Taxpayer Interest And Penalty Relief: How Can A Taxpayer Get Some Relief?

Canadian taxpayers are entitled to apply to the Canada Revenue Agency for taxpayer relief of penalties and interest.  All that is required is for a taxpayer who has been assessed to complete and submit an RC4288 form "Request for Taxpayer Relief - Cancel or Waive Penalties and Interest".  This form can be used for goods and services tax ("GST") and harmonized sales tax ("HST") relief in addition to income tax.

The form is relatively simple - however, the devil is in the details.  Section 2 is very important and any taxpayer seeking a significant amount of relief should take care in writing the reasons for the request for relief.  We often prepare a separate document providing the facts and reasons why relief should be granted - we do not limit the written communication to the form.  We also attach relevant documents to show transparency and openness.

It is important to understand that relief is not guaranteed.  While the CRA has broad discretion to grant relief, they also have broad discretion to deny relief. The CRA provides limited information about when they will grant penalty and interest relief.  The CRA indicates that the Minister of National Revenue may grant relief from penalty or interest when the following types of situations prevent a taxpayer from meeting their tax obligations:

  • extraordinary circumstances:  Penalties or interest may be cancelled or waived in whole or in part when they result from circumstances beyond a taxpayer's control. Extraordinary circumstances that may have prevented a taxpayer from making a payment when due, filing a return on time, or otherwise complying with a tax obligation include, but are not limited to, the following examples:
    • natural or human-made disasters, such as a flood or fire;
    • civil disturbances or disruptions in services, such as a postal strike;
    • serious illness or accident; and
    • serious emotional or mental distress, such as death in the immediate family;
  • actions of the Canada Revenue Agency (CRA): The CRA may also cancel or waive penalties or interest when they result primarily from CRA actions, including:
    • processing delays that result in taxpayers not being informed, within a reasonable time, that an amount was owing;
    • errors in CRA material which led a taxpayer to file a return or make a payment based on incorrect information;
    • incorrect information provided to a taxpayer by the CRA;
    • errors in processing;
    • delays in providing information, resulting in taxpayers not being able to meet their tax obligations in a timely manner; and
    • undue delays in resolving an objection or an appeal, or in completing an audit;
  • inability to pay or financial hardship:  The CRA may, in circumstances where there is a confirmed inability to pay amounts owing, consider waiving or cancelling interest in whole or in part to enable taxpayers to pay their account. For example, this could occur when:
    • a collection has been suspended because of an inability to pay caused by the loss of employment and the taxpayer is experiencing financial hardship;
    • a taxpayer is unable to conclude a payment arrangement because the interest charges represent a significant portion of the payments; or
    • payment of the accumulated interest would cause a prolonged inability to provide basic necessities (financial hardship) such as food, medical help, transportation, or shelter; consideration may be given to cancelling all or part of the total accumulated interest; and
  • other circumstances: The CRA may also grant relief if a taxpayer's circumstances do not fall within the situations described above.

The CRA is working to improve its procedures for dealing with Requests for Taxpayer Relief. When a completed form is filed with the supporting documentation, the CRA should send a letter to the requester acknowledging receipt of the Request for Taxpayer Relief.  The file should be assigned to a CRA officer and the taxpayer should receive requests for relevant documentation (unless a full set of relevant documents is provided with the Request for Taxpayer Relief).

If the taxpayer gets a decision that is not favourable - it happens often - then there is the ability to request an impartial review of the CRA officer's decision by the CRA (not the same CRA officer who rejected the request).

If the review procedure ends in a rejection of the requested relief, it is possible to seek a review by the Federal Court of Appeal by way of a judicial review.  However, judicial reviews often are an expensive legal procedure and can cost tens of thousands of dollars (even hundreds of thousands of dollars in some cases depending on the complexity of the issues). There have been judicial review applications filed and the Federal Court of Appeal has in some cases sided with the taxpayer.

