Tax Articles
BC and Ontario Manufacturers: Ensure New Value-Added Tax Adds Value to your Operation
Rino Bellavia
Plant Magazine,
January 18, 2010
While addressing taxes likely isn’t high on the 2010 priority list for many of Canada’s manufacturers, those in British Columbia and Ontario might want to start planning now in order to realize the most value from the incoming harmonized sales tax.
Effective July 1, BC and Ontario provincial sales taxes will be harmonized with the federal goods and services tax (GST). These new federally administered taxes will be 12% in BC and 13% in Ontario, of which the provincial portions will be 7% and 8%, respectively. These two provinces will join Nova Scotia, New Brunswick and Newfoundland & Labrador, which already have harmonized sales tax systems.
The HST is a value-added tax like the GST, ensuring that only the value contributed by each manufacturer is taxed by allowing the business to claim tax credits for the HST it pays on most inputs. The HST will only be an added cost on the final sale of a manufacturer’s goods to a person who is not entitled to either an input tax credit (ITC) or rebate (such as the consumer).
Since more than 130 countries already have a value-added tax system similar to Canada’s harmonized sales tax, the move by BC and Ontario to the HST should strengthen the competitiveness of manufacturers in these provinces within many of their export markets.
The principal reason? Although production materials and equipment are exempt from provincial sales tax, BC and Ontario manufacturers currently pay 7% and 8% provincial sales tax on many non-manufacturing expenses for their own use. These include furniture, fixtures, office equipment, certain software and hardware, promotion materials, delivery vehicles and more. Manufacturers cannot recover this tax as they do with the GST.
With the harmonized sales tax, however, while manufacturers will have to pay higher HST on these items, entitlement to ITCs should allow for the recovery of most, if not all, of these tax payments, resulting in lower overall costs.
There are other HST benefits for manufacturers as well. Purchase exemption certificates will no longer be required. And manufacturers will no longer be required to file two sales tax returns. Only the Canada Revenue Agency (CRA) will administer and collect the HST and audit taxpayers.
Of course, along with the added value of lower production costs and fewer compliance requirements, harmonization also presents certain new challenges. Thus it will be particularly important for BC and Ontario’s manufacturers to take the following steps now in order to realize the most value possible from the transition to the new tax system.
Special planning considerations for mid- to large-size manufacturers. Manufacturers with annual taxable sales above $10 million (i.e. “large business”) will not be able to reap all of the benefits of input tax credits for several years. They are temporarily restricted from recovering the provincial component of the HST for certain expenditures. The government has stated that this is a five-year restriction, followed by a three-year phase-in period. These expenditures include energy not directly used in the manufacturing process, telecommunication services (other than Internet and toll-free numbers), road vehicles less than 3,000 kg, vehicle parts and fuel, and energy.
Since energy is currently exempt from provincial sales tax in Ontario, this could be a significant added cost for some manufacturers. It also means these businesses will have to track the portion of energy use attributed to the non-production areas of their operations.
Update projections and budgets. Regardless of the size of the business, every manufacturer in BC and Ontario should determine the potential financial impact of harmonization. This should be initiated as soon as possible by reviewing planned expenditures. Determine the potential savings by identifying the expenses for which the business currently pays PST. For large businesses, project the cost of the restricted ITCs. Integrate the calculations of savings and added costs, including implementation costs, on cash flow projections, budgets and pricing.
Update accounting systems. Determine what’s involved in converting accounting systems to ensure compliance (e.g., charge and remit appropriate HST and claim appropriate ITCs). As well, investigate what modifications may be required for invoices, sales receipts, purchase orders and expense reports.
Review agreements. Assess the impact of harmonization on current and planned contracts and other agreements, including leases, credit notes and discounts. Suppliers may be required to begin collecting the HST as early as May 1 on transactions that relate to the post July 1 period.
Making purchases earlier than May 1 will not likely reduce HST costs due to the fact that certain businesses may be required to self-assess the proportionate amount of HST that relates to the post-implementation period.
Review payment terms. Since purchase exemption certificates will be eliminated, manufacturers will be required to collect HST from customers, including previously GST-exempt provincial government entities. When this is a “cash on delivery” arrangement, manufacturers will collect HST on the requisite portion of the payment. HST payments may become a cash flow issue due to the fact a business must wait for invoice payments while already having remitted the 12% or 13% HST portion of those payments to the Canada Revenue Agency. Thus manufacturers should review payment terms and invoice timing in order to ensure that cash flow is not strained.
Time major expenditures. It will also be important to review the timing of any planned capital acquisitions or major expenditures. It may be worthwhile delaying these purchases until after July 1 to ensure the provincial portion of the tax paid qualifies for ITCs. As well, since manufacturers will be required to pay the higher HST on non-manufacturing expenses, rather than only the 5% GST as they do now, it will be important to balance the timing of payables and the filing of HST returns.
Review tax impact of inter-provincial sales and purchases. Manufacturers that sell inter-provincially will have to assess the tax implications of these transactions. We are still waiting for the Government to issue the “place of supply” rules that will apply when goods are sold inter-provincially. If the existing rules for the HST provinces (e.g., Nova Scotia, New Brunswick and Newfoundland and Labrador) continue to apply, the provincial portion of the HST would be required to be collected if the goods are delivered to BC or Ontario.
Suppliers to the BC, Ontario or federal governments will have to charge and collect HST. While the federal government does not currently pay PST on taxable supplies and neither the BC nor Ontario governments pay GST on supplies, this immunity will change as of July 1. Just like most other organizations, the BC, Ontario and federal governments will be required to pay the GST and the provincial portion of the HST on supplies. Thus manufacturers selling to these entities will have to charge and remit GST and the provincial component of the HST.
According to a September 2009 Special Report,* TD Economics estimates the move to the harmonized sales tax will reduce the amount of taxes businesses in BC and Ontario pay on inputs by $6.9 billion. As well, there will be an additional $650 million saved in compliance costs. This can be big value for manufacturers – provided that you begin planning now to adapt your systems, processes and policies in order to maximize the value you receive from harmonization.
Rino Bellavia is a partner of BDO Canada LLP (www.bdo.ca) and the leader of the firm’s large market region indirect tax practice. You can reach Rino in BDO’s Burlington office at 905-633-4905 or rbellavia@bdo.ca.
* www.td.com/economics/special/dp0909_hst.pdf
