

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

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

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

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

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

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

New Canada Revenue Agency Guides Help With New Housing Rebate Calculations

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

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

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

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

What is on your list?

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

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

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

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

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

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

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

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

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

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

Continue Reading...

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

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

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

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

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

The Toronto Post-G20 Clean Up and HST

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

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

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

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.

Tip on Pre-HST Billings

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

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

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

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

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

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

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

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

June Billings & HST Transition Rules

I was speaking with a service provider (marketing advisory services) in Ontario the other day about her June 2010 billings.  She said that she will be sending out invoices on June 15, 2010 in respect of services to be provided between July 1, 2010 - July 31, 2010.  She does not currently charge Ontario retail sales tax on her advisory services.  She asked me whether she is required to charge Ontario harmonized sales tax (HST).

The answer is yes (assuming the client being billed is located in the province of Ontario).  ABC Co. would charge GST on her marketing advisory services.  She would remit the GST with her GST return for the period June 1, 2010-June 30, 2010 (she is a monthly filer).

She would also add HST to the invoices.  However, she would remit the HST collected with the GST/HST return for the post-HST implementation period being her July 1-July 31, 2010 GST/HST return, which is due at the end of August 2010. She does not include the HST in the GST/HST return that she files in July even though the HST was invoiced in June 2010.

Yes, there is an unusual delay in the remittance of the HST.  This is because the HST must go into the HST pot so that it can be properly allocated to the HST Zone provinces (including Ontario).  If the HST is remitted to the Government of Canada in July, Premier McGuinty does not get any of the money.  Also, the supplier would be making a mistake and may be penalized at the time of an audit.

The New Harmonized Value-Added Tax System Regulations Contain a Surprise - An Anti-Avoidance Rule

The June 9, 2010 Canada Gazette (Part II,  Vol 144, No. 12) contained the New Harmonized Value-Added Tax System Regulations SOR/2010-117. Part 2 (section 34-37 contain the HST anti-avoidance rules.  These rules are in addition to the general anti-avoidance rule in section 274 of the Excise Tax Act (Canada) and the Ministerial discretion in subsection 2(18) and section 6 of the Retail Sales Tax Act (Ontario).

In short, related parties (parties operating at non-arms length) may see their tax planning challenged by the Canada Revenue Agency and additional assessments of harmonized sales tax (HST) levied where the Minister believes there is a tax benefit flowing from a transaction with no bona fide business purpose.  The HST anti-avoidance rules do not appear to apply to arm's length parties.

First, the time frames - the HST anti-avoidance rules apply to transactions that occurred after March 26, 2009 (the date of Ontario's HST budget announcement). In particular, Part 5 of the Regulations provide:

  • Section 35 applies to any agreement varied,
    altered or terminated on or after March 26,
    2009 and to any new agreement entered into on
    or after that day.
  • Section 36 applies to any agreement varied,
    altered or terminated on or after April 6,
    2010 and to any new agreement entered into on
    or after that day.
  • Section 37 applies to any transaction made
    on or after March 26, 2009.

My first reaction is - poor souls in British Columbia.  The drafters of the Regulations are mistaken and must believe that the B.C. HST announcement occurred at the same time as Ontario and not on July 23, 2009.

Next, what appears to be covered:

  • Non-arm's length transactions entered into between March 26, 2009 and July 1, 2010 that are altered or varied or terminated
  • Non-arm's length transactions entered into after a tax rate change announcement that are altered or varied or terminated
  • Non-arm's length transactions or series of transactions would in the absence of this section result, directly or indirectly, in a tax benefit to one or more of the persons involved in the transaction or series of transactions it may not reasonably be considered that the transaction, or the series of transactions, has been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit, arising from a harmonization event, for one or more of the persons involved in the transaction or series of transactions.

I would like to highlight something that is written in the Regulatory Impact Statement (at the end of the Regulation) after reading the part under "Consultations"

The Regulations are designed to reflect previous HST announcements of proposed rules by Ontario and British Columbia on October 14, 2009 and by the Government of Canada on February 25, 2010.

I must have missed the anti-avoidance rules announcement.

Finally, after re-reading the Regulatory Impact Statement regarding the anti-avoidance provisions, businesses that have expanded into another province after March 26, 2009 may find their business activities under a CRA microscope and will have to prove their legitimate business purpose to an auditor:

The Regulations also set out rules to prevent persons from improperly taking advantage of a change in the new harmonized value-added tax system under the Excise Tax Act. Such changes include the addition of a province to the system, a change to the tax rate of a participating province or a change to a rebate of the provincial component of the HST.

The anti-avoidance rules in these Regulations apply where persons not dealing at arm’s length with each other enter into transactions to obtain a tax benefit as a result of a change in the new harmonized value-added tax system and not primarily for bona fide purposes other than to obtain the tax benefit. In these circumstances, the Regulations allow the Minister of National Revenue to assess the participants in the transactions in order to deny the tax benefit. Generally, the aim of the harmonization anti avoidance rules is to prevent persons not dealing at arm’s length from attempting to avoid the HST simply to obtain a tax benefit and for no bona fide purpose.

Here are the HST anti-avoidance rules (which are long and difficult to read):

Continue Reading...

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. 

Ontario Massage Therapists May Learn About HST Consequences From BC

The Winnipeg Press Press (an unlikely resource for HST information) reports in an article entitled "B.C. massage therapists will have to charge HST on chronic disease patients" that massage therapists must charge HST on massage services to chronic pain patients, even if they have a doctor's note and the services are medically necessary. There are many human conditions that require massage therapy as a medical treatment.

The article states:

The NDP says people in B.C. who suffer from chronic diseases and need massage therapy are the latest to be hit by the harmonized sales tax.

Health critic Adrian Dix says massage therapists who treat people with diseases such as multiple sclerosis will have to charge their patients the HST, pushing treatment costs toward $100 an hour.

He says the government is imposing the tax despite warnings from patients and health care professionals that it hurt those needing the treatment for chronic illness.

However, Finance Minister Colin Hansen says a health profession can't be exempted from federal tax unless it's regulated in at least five provinces, and massage therapists are only regulated in three — Ontario, Newfoundland and British Columbia.

He says the government is providing a HST credit for low and modest income people as well as increasing the basic personal amount tax credit.

Meanwhile, organizers of an anti-HST petition say they've now signed up 15 per cent of registered voters in all but five of B.C.'s 85 ridings, five per cent more than the minimum needed for the petition to succeed in getting either a vote in the legislature or a referendum.

This gap in the tax system will cost insurance companies and individuals.  If you have a doctor's note, you may be reimbursed under some health insurance policies for the massage services (but, then again, doctor's may charge you for a note to provide to your insurance company (also subject to HST).  If you do not have insurance coverage for the massage services, then it is a taxable health care costs to individuals (on top of employer health taxes, fair share health levies, insurance premiums, taxes on insurance premiums, etc.).

The good news is that if the massage therapy is provided by a registered nurse, a registered nursing assistant, a licensed or registered practical nurse, it will be exempt from HST.

It is also important to distinguish between massage (which is taxable) and chiropractic services (exempt) and physiotherapy  services (exempt). So, it may be a characterization problem for some chronic pain patients.

The HST is Coming, The HST is Coming

Kevin Marron has written a helpful article about harmonized sales tax in "The Canadian Lawyer" magazine entitled "The HST is Coming, The HST is Coming".  I am not just saying it is a good article because I am quoted in the article.  My good friend, Terry Barnett, is also quoted.

Please note that I will be giving a presentation on HST for lawyers with David Schlessinger of KPMG LLP on June 23, 2010, which is being presented by the Law Society of Upper Canada.  Last I heard, over 283 people have signed up to listen.

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

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

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

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

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

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

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

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

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

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.

 

Consumer To Do List - HST is Coming

I want to share with you the list I made for myself to save HST:

  • book an appointment with Jie to save the HST on a hair cut (call beginning of June for late June appointment - also book summer highlights)
  • Late Spring Cleaning - take clothes to dry cleaners in June to save HST
  • Take dog to vet (save HST)
  • Call Electrician
  • Repair facets (save HST)
  • Arrange for Structural Engineer to take another set of readings (don't get me started on this one)
  • Ask husband to vacuum (okay, I am already saving the HST on this one).

What is on your list?

Gift Certificates and Gift Cards and GST/HST

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

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

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

1) has a stated monetary value,

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

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

4) which has no intrinsic value.

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

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

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

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

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

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

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

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

Consumer Alert – Gift Cards - Retailers Charging Sales Taxes

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

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

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

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

Tim Hudak Continues to Talk About HST Effects on Seniors and Others in Question Period

On June 1, 2010, Leader of the Opposition, Tim Hudak and Joyce Savoline, MPP continued to question the McGuinty Liberal Government about HST.  Their focus was senior citizens and condo owners.

