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

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

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

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


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


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

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

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

The ABCs of Harmonized Sales Tax

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Canada & Quebec May Sign HST Agreement Tomorrow

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

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

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

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

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

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

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

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

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

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

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

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

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

New Buy America Initiative Takes Aim At Zero-Rated Exports

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

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

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

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

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

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).

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

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

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

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

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

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

The judge further goes on to add:

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

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

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The ABCs of Harmonized Sales Tax

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

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

A is for Almost Everything - HST covers almost everything;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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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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.