Tax Articles
Harmonize your Business with Sales Tax Harmonization
Hendrik Swaneveld
Enterprise Magazine,
January 2010
While summer may seem a long way away, businesses in Ontario and British Columbia should already be planning for July 1 when sales taxes in these provinces will be harmonized with the federal goods and services tax (GST).
Ontario and BC will join Québec, Nova Scotia, New Brunswick and Newfoundland & Labrador, which have already harmonized their sales tax systems with the federal GST.
In order to capitalize on the promised benefits of lower production costs and reduced compliance and paperwork, Ontario and BC business owners should undertake a number of steps.
Currently, Ontario enterprises pay 8% provincial sales tax and those in BC pay 7% on many purchases. They cannot recover the tax as they do with the GST. With the new harmonized sales tax (13% in Ontario and 12% in BC) however, input tax credits (ITCs) will recover the provincial component of the tax, resulting in lower costs.
Compliance will also ease. Businesses will only be required to file one sales tax return with the Canada Revenue Agency (CRA), will only be audited by one level of government and will no longer require purchase exemption certificates. As well, businesses with sales below $30,000 will not be required to register for or to collect the HST.
At the same time, harmonization will present new demands for certain businesses, particularly those that sell goods and services that were not previously subject to provincial sales tax but will now be subject to the harmonized sales tax. These include gas and diesel fuel; electricity, oil and gas for home heating; Internet services; personal services such as hair cuts, massages, tailoring, dry cleaning; taxi, bus, train and plane fares; memberships and subscriptions; mutual fund, consulting, legal and accounting fees; service contracts as well as labour, mechanical, engineering, contracting fees; and even camping fees, vitamins, and prepared foods below $4. Companies that sell these items will have to charge 12% or 13% HST rather than the 5% GST as they currently do.
There are only a limited number of exemptions to the HST; these include children’s clothing and shoes, children’s car seats, diapers, feminine hygiene products and books.
The provincial governments are helping small businesses (those with annual taxable revenue of less than $2 million) cover some of the costs for the transition to new accounting and point-of-sale systems by providing a credit of up to $1,000.
While the Ontario and BC governments are releasing new details of HST implementation on an ongoing basis, there are a number of steps you can take now to prepare your business for the imminent transition.
Budgeting: As of July 1, businesses will be able to recover provincial sales taxes as input tax credits, which will reduce costs. At the same time, collecting and remitting HST on more goods and services and paying HST on business inputs will impact cash flow. You should therefore assess the impact of the HST, including implementation costs, on cash flow projections, budgets, costs and pricing.
Enterprises whose annual taxable sales exceed $10 million will not immediately realize all of the benefits of the harmonized sales tax. They will have a temporary five-year restriction and then a three-year phase-in period to claim ITCs for certain expenditures, therefore these companies will need to take these restrictions into account.
As well, the construction and real estate sectors will experience significant impacts from the introduction of the HST. Currently, new housing is only subject to the 5% GST. In Ontario, a rebate is available for 36% of the tax paid on the first $350,000 of the purchase price. Under harmonization, new homes will be subject to the 12/13% HST.
Thus the provincial governments are establishing additional rebates to ease the burden of the new tax. In Ontario, new homes purchased as primary residences will qualify for a rebate of up to $24,000 of the 8% provincial component while in BC they would receive a rebate of 71.43% of the provincial component of the 7% provincial component, up to a maximum of $26,250. In Ontario there is also a rebate for new rental housing including investment properties to be rented out.
Systems conversion: You should determine what is involved in converting accounting and point-of-sale systems so that you can charge, collect and remit HST as well as collect input tax credits. Retailers must ensure that systems can distinguish between items that are exempt from HST. All businesses will likely have to modify invoices, sales receipts, purchase orders and expense reports.
Contracts: Assess the impact of harmonization on any current and potential contractual obligations, including leases, credit notes and discount coupons. Suppliers are required to begin collecting HST on May 1. If you have agreements that will straddle the July 1 HST implementation date, the supplier must charge HST on the portion of the contract that includes the period after July 1. Purchasing a contract earlier than May 1 will not reduce HST costs since companies must self-assess the proportionate amount of HST.
Timing of expenditures: If you are planning major expenditures or capital acquisitions, determine whether they may be subject to provincial sales tax that can’t be recovered. If so, you may wish to delay these expenditures until after July 1 so the provincial portion of the tax paid qualifies for an input tax credit.
Inter-provincial sales and purchases: If your business sells or purchases in other provinces, assess the tax impact related to inter-provincial sales and central purchasing. If you ship goods or supply services to other provinces, you need to determine whether to collect the relevant 5% GST or 12/13% HST. If a supplier in Ontario, for example, ships products to a customer in BC, the supplier is required to charge 12% HST on that sale.
If harmonization will impact numerous areas of your business, consider establishing an HST working group with representatives from relevant units. The members of the team can identify the impact of harmonization in their respective areas and prepare an implementation plan, budget and timeline. It would also be wise for the team to consult with a commodity tax specialist to ensure proper compliance.
Ultimately, harmonization is intended to generate tax savings for most businesses in Ontario and BC. By preparing now for the transition, you can start to realize those gains sooner rather than later.
Hendrik Swaneveld is a partner of BDO Canada LLP (www.bdo.ca) specializing in commodity taxes and transfer pricing. You can reach Hendrik at (905) 946-2509 or hswaneveld@bdo.ca.
