News
- Ontario and BC Sales Tax Harmonization
- 10/8/2009
Ontario and British Columbia Sales Tax Harmonization - Time to Start Planning
In the Ontario provincial Budget, the government announced its intention to harmonize its retail sales tax (RST) with the federal GST effective July 1, 2010.The new harmonized sales tax rate would include the 5% GST and 8% RST for a combined Ontario HST rate of 13%.The tax would be administered by the federal government and would use the same tax base and structure as the federal GST subject to several exceptions.
Similarly on July 23, 2009, the government of British Columbia (B.C.) also announced its intention to harmonize its RST with the federal GST effective July 1, 2010. The B.C. HST rate would combine the 5% GST and the 7% RST for a total rate of 12%. This is currently the lowest HST rate in Canada.Current and proposed HST Rates
Newfoundland & Labrador, Nova Scotia and New Brunswick 13%
Quebec (GST and QST) 12.875% / 13.925% (2011)
Proposed Ontario 13%
Proposed B.C. 12%
The B.C. HST would also be administered by the federal government and would use the same tax base and structure as the federal GST subject to several exceptions.Highlights of the Ontario HST and B.C. HST
Ontario HST
The provincial portion of the Ontario HST would not apply to the retail sale of:
1. Books;
2. Children's clothing and footwear;
3. Children's car seats and car booster seats;
4. Diapers;
5. Feminine hygiene products.There would be a temporary restriction for large businesses (those with annual taxable sales in excess of $ 10 million and financial institutions) from claiming input tax credits on the provincial portion of the Ontario HST for the following common types of business expenses:
1. Telecommunication services other than internet access or toll-free numbers;
2. Energy, except where used to produce goods for sale or purchased by farms;
3. Road vehicles weighing less than 3,000 kg, as well as parts and certain services and fuel to power those vehicles;
4. Food, beverages and entertainment.The restrictions would apply for the first five years after which input tax credits would be permitted on a phased-in basis over a three year period.
These restrictions appear to be very similar to the current restrictions under the Quebec Sales Tax regime which were never eliminated for large businesses in Quebec.
A one-time Small Business Transition Credit of up to $1,000 will be provided to most businesses (other than financial institutions) with less than $ 2 million in annual taxable sales.
Transitional credits and Enhanced New Housing Rebates would be available to builders and purchasers of new housing in Ontario. These credits and rebates are introduced to effectively equate the total tax payable to the current tax burden of a new home up to a value of $400,000 (Consult recent tax publication: Ontario PST Harmonization and the Residential Real Estate Sector).Rebates would be available to public service bodies on the provincial portion of the Ontario HST as follows:
Municipalities 78%
Universities 78%
Schools 93%
Hospitals 87%
Charities / Eligible non-profit organizations 82%
Ontario will maintain a separate sales tax for private transfers of used automobiles and for certain types of insurance premiums such as group insurance.B.C. HST
The provincial portion of the B.C. HST would not apply to the sale of:
1. Gasoline, ethanol, diesel and biodiesel when used in motor vehicles as well as locomotive fuel used for trains, marine diesel used for boats, and aviation fuel and jet fuel used for aircraft;
2. Books;
3. Children's sized clothing and footwear;
4. Children's car seats and car booster seats;
5. Diapers;
6. Feminine hygiene products.
In addition, a provincially administered point-of-sale rebate would apply to purchases of residential energy.
Similar to Ontario, there would be a temporary restriction for large businesses (those with annual taxable sales in excess of $ 10 million and financial institutions) from claiming input tax credits on the provincial portion of the B.C. HST for certain common types of expenses. The restrictions would apply for the first five years after which input tax credits would be permitted on a phased-in basis over a three-year period.
B.C. also proposes rebates for the purchase of new housing subject to the B.C. HST. A rebate of up to $ 20,000 would be available to purchasers of new homes. New homes up to a value of $400,000 would not pay any more provincial sales tax due to harmonization than is currently embedded (as RST) in the price of a new home.Rebates would be available to certain public service bodies on the provincial portion of the B.C. HST as follows:
Municipalities 75%
Charities and qualifying non-profit organizations 57%Transitional rules relating to new housing and general transitional rules relating to other transactions are still being worked on and are expected to be released in the coming months.
Impact on Businesses in Canada
Although formal legislation implementing these new changes has not yet been released, it is still important to start planning for the changes that will impact many businesses across Canada.As a GST registrant, a business located outside Ontario and B.C. will have to adjust their accounting systems if they sell taxable goods (tangible and intangible) or provide taxable services to customers in these provinces. The basic rules are expected to be very similar to the changes that were introduced in April 1997 when the provinces of Newfoundland & Labrador, Nova Scotia and New Brunswick harmonized their RST with the GST.
In addition, a business carrying on commercial activities and located outside Ontario and B.C. that incurs expenditures in these provinces (i.e. travel expenses, delivery charges, salesman expenses) will now be entitled to claim input tax credits on the provincial portion of the HST (in addition to the GST) subject to any specific restrictions.
Accordingly, the following list is just a few points that require careful consideration and planning to ensure businesses are ready for these changes:
1. Computer software systems changes will be required to account for the following expected changes:
• Invoicing the Ontario HST or B.C. HST versus the current GST/HST;
• Capturing input tax credits, as applicable, for expenses incurred in those provinces;
• Cash register adjustments to provide for point-of-sale rebates of the provincial portion of Ontario HST or B.C. HST in those provinces.
1. Reviewing impact of these changes on costing and pricing for businesses operating in these provinces;
2. Determining cash-flow impact on collecting and paying more tax;
3. Planning for large capital expenditures in Ontario and B.C. – Consideration should be made to defer large capital expenditures that currently are subject to non refundable RST until July 1, 2010;
4. Reviewing the availability of any sales tax elections to minimize cash flow considerations (i.e. elections for closely related corporations and partnerships);
5. Reviewing existing contracts that will straddle July 1, 2010.
The time to start planning is now .The proposed date of July 1, 2010 is not that far off and businesses will have to be ready to deal with the harmonization of these sales tax regimes.