Here are some of the excerpts from the questions and the answers (which, in my view, do not respond to the questions asked):

Question:

Mr. Tim Hudak: Back to the Acting Premier: Not only are people in the Yellow Shirt Brigade and other seniors across the province losing access to key ER services like in Fort Erie and Port Colborne, they're worried about the impact of the HST in one month's time. The HST greedy tax grab kicks in on Canada Day. Today marks the beginning of Seniors' Month, and how is Dalton McGuinty celebrating? Well, not in the Legislature today. He's interested in punishing seniors. The Premier is putting a new tax on mutual funds, which means less income in retirement. He's putting a new tax on condo fees, 8% on gas for their cars, snow removal, lawn care, home repairs, Internet, entertainment etc.

Why is the Premier closing down ER services and also raising the taxes on seniors in their retirement?

Hon. Kathleen O. Wynne: I know my colleague is going to want to comment on the HST.

I want to just make a comment, first of all, about what we have done for seniors, because the member opposite is saying that this government has not paid attention to the needs of seniors, and that is not true.

The most recent example that this party is not supportive of the initiatives we've put in place to help seniors is that they are in opposition to reducing the price of generic drugs. We are working very hard to make sure that seniors get the medications they need at a price that's reasonable, and the party opposite is not supportive of that.

On top of creating 8,000 new long-term-care beds, creating a new Ontario sales tax for seniors, doubling the Ontario home property tax for seniors, we have got a basket of measures to support seniors. The party opposite has not supported any one of those.

Question:

Mr. Tim Hudak: The minister asks what you've done to seniors. Well, Minister, you've closed the ERs for seniors in Niagara. You're bent on closing down community pharmacies and interrupting that dependent relationship between seniors and their community pharmacists. Now you're putting in smart meters that say to seniors, who have fought in the wars, who helped us through the Depression, who have built this great province, "Well, too bad. Wash your clothes at 11 p.m. Do your dishes at 10 p.m. We don't care."

The PC Party does not share that view, and we will continue to stand up and fight for seniors in this province.

What happens on Canada Day? A new tax on home heating, energy conservation retrofits, taking the dog or cat to the vet, cable, haircuts, vitamins. How much more can seniors take in Dalton McGuinty's Ontario? Won't the minister please stand up and say you're not going to go through with this massive tax-

Answer:

Hon. John Wilkinson: Millions of seniors and millions of Ontarians are going to receive billions of dollars over the next year courtesy of our agreement with the federal government. The PC Party voted against that. On July 1, seniors will receive their enhanced property tax credit. We're doubling that credit, a credit that you voted against in the first place, and you voted against the doubling. That is for seniors. And then there are many seniors who, in August, will start to qualify for the new Ontario HST rebate that your party voted against.

Let's make sure the seniors know the whole story on this file. Yes, indeed, we are reforming our tax system. This side of the House has a plan to create 600,000 more jobs in this province, and your side of the House doesn't. Seniors rely on their public services. It requires a vibrant economy, an economy like Ontario leading Canada and leading in the world-

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Tim Hudak and Lisa MacLeod Talk About HST Effects in Question Period

On Monday, May 31, 2010, Lisa MacLeod, MPP invited me to attend Question Period at the Ontario Legislature.  I had the opportunity to hear the questions being asked by the Leader of the Opposition, Tim Hudak and Lisa MacLeod, MPP and the Revenue Critic for the Progressive Conservative Caucus at Queen's Park and other Conservative MPPs (and Minister of Finance Dwight Duncan's responses)

Here are some excerpts of the exchanges (the heckling is cut out of this transcript):

Question:

Mr. Tim Hudak:  A question to the Acting Premier: As you know, Dalton McGuinty is going to force Ontario families to celebrate Canada Day with a massive new HST hike on everything. Families will also remember, as they're paying Dalton McGuinty's new greedy tax grab, that back in 2003 Dalton McGuinty was so eager to convince people he was not another tax-and-spend Liberal that he staged a photo op where he signed a promise not to raise taxes on families without their explicit consent, but then he increased taxes across the board anyway, including his massive health tax hike. I ask you, Acting Premier, why did Dalton McGuinty tell families something that he definitely is not?

Answer:
Hon. Dwight Duncan: This government has made strategic investments in health care and education and was re-elected in 2007 on the basis of those kinds of undertakings. Unlike the member opposite, we don't think the status quo is good enough. We are taking a tax change that will not raise taxes but overall will reduce taxes for some 93% of Ontarians. That's why Jack Mintz, that leader's expert witness at last year's budget hearings, says it's absolutely the best thing we could have done. That leader and his party supported it. That leader and his federal counterparts, Mr. Flaherty, Mr. Baird, Mr. Clement-all of them support this. They recognize, as that member used to recognize, that-
 

 

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

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

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

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

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

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

HST Means No More ORST Purchase Exemption Certificates

I received the following question today:

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

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

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

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

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

June Transactions May Limit Unrecoverable Sales Taxes

June 2010 may see an increase in last minute reorganizations by MUSH sector entities wishing to minimize unrecoverable harmonized sales tax (HST).  Here is a real life example with numbers. 

Example: A hospital needs to undertake a reorganization in order to remove unrecoverable HST in the current structure (the corporate structure has employees in one entity and that entity provides the services of the employees of that entity to other separate legal entities in the corporate structure, which results in GST being payable on the inter-company payments).

Let's say that the inter-company services of workers fees is $1,000,000 per year.  For the annual period July 1, 2009 to June 30, 2010, the GST payment would have been $50,000 and the hospital authority would have recovered 87% (or $43,500) by way of a MUSH sector rebate.  The unrecoverable GST would have been $6,500.

For the period July 1, 2010 to June 30, 2011, the same $1,000,000 inter-company fee for services would result in $50,000 in GST and $80,000 in HST (Ontario).  The MUSH sector rebate would be $43,500 of the GST portion and $66,400 of the HST portion (for Ontario) (and in BC it would be $70,000 in HST and a MUSH sector rebate of $40,600).  As a result, the unrecoverable combined GST/HST would be $20,100 (6,500 + $13,600).

The additional $13,600 will add up over time.  As a result, a reorganization is necessary based on this HST analysis and other considerations. 

When should the reorganization occur?  Let's assume that the fair market value of the assets involved in the reorganization is $10,000,000.  If the transaction is completed before July 1, 2010, the hospital entities in the structure would save $136,000 in unrecoverable HST.  Since the structure involves a number of charities, the unrecoverable HST is actually higher because the MUSH sector rebate for charities is 82%.  If you do the math, it makes sense to complete reorganizations before July 1, 2010.

As a result, it would be prudent for MUSH sector entities (which cannot recover GST/HST by way of input tax credits) to consider whether they should reorganize their structure in order not to "bleed" money after HST.  MUSH sector entities need all the money in their cash flow.

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

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

Example 3 in GI 073 provides as follows:

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

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

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

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

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

My Latest HST (and Customs Duties) Presentation

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

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

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

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

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

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

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

The SAM attribution methods are briefly discussed for:

i. banks

ii. insurance corporations

iii. trust and loan corporations

iv. investment plans and segregated funds

v. other corporations, individuals and trusts

The publication also covers the following topics:

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

 

Ontario Finally Lets Suppliers Know They Have To Start Charging HST

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

Tax Information Notice 6 states:

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

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

Tax Information Notice 6 goes on to state:

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

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

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

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

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

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

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

Beware: Some Tips to Save HST Are Wrong

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

Printed Version:

Tip 1 "Buy Now, Use Later

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

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

Printed Version:

Tip 2 "Get to Know the Internet

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

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

Printed Version:

Tip 5 "Get on the Internet

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

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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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Real Estate Agents Have A Good HST Question

I have been contacted by an old friend (an Ottawa lawyer that I know and respect from my days at Goodmans LLP) who asked whether residential real estate commissions are subject to harmonized sales tax (HST) if the fees are in respect to activities performed by a real estate agent before July 1, 2010 and where the agreement of purchase of sale was signed before July 1, 2010, but the actual transfer of the residential real estate to the purchaser(s) occurred after July 1, 2010.  Obviously, the real estate at issue is located in Ontario.

What was explained to me was that all or substantially all of the real estate agent's services are performed prior to the conclusion of an agreement of purchase and sale by the vendor and purchaser.  Based on my personal experience buying a new home and selling an old home is that most of the services of the real estate agent are provided before the agreement is signed.  The vendor's real estate agent makes the house or condominium unit pretty and takes pictures.  Then they make a promotional brochure.  Then they advertise the property.  Then they take appointments for showings and sometimes attend the showings.  They sometimes host open houses.  The vendor's agent works to bring together a group of persons who would be interested in the property and often aims to create the environment of a bidding war between potential buyers.  The vendor's real estate agent then receives the offer(s) to purchase and forwards the offer(s) to the homeowners.  The negotiation process proceeds and eventually the vendor accept an offer an the paperwork is drawn up and signed.  Very little in the way of services is required from the vendor's real estate agent after the agreement of purchase and sale is signed and sent to the lawyers.

The purchaser's real estate agent performs services of identifying properties that meet the purchaser's requirements, setting up appointments with other agents for listed properties and takes the purchasers to the various appointments.  These services can take place over a number of months.  Eventually the perfect property is located and the purchaser's agent assists the purchaser in arranging financing and drafting an offer.  The purchaser's agent assists the purchaser with the negotiation of the deal and the final step is the agreement of purchase and sale.  It is possible that the offer/negotiation stage may transpire on many homes until the purchaser concludes a contract with a vendor.  In my experience, the purchaser's agent may also assist the purchaser find a lawyer and an inspector. Very little in the way of services is required from the purchaser's real estate agent after the agreement of purchase and sale is signed and sent to the lawyers.

That being said, after the date the agreement of purchase and sale is signed, there may be conditions in the agreement that must be satisfied (e.g. arranging financing, a home inspection, selling an existing home, etc.) before the contract is perfected. As a result, the important date is either the date of signing the agreement of purchase and sale or the date that the conditions are satisfied or expire. 

The question is whether under the transition rules, the real estate agent must charge HST.  The transition rule for services is that HST would generally apply to the supply of a service to the extent that the service is performed on or after July 1, 2010.  HST would generally not apply to a supply of a service if all or substantially all (90 per cent or more) of the service is performed before July 2010.  Consideration due or paid on or after July 1, 2010 would be subject to HST to the extent that  the consideration is for the part of a service that is performed on or after July 1, 2010 (See Ontario Ministry of Revenue Information Notice #3 "General Transition Rules for Ontario HST")

Based on the transition rules:

1) With respect to residential real estate deals signed before July 1, 2010 and all conditions are satisfied before July 1, 2010, it should be that HST is not payable if all or substantially all of the real estate agent's services are performed before July 1, 2010.  If the agreement of purchase and sale is signed and the conditions expire before July 1, 2010, it should be that all or substantially all of the services are considered to be performed before July 2010 and, therefore HST should not be payable. 

That being said, it would be useful for the Canada Revenue Agency (CRA) to issue an administrative statement that they agree with the timing of the services.  I cannot imagine what basis the CRA would give that 10% or more of the services are performed after the satisfaction of all conditions.

Real estate agents should help themselves by taking detailed records of when they performed services for clients so that they can do the math for the auditors.

2) With respect to residential real estate deals that are signed before July 1, 2010 and some of the conditions expire after July 1, 2010, the facts and the HST status of the supply will have to be considered on a case-by-case basis.  It is possible that more than 10% of the services will be performed after July 1, 2010 if the conditions create particular complications or if the buyer picked the first home they saw and the real estate agent's time was required to keep a deal together.

3) With respect to residential real estate deals that are signed before July 1, 2010 and fall apart after July 1, 2010, the facts and HST status of the supply will have to be considered on a case-by-case basis with respect to amounts received by real estate agents from the deposits.

Landlords Not Happy about HST and are Asking Tenants to Leave

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

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

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

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

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

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

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

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

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

British Columbia Government Restructures Itself To Save HST Costs

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

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

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

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

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

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

HST Will Cost Municipalities

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

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

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

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

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

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

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

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

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

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

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

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

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

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An HST Calculator - What a Useful Tool!

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

The areas covered by the HST calculators are:

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

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

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

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

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

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

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

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

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
 

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

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

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

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

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.

What is a "Service" for GST/HST Purposes?

The harmonized sales tax (HST) transition rules and HST place of supply rules set out general and specific rules for tangible personal property, real property, intangible property and services.  What is important and glaringly missing is guidance on how the Canada Revenue Agency divides up the categories.

Subsection 123(1) of the Excise Tax Act (Canada) defines "service" to mean:

"anything other than
(a) property,
(b) money, and
(c) anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person"

This means that the catch-all basket is the services basket.  It also means that you must determine if the supply at issue fits in another basket and whether it is property, money or supplied in the context of an employer-employee relationship.

I will focus on the more difficult concept - property. Subsection 123(1) of the Excise Tax Act (Canada) defines "property" to mean:

"any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money."

"Personal property" is defined to mean "property that is not real property".  So, you must ask if the supply is real property.

"Real property" is defined to include:
 

(a) in respect of property in the Province of Quebec, immovable property and every lease thereof,
(b) in respect of property in any other place in Canada, messuages, lands and tenements of every nature and description and every estate or interest in real property, whether legal or equitable, and
(c) a mobile home, a floating home and any leasehold or proprietary interest therein;

 
If the supply does not fit within this "real property" definition, you must ask if the supply is "tangible personal property or intangible property.  However, the terms "tangible personal property" and "intangible personal property" are not defined in the Excise Tax Act.  That being said, there is significant case law on the subject(s).
 
