The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

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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If one reads the Ontario - Canada Comprehensive Integrated Tax Coordination Agreement (the "HST Agreement") signed by Minister Dwight Duncan, it is clear that there is more room for point of sale (POS) rebates.  Point of sales rebate means the 8% provincial component of the HST is not payable.

Article 3 of Annex B of the HST Agreement provides:

Where the Province advises Canada of its desire to designate particular property or services as items eligible for a PVAT-POS Rebate in respect of the Province effective on and from a particular day, the Parties agree that the Province will be permitted to designate those property and services as such items if the total value, as determined by Finance (Canada) in consultation with the Province, of all such items that would be eligible for a PVAT-POS Rebate in respect of the Province immediately after the particular day (including the particular property or services) and that were supplied in the Province during the last calendar year for which the GST Base in respect of the Province has been determined, in accordance with Annex “A”, does not exceed 5% of that GST Base. 
 

What this means is that Ontario may grant point of sale rebates (called "POS") in respect of the provincial component of the HST (called "PVAT").  “GST Base”  is defined in Annex B to mean "in respect of the Province for a calendar year means the estimated tax base under the harmonized sales taxes for the Province in the calendar year, as determined by Finance (Canada) pursuant to Formula D of Annex “A” (referred to in that Annex as “PROVBASEt”)."  I won't complicate things further by going through Formula D.

Ontario granted a very small number of POS rebates:

• books
• children’s clothing and footwear
• children’s diapers
• children’s car seats and car booster seats
• feminine hygiene products
• printed newspapers
• prepared food and beverages sold for a total consideration of $4 or less

There is a lot of room for more POS rebates.  Tim Hudak has promised if elected October 6th to negotiate a POS rebate in respect of hydro and home heating.  British Columbia negotiated that one from the very beginning.

In this blog, I have the luxury of making my own recommendations.  My first recommendation would be for a POS rebate on healthy prepared meals such as salads (the salads I buy cost more than $4.00).  I also think that bicycles and accessories should not be subject to PVAT (there was an exemption under the Retail Sales Tax).  To promote Ontario culture, family outings and tourism, I think the former retail sales tax exemption for admissions to small theaters should reappear as a POS rebate.  In my view, vitamins should be the subject of a POS rebate. 

In addition, Ontario should determine whether more transactions involving hospitals, nursing homes health care and education can be the subject of a POS rebate.  The HST on these items that require government funding should be reviewed because it is an area of government spending that can be reduced without negatively affecting service.

I could go on, but I will receive many negative partisan comments if I do.  As a taxpayer who knows about HST, I feel that more POS rebates and relief could have been granted from the beginning.  The McGuinty Government chose what POS rebates to grant or chose not to grant many rebates.  Given the insignificant coverage of the POS rebates in the current CITCA, they chose tax revenues over using their POS bandwith.

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British Columbia Premier Christy Clark and Finance Minister Kevin Falcon should act like the Chairman and Chief Financial Officer of a publicly listed corporation.  What would the Chairman and CFO of a publicly listed corporation do if the federal government issued a harmonized sales tax ("HST") assessment for $1.6 Billion?  They would hire the best lawyers in the area of commodity tax and the best litigators to review all relevant documents, all relevant law and see if there is any valid argument to object to paying the assessment.  The Chairman and CFO of a publicly listed corporation would attempt to preserve shareholder value if at all possible. The Chairman and CFO would not give up immediately and write a big cheque without considering all legal options.

Yesterday on the Lang & O'Leary Exchange on CBC, I discussed the need to review carefully the Comprehensive Integrated Tax Coordination Agreement between Canada and B.C..  Annex C addresses the issue of the transitional payment of $1.599 Billion and what happens if the CITCA is terminated before the 5 year anniversary date.  Sections 9-17 of Annex C are the most relevant to consider.  The key question will be whether British Columbia has committed a "material breach" under the CITCA?

The answer to this question needs to be considered carefully given the fact that the people of British Columbia have spoken in the referendum and the Government of Canada cannot demand the Government of B.C. to ignore the will of the people in the very unique circumstances.  This is not a case where the politicians have unilaterally decided to back out of the CITCA.  In fact, Premier Clark does not want to terminate the CITCA and may hope to try again in the future to implement the HST.  The Government of B.C. has followed the law in holding the referendum and has spent significant resources to educate the public about how they should vote.  How do these facts interact with the CITCA wording?

I am not saying that this is the answer to the $1.599 Billion question.  I am saying that a lot of questions need to be asked of really smart people who are not ex-political aides.  It is time to ask HST lawyers and contracts lawyers and litigators to canvass all the legal arguments.  In the end, the $1.599 Billion may be payable.  Let's not start with that conclusion and give up on asking more questions.

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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.

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The Globe & Mail is reporting in an article entitled "B.C. HST 'fix' not enough to save tax in referendum: poll" that an Ipsos-Reid poll released June 12, 2011 says 54% of decided voters will vote against keeping the HST in British Columbia.

If British Columbia backs out of the Comprehensive Integrated Tax Coordination Agreement with the federal government, there will be consequences under that agreement.  Most importantly, British Columbia will have to pay back the two installments (will be three installments are July 1, 2011) of the implementation monies. Businesses will have to change their tax systems again -- to what? It is too soon to tell.

Will B.C. walk away from HST?  We will have to watch for the referendum results.  Could B.C. use the referendum results to negotiate a better HST deal with Ottawa? Maybe (I would try that).  Could B.C. convince the people to accept a revised HST deal after the referendum?  That one will be tricky.  Will a "NO HST" referendum result complicate things for B.C. businesses? Yes - and that is why businesses are coming out in support of HST.

Will B.C. revert back to the social services tax regime?  I am not sure.  However, if I was to bet on an outcome ... it would be that if the "No" vote succeeds, the B.C. government would back out of the HST (the federal sale tax regime under the Excise Tax Act).  The B.C. government would implement the British Columbia sales tax (BCST) under B.C. law that looks a lot like HST (similar to Quebec sales tax in Quebec). British Columbia would enter into an agreement with the federal government to administer BCST (just like with HST).  In other words, things would remain pretty much the same for consumers and businesses.  The difference would be with coordination of changes (just like in Quebec).

I have not talked with anyone in British Columbia about this and do not know what are the actual plans.  What I have written is a guess and nothing more.  Time will tell if it is a good guess.

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