Tax Articles
Time to Attune your Business to Sales Tax Harmonization
Rino Bellavia
Review magazine
July 2009
On July 1, 2010, the Ontario government will eliminate the provincial sales tax and introduce a sales tax that is harmonized with the federal goods and services tax (HST).
While the government has yet to release all of the details of HST implementation, there are a number of steps you can take now to prepare your business for the transition and to determine the resources needed to make the necessary changes.
Budgets, costing and pricing: Evaluate the impact of the harmonized sales tax on budgets, cash flow projections, costing and pricing. Factor the costs of implementation, including any required system changes, into budgets. Once the HST is implemented, the ability to recover previously unrecoverable PST as input tax credits (ITCs) will reduce business costs. At the same time, cash flows will be impacted due to the collection and remittance of the HST on a broader range of goods and services and the payment of the HST on business inputs.
Organizations with annual taxable sales above $10 million will have a temporary five-year restriction, followed by a three-year phase-in period, to claim ITCs for certain expenditures, therefore they need to take these restrictions into account.
Systems conversion: Identify the changes required to convert accounting and point-of-sale systems to charge, collect and remit HST and to collect ITCs. Invoices, sales receipts, purchase orders and expense reports will likely require modification.
Contractual obligations: Since the HST may impact both current agreements and proposed transactions, review any contractual obligations, including leases, credit notes and discount coupons, to assess the impact of harmonization. HST also needs to be considered when negotiating new contracts that will extend beyond July 1, 2010.
Timing of expenditures: Review the timing of planned expenditures and capital acquisitions to determine whether any are subject to PST that can’t be recovered. If possible, these expenditures should be delayed until after June 2010 so the provincial component of the tax paid qualifies for an ITC.
Doing business inter-provincially: Businesses that operate in Ontario as well as other provinces should assess the tax impact related to inter-provincial sales and central purchasing. They should also determine whether to collect the 5% GST or the 13% HST on shipments of goods or supplies of services – which will depend on where the supply is provided.
Keep in mind that harmonization is intended to generate tax savings for most Ontario businesses, so the initial pain of implementation should eventually produce long-term gains. And, to defray some of the costs for small businesses (those with annual taxable revenue of less than $2 million) to move to the new system, the provincial government is offering a credit of up to $1,000 for the first reporting period following harmonization.
Given that harmonization may affect multiple aspects of your business, consider establishing an HST working group comprising representatives from relevant departments. This team could be responsible for identifying the impacts of harmonization, preparing an implementation plan, budget and timeline as well as consulting with a commodity tax specialist to ensure timely and proper compliance.
By preparing now for the coming transition, you can set aside the necessary resources and make the necessary changes so that by next July your business will be able to seamlessly transition to the new tax regime.
Rino Bellavia is the leader of the Indirect Tax Practice for BDO Dunwoody LLP. You can reach Rino in the Burlington office (www.bdo.ca/burlington) at (905) 633-4905 or rbellavia@bdo.ca.
