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 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?

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!

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).

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.

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.

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...

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. 

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.

 

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-
 

 

Continue Reading...

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.

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.

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.

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.

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.