I will be honest with you - the Request for Taxpayer Relief Program can be frustrating for persons seeking relief. That does not mean it is not worth the effort and one should not try. Just know that you may feel like you are still stuck in the mud while pursuing a process that may take time.

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

15 Stages Of A Canada Revenue Agency GST/HST Audit

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

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

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

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

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

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

The filing fee is only $CDN 5.00.

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

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

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

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

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

Lawyers Receive Revised PST Guidance from British Columbia

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Would You Like To Get On The HST Bandwidth Wagon?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The CRA document addresses many issues, including:

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

2. How is GST/HST calculated?

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

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

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

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

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

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

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

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

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

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

Justice Stratus held:

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

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

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

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

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

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

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

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

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

The CRA's position is:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Judge Campbell considered two questions:

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

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

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

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

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

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

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

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

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

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

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

GST/HST Taxable Independent Contractor vs Non-Taxable Employee

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

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

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

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

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

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

(a) degree of control and supervision;

(b) ownership of tools;

(c) chance of profit; and 

(d) risk of loss.

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

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

Employment Services vs Independent Contractor Services

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

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

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

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

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

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

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

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

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

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

Read this document!

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

Fact: It snows in Canada.

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

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

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

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

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

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

The ABCs of Harmonized Sales Tax

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

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

A is for Almost Everything - HST covers almost everything;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How Much is That Doggie in the Window?

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

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

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

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

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

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

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

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

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

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

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

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

Bed Bugs and HST

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

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

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

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

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

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

HST and Disbursements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gratuities as Added Consideration For the Supply

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ontario has a very short list including the following:

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

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

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

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

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

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

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

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

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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.

HST = Haveto Sum Together

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Will ORST Refunds Be Another TFSA Miscommunication?

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

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

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

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

I will give an example in order to clarify: 

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

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

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

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

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

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

Many Government Purchasing Departments Are Reopening Contracts and Seeking Price Reductions

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

The Toronto Post-G20 Clean Up and HST

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

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

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

Service Providers That Make Presentations May Have to Rethink Venue

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

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

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

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

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

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

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

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

Tip on Pre-HST Billings

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

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

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

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

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

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

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

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

June Billings & HST Transition Rules

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

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

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

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

We Now Have Place of Supply Regulations And More

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

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

Ontario Massage Therapists May Learn About HST Consequences From BC

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

The article states:

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

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

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

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

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

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

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

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

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

The HST is Coming, The HST is Coming

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Consumer To Do List - HST is Coming

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

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

What is on your list?

Gift Certificates and Gift Cards and GST/HST

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

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

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

1) has a stated monetary value,

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

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

4) which has no intrinsic value.

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

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

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

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

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

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

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

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

Consumer Alert – Gift Cards - Retailers Charging Sales Taxes

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

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

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

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

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

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

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

Question:

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

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

 

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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.

Ontario Finally Lets Suppliers Know They Have To Start Charging HST

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

Tax Information Notice 6 states:

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

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

Tax Information Notice 6 goes on to state:

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

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

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

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

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

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

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

What Are The HST Place of Supply Rules For Services

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


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


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


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


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


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


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


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


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

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

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


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


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


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


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


This means that:


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

 

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Real Estate Agents Have A Good HST Question

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

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

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

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

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

Based on the transition rules:

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

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

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

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

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

British Columbia Government Restructures Itself To Save HST Costs

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

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

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

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

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

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

An HST Calculator - What a Useful Tool!

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

The areas covered by the HST calculators are:

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

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

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

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

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

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

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

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

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

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

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

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

More simply put, the rules are:


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

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


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


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


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


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

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


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


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

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

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

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

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

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

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

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

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

to:

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

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

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

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

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

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

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

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

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

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

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

"Real property" is defined to include:
 

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

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

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

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

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.

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

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

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

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

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

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

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

The Music Industry is Blogging About HST

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

1) That they have attended GST/HST seminars;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The BC CITCA has similar provisions.

What this all means is:

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

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

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

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

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

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

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

HST Place of Supply Rules for Services

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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