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

In August 2010, the Ontario Ministry of Revenue issued Tax Tip #19 "Purchase Exemption Certificates" directed at resellers of taxable insurance (insurance premiums).  The Ministry wrote:

This information will help purchasers understand when a valid Purchase Exemption Certificate (PEC) may be used.

Claiming RST Exemptions

Retail Sales Tax (RST) will continue to apply to premiums paid under a contract of insurance or benefits plan after June 30, 2010. Some purchasers may be entitled to an exemption from RST. To claim the exemption, the purchaser is required to provide the seller with a valid PEC.

Examples where a PEC may be used by the purchaser to acquire insurance products exempt from RST include:

- Contract of insurance on agricultural products, structures, equipment, livestock and recreational equipment purchased by a person actively engaged in the business of farming

- Cargo insurance for the portion where the risk is not in Ontario

- Contracts of insurance in respect of an aircraft where the purchaser of the aircraft is exempt from RST

- Contracts of Insurance entered into by Indian Bands or Band Councils.

Information Required on a PEC

A valid PEC must show:

- Name of person or name of business•

- Address•

- Name of authorized person•

- Vendor permit number, if it applies•

- Reason exemption is being claimed•

- Date the PEC is issued•

This information is useful to the small handful of persons still caught in the Ontario retail sales tax regime (where a life of input tax credits and a single sales tax did not start on July 1, 2010).  what is missing is the useful guidance on who need to know this information --- this Ministry should of started with "For Whom it May Concerns - you know who you are - don't ask us to send you this Tip, we hope you find it on your own". 

Please let me help by identifying the class of persons who might benefit from this notice - it is buyers of taxable insurance (under the Retail Sales Tax Act (Ontario) who are not the final user or consumer.  It is relevant for those persons who resell the insurance such that another purchaser is downstream.  The purchase exemption certificate allows the middleman to not have to pay ORST and apply for a refund to get it back.

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I received the following question today:

I am a furniture manufacturer who works with interior designers.  When I invoice, if an item is being re-sold by the designer then I do not invoice the Ontario retail sales tax (ORST).  The designer will invoice ORST directly to the client. How will this change with the HST?  Will my clients be exempt if they are re-selling an item?   Also, when I purchase materials for manufacture many items such as wood, screws glue etc are PST exempt when I purchase them and get added into the cost once sold to the customer?  How will the HST deal with this?

The answer is that the furniture manufacturer will be required to charge HST when he/she sells to the interior designer.  The interior designer is no longer entitled to provide an ORST purchase exemption certificate to be exempted from payment of sales tax.  The interior designer will pay the GST/HST and claim an input tax credit (if he/she is registered for GST/HST purposes.  The interior designer will charge the final consumer GST/HST.

In addition, the furniture manufacturer will no longer purchase his/her inputs using an ORST purchase exemption certificate.  In other words, the furniture manufacturer must pay GST/HST on all materials and components used in the manufacture of the furniture.  The furniture manufacturer would be entitled to claim an input tax credit if he/she is registered for GST/HST purposes.

This will result in cost flow issues for both the manufacturer and the interior designer (the two businesses in the example).  The businesses will have to fund the GST/HST portion when paying invoices and will be able to claim input tax credits (and offset GST/HST collected) on their GST/HST returns for the period during which the supply occurred.  I am told that some businesses may need to increase their lines of credit in order to fund the HST component that was previously ORST exempt by virtue of the purchase exemption certificate.

To be clear, on July 1, 2010, purchase exemption certificates will be invalid for purchases after July 1, 2010.  The days of the sales tax relief will over gone for good.  The Canada Revenue Agency auditors will be auditing the entire supply chain to make sure that GST/HST was paid at each step in the supply chain.

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