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.

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?

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.

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.

 

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).

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%

 

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).

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.

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.

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.

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.

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.

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
  •  

 

Beware: Some Tips to Save HST Are Wrong

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

Printed Version:

Tip 1 "Buy Now, Use Later

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

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

Printed Version:

Tip 2 "Get to Know the Internet

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

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

Printed Version:

Tip 5 "Get on the Internet

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

Continue Reading...

Landlords Not Happy about HST and are Asking Tenants to Leave

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

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

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

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

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

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

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

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

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

HST Will Cost Municipalities

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

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

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

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

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

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

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

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

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

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

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

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

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

Continue Reading...

An HST Calculator - What a Useful Tool!

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

The areas covered by the HST calculators are:

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

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

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

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

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

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

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

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

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

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

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

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

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.

Continue Reading...

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

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

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

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

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

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

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

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. 

Continue Reading...

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".