In short, if you can determine that the supply is not real property, not property, not money and not supplied in connection with an employer-employee relationship, the rules relating to services would apply.

The various publications by the Canada Revenue Agency, Department of Finance and Ontario/BC contain examples in connection with the transition rules.  This helps if certain situations fall between the lines or in the grey area.  In my 16 years of practice I have seen many grey areas and have seen auditors move supplies from one basket to another.  I expect this practice to continue.

If your situation falls between the lines in the grey area, please seek the advice of a specialist.  For example, the Canada Revenue Agency is going to have difficulties with computer programs.  Over-the-shelf software will likely be considered to be tangible personal property.  Custom computer software may be considered to be tangible if provided on a disk/CD-Rom or a service if custom or intangible personal property if the contract sets out license rights.  Whether a computer software maintenance contract is a contract for services or intangible property is an open question that the Canada Revenue Agency is considering.  If it is possible that no maintenance would be required in a given period, the Canada Revenue Agency may consider the contract to be in respect of intangible personal property.  The same issue arises for warranties and help desk contracts.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

For The Next Two Weeks Only, No HST On Goods and Services Delivered After July 1

Some businesses in Ontario and British Columbia have a promotional opportunity.  Businesses that sell goods and/or services may advertise that if payment in full is received before May 1, 2010 for goods and/or services to be delivered after July 1, 2010, HST will not be payable.  Few customers/clients may be aware of this opportunity to take advantage of the Ontario transition rules and British Columbia transition rules.  Please refer to the HST Library for more government publications on the transition rules.

April 16 - 30, 2010 presents an opportunity to place an ad on your web-site, post a promotional sign in your store window, change your voice mail greeting, or place more traditional advertising.  For example, a hair stylist or massage therapist may offer coupons for services to be delivered after July 1, 2010.  If the client pays in full for the book of coupons before May 1, 2010, then the service provider will not be required to charge, collect and remit HST (even when the pre-paid coupon is used).  Another example is that a buyer of custom furniture may pay for the furniture in full before May 1, 2010 and will not have to pay HST if the custom furniture is delivered after July 1, 2010.

There is a risk for the buyer of non-delivery of goods and/or non-performance of services.  Buyers will have to weigh the credibility of the supplier against their desire to save the HST.  However, if my hair stylist were to present this opportunity to me and I have been going to Jie Matar for years, I would feel comfortable parting with my money.  Each consumer will have to assess their comfort with pre-payment.

NOTE: Prepayment is different than a deposit.  A deposit that can be returned (such as a lawyer's retainer) may not satisfy the payment prior to May 1, 2010 transition rule requirement.  If the deposit is held in trust and is not applied to an invoice for delivery or performance before July 1, 2010, the CRA auditors may expect HST.  The CRA has administrative positions relating to deposits that are based on provisions in the Excise Tax Act.  In other words, use of the word "deposit" may be problematic in an audit.  The payment must be a pre-payment or consideration for the goods and/or services.

If a business takes advantage of the transition rules, they must keep detailed records.  An auditor may show up to conduct an audit in 3 years and will ask why HST was not collected on the deliveries (services performed) that occurred after July 1, 2010.  The business will have to provide evidence of the payment before May 1, 2010 (an auditor will not rely on a statement).  It will be important to enter the receipts of money into the business records (e.g., general ledger accounts for April 2010) as soon as possible and preferably in April 2010.  Frequent trips to the bank in April 2010 is highly recommended so that you can prove the deposits - you must have received the money from the customer or client if you deposited the money in the bank.  The purchase of a "PAID" stamp from the office supplies store would be helpful (but may not be considered definitive proof because the stamp could be used in May, June, July) -- a stamp on each paid invoice along with the date of payment would be evidence if matched with other documents (such as photocopied cheques, bank statements, credit card receipts, etc.).  Scanning documents into computerized records that will show an April 2010 saved date may be useful.

I would like to note that auditors can be difficult and not accept documentary evidence.  lawyers and courts like documentary evidence. A real attempt to keep accurate records may satisfy due diligence defense requirements even if the record-keeping is not perfect.

The Federation of Rental-Housing Providers of Ontario Come Out Swinging

After I posted my blog posting yesterday, I was sent the Federation of Rental Housing Providers of Ontario issued a press release entitled "McGuinty Government Dupes Media and Tenants on HST: Tenants not protected from HST". The press release states:

Today the McGuinty Liberal government misled the media and tenants and caused further harm to rental housing quality by announcing that landlords will not be able to pass on HST costs to tenants in above guideline rent increases (AGIs).

“This bizarre move by the Liberal government was designed to capture headlines and dupe the media into believing that tenants are somehow going to be protected from negative HST impacts” said Vince Brescia, President & CEO of FRPO. 

The government gave deliberately misleading information in its press release designed to capture media attention, and also designed to attack landlords rather than help them deal with the huge negative consequences of the HST that are specific to the rental housing industry.

“It is unfortunate that the government has chosen not to help the industry deal with the massive negative impact of the HST on Ontario’s rental stock and tenants” said Brescia. “They seem to be more interested in headlines than in helping tenants”.

This is an interesting press release that goes on to provide more detailed information about the rental housing industry in Ontario and their point of view that harmonized sales tax (HST) costs to landlords will be passed on to renters in the form of higher rents.  It is particularly interesting in light of the fact that HST implementation is only 2.5 months away.  It is also interesting in light of the wage freeze budget.

The tone of the news release is more provocative than what is usual. But, provocation may be necessary.  Many in Ontario can be described as happy sleeping puppies who are not aware of what HST will mean starting on July 1, 2010. If there is misinformation by government officials, then in is n important public service for those who understand what is myth and what is true to come forward.

I will continue to monitor this situation in order to report further on whether landlords will be restricted n their ability to pass on unrecoverable HST costs to tenants/renters of residential real property.  I would expect that landlords would be entitled to pass on unrecoverable HST costs in the form of higher rents.  It will be a significant development if laws and regulations are passed to limit landlords' recovery rights. 

If laws and regulations are passed in relation to one industry, it is a slippery slope to force on businesses unrecoverable HST costs.  The initial announcements at the time of the announcement of HST was that the tax reform was beneficial to business.  The residential rental property industry may disagree at this time.

Ontario Renters Hear Good News About Government Limits on HST Recovery Rent Increases

The Toronto Star is reporting that the Ontario Liberal Government plans to make a big announcement  to help out renters of real property by restrictions on rent increases.  On the other hand, the announcement restricts the ability of landlords to raise rents to recover unrecoverable harmonized sales tax (HST).

Laurie Monsebraaten reports:

In advance of the harmonized sales tax taking effect in July, sources say the Liberal government will close a loophole in rent regulations that would have allowed landlords to apply for above-guideline rent increases based on the new 13 per cent tax on utilities.

Instead, the new HST costs for utilities will be reflected in rent only as they affect the Consumer Price Index, which the province uses to calculate the annual rent increase guideline. 

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The Music Industry is Blogging About HST

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

1) That they have attended GST/HST seminars;

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

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

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

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

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

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

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

New Finance Canada Statement Does Not Solve GST Dilemma

Finance Minister Flaherty's written statement on March 26, 2010 concerning the proposed changes to the goods and services tax (GST) definition for "financial services" does not provide sufficient clarification for affected businesses.  He said:

"The proposed changes contained in the Notice of Ways and Means Motion tabled in the House of Commons on March 22, 2010 are designed to confirm our long-standing policy intent and restore the situation that existed prior to court decisions. We are not imposing new taxes."

There are three big problems wit this statement:

1) The Notice of Ways and Mean Motion tabled in the House of Commons on March 22, 2010 retroactively changes the definition of "financial services" in subsection 123(1) of the Excise Tax Act(Canada).  The changes are retroactive to January 1, 1991 and Canada Revenue Agency officials have stated that the changes will be used in audits; and

2) The Tax Court of Canada has considered the existing definition and has issued its decisions interpreting the law against the Canada Reveneu Agency and in favour of the taxpayer.  It is inconsistent to say that the Department of Finance is responding to Court decisions that were decided against the Canada Revenue Agency and that the proposed amendemnts that are intended to improve the Canada Revenue Agency's chances of success in other and future cases are not changes to the law; and

3) The proof will be in the actions of the Canada Revenue Agency and not in a Statement by the Minister of Finance. The real problem will arise when an auditor assesses a financial service business in the future for non-collection of GST on supplies of financial services or when the Canada Revenue Agency issues a ruling that a particular supply is GST taxable in circumstances where (a) a ruling was provided to the taxpayer prior to the changes in which the CRA took a different position, (b) taxpayers follow the Tax Court of Canada decisions, (c) taxpayers follow the Canada Revenue Agency's pre-amendment administrative statements (e.g., policy P-239), or taxpayers exercised due diligence and did not collect GST (and HST) based on a reasonable interpretation of "arranging for".

Will HST Apply to Imports of Goods Into Ontario and British Columbia?

There is some misinformation about whether HST will apply to imports into the new HST provinces (Ontario and British Columbia) after July 1, 2010. I hope I can clear up some of the confusion.

The first place to look for the answer to the question of whether HST apply to imports into Ontario, you need to look at the Comprehensive Integrated Tax Coordination Agreement Between The Government of Canada and The Government of Ontario ("CITCA-O").  Part VIII of the CITCA-O addresses imports and provides as follows:

23. In this Part, unless otherwise defined for the purposes of Part IX of the Excise Tax Act, the term “non-commercial imported goods" means imported goods, other than goods imported into Canada for sale or for any commercial, industrial, occupational, institutional or other like use.

24. Unless otherwise provided in this Part, the importation into Canada of non-commercial imported goods by, or for, a consumer that is a resident (including a “seasonal resident" as defined for the purposes of the Seasonal Residents’ Remission Order, 1991) of the Province will be subject to the PVAT in respect of the Province in accordance with the rules generally applicable to the importation of goods into Canada under Part IX of the Excise Tax Act, and any other special rules under that Part developed for purposes of the PVAT in respect of the Province.

25. Canada will neither assess nor collect under this agreement any product-specific tax, levy or mark-up imposed by the Province in respect of the importation of goods subject to a specific tax collection agreement between Canada and the Province.

26. The PVAT in respect of the Province will not be applicable to the importation into Canada of any goods other than non-commercial imported goods in accordance with the rules under Part IX of the Excise Tax Act, and any other special rules under that Part developed for purposes of the PVAT in respect of the Province.

27. Goods, other than non-commercial imported goods, which are imported into Canada for consumption or use, or for supply in whole or in part, otherwise than in the course of commercial activities, in the Province by a person, will be subject to self-assessment of the PVAT in respect of the Province by the person in accordance with the rules under Part IX of the Excise Tax Act, and any other special rules under that Part developed for purposes of the PVAT in respect of the Province. PVAT in respect of the Province will also apply through the self-assessment provisions under Division IV of that Part.

28. The Province will assess and collect, at the time of vehicle registration in the Province, any PVAT in respect of the Province payable in respect of motor vehicles imported into Canada as non-commercial imported goods.

The BC CITCA has similar provisions.

What this all means is:

Rule 1. HST (called PVAT in the CITCA-O) is payable in respect of non-commercial imports of goods and will be collected by the Canada Border Services Agency (CBSA) at the border. For example, if an individual purchases a kindle from amazon.com for personal use, HST will be applicable. Generally speaking, if the importer does not have an import number (the RM extension on a business number), the CBSA will consider the importer to be bringing in non-commercial imports. Also, if the importer appears to be an individual and the "ship to" address is residential, the CBSA will consider the importer to be bringing in non-commercial imports. Please note that goods and services tax ("GST") will also be applicable.

Rule 2. There are exceptions to Rule 1. If an imported good is a non-taxable supply, an exempt supply or a zero-rated supply, HST will not be applicable. The import documentation (the B3 Customs Coding Form) will have to indicate the proper code in order to be relieved of HST.

Rule 3. Commercial importations of goods will not be subject to HST. That is, if a business imports goods, the CBSA will not impose HST at the border. The CBSA will still collect the GST.

Rule 4. In addition to Rule 3, Commercial importations of goods by businesses for consumption or use, or for supply in whole or in part, otherwise than in the course of commercial activities, in the Province by a person will be subject to HST and the importer will be required to self-assess any applicable HST on its GST/HST return. Depending on the place of supply rules, the HST rate applicable to the relevant province will apply.

Rule 5. Businesses that are residents in an HST province that are not engaged in commercial activities or import services and/or intangible property for consumption or use  or supply in whole or in part otherwise than in commercial activities (meaning in exempt activities) will be required to self-assess applicable HST on imported taxable supplies of services and/or intangible property.

If you require additional guidance, please refer to the old GST/HST Technical Information Bulletin for the Maritime HST provinces (Nova Scotia, New Brunswick & Newfoundland/Labrador) TIB-081 "Application of HST to Imports" Note: when reading TIB-081, please remember that the place of supply rules are changing and TIB-081 will have to be updated.

Please be mindful of the CBSA's D-Memo D13-3-13 "Post-Importation Payments or Fees: Subsequent Proceeds" which takes the position that certain management and administrative fees and amounts paid by the importer to the exporter (or subsidiary to parent) after importation must be added to the price paid or payable. This could result in additional GST and HST being payable in respect of imported taxable supplies or property and/services. You will also have to be careful to ensure that some services that are added to the price payable for goods (and reported on a B2 Adjustment) are not duplicated in a self-assessment of GST/HST on a GST/HST return.

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.

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.