Tax Alerts
Getting you Ready for the HST
As the summer quickly approaches, chances are that you have already started to plan for July 1st when the sales tax in Ontario and BC will be harmonized with the federal GST. Before we know it, Ontario and BC will join Nova Scotia, New Brunswick and Newfoundland & Labrador which have already harmonized their sales tax systems with the federal GST.
There is little doubt that the HST will present new demands for many businesses. In particular some of the areas that need to be considered by most businesses include the following:
Budgets and Cash Flow
- With the introduction of the HST, most businesses will find that cash flow will be impacted by the collection and remittance of the HST on a broader range of goods and services sold and the payment of the HST on business inputs. In light of this, budgets and cash flow projections will have to be evaluated and modified. For some businesses, this will be good news (for example, businesses that transact with GST/HST registrants – they will get an input tax credit (ITC) on most costs now subject to PST and the imposition of HST on sales will not negatively impact most customers).
- For many large businesses (over $10 million in annual taxable supplies including associated entities), and some financial institutions, the provincial portion of ITCs will be restricted during the first five years of the new system, and after that full ITCs will be phased in over three years. This eight year restriction on the ability to claim ITCs will increase the implementation cost of the HST and will negatively impact cash flows for these businesses. The restriction would generally apply to costs relating to road vehicles weighing less than 3,000 kilograms, specified energy (generally energy other than that used to produce goods for sale), certain telecommunications services and certain meals and entertainment.
- Implementation costs including any required system changes and staff training will have to be considered when preparing budgets and forecasts.
- In terms of related groups, inter-group charges to businesses carrying on exempt activities will need to be carefully reviewed as the amount of unrecoverable HST may more than double (when compared with GST) if full ITCs cannot be claimed.
Conversion of Systems and Pricing
- Most businesses will need to reconfigure their accounting and billing systems to ensure the correct coding and invoicing of the HST. As well, invoices, sales receipts, purchase order and expense reports will require modification to account for the varying provincial rates.
- Billing systems will need to be adjusted to ensure that the HST rate is being charged and disclosed correctly on invoices. Where different rates apply on the same invoice it is important that the invoice indicates the rate applied to each item.
Staff Training
- Complexities associated with the new rules will mean that staff must be properly trained and have the knowledge to account for the HST. Billing staff will need to be aware of the transitional rules to ensure that GST/HST/PST is correctly applied. As well, the accounts payable department will need to be prepared to face the challenge of correctly coding the sales tax and all of the varying provincial rates.
- For those businesses with customers in more than one province, they may need to review the revised place of supply rules.
Contractual Obligations and Documentation
- A review of all contracts, existing and contemplated should be conducted. Great care should be taken to ensure that all contracts, agreements and closing documents properly disclose whether fees or a purchase price include the HST.
- As well, supplies of property or services should be described to ensure that they are properly characterized for purposes of applying the new rules (i.e. place of supply rules and ITC restrictions).
Contact your BDO advisor for help determining how these issues will impact your business.
Something to Think About – Tax Planning Tips as July 1st Approaches
Taxpayers not entitled to claim full ITCs (large businesses, financial institutions and many public service bodies) may want to consider advancing purchases of PST-exempt goods prior to July 1, 2010.
Taxpayers entitled to claim full ITCs may wish to delay purchases of taxable tangible personal property that is currently subject to Ontario or BC PST until after June 30, 2010 (most tangible goods and supplies).
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For more information on the HST please take a look at the following BDO Tax Bulletins:
