The Association of Registered Graphic Design (Ontario) (ORDG) has monitored Ontario retail sales tax (ORST) developments for its members for number of years. One of the benefits on membership is access to documentation prepared by ORDG relating to ORST for submission to the Ontario Ministry of Revenue. Go to ORGD website to see more.
I am seeing more Ontario retail sales tax (ORST) audits (and large proposed and actual assessments). I am seeing rushed audits. I am seeing quick analysis without the auditor referring questions to Tax Advisory. The reason is that we are in the final 13 months of ORST auditors working for the Ministry of Revenue before moving to the Canada Revenue Agency. Almost all ORST auditors will change jobs in Match 2012 and, therefore, all their audits need to be complete and assessments issued. This is why we are seeing so much activity, because there isn't much time left to visit all vendors who were registered for ORST purposes.
A range of businesses are being targeted - restaurants & bars, graphic designers, interior designers, cabinet makers and other installers, software manufacturers, manufacturers, printers, telecommunications companies, builders, accountants, etc.
If you are assessed, you may wish to file a notice of objection.
Under the Retail Sales Tax Act, the notice of objection must be filed within 180 days of the date of mailing of the statements of notice of assessment (look at the notice of assessment and/or the envelop).
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.
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):
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.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity TaxMore...
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