Canada: Are You Ready? The Harmonizat Ion Of The QST And The GST May Considerably Impact Your Business Or Clients

On March 28, 2012, the federal government and the Quebec government entered into a tax coordination agreement¹ under which significant changes will be made to the Quebec Sales Tax (QST). This agreement modifies in many respects the application of the QST in Quebec by providing for, among other things, material changes applicable to financial services rendered in Quebec. However, Quebec will generally retain the administration of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) and QST in its territory.

Firstly, from January 1, 2013 onward, QST will be calculated on the sale price excluding GST. In order to neutralize the withdrawal of the GST in calculating the QST, the QST rate will be increased by 0.475% to 9.975%. Under the agreement entered into between the two levels of government, Quebec will ensure that its tax base is virtually identical at all levels with the one applicable for GST/ HST purposes in the other provinces and, to do so, will include the parameters provided under the agreements entered into with the other provinces. Thus, the differences which currently exist between the GST and QST regimes should be practically eliminated.

In addition, from April 1, 2013 onward, goods and services providers will be required to charge the QST and GST/HST to all federal and provincial departments and agencies. As a result, the exemption certificates will no longer be valid².

Major changes are also planned with respect to financial services provided in the province of Quebec. As these services are currently zero taxed, they will become exempt from January 1, 2013 onward with the result that financial services providers will no longer be able to claim input tax refunds (ITR). This loss of ITR will have significant impact on financial services suppliers. Planning may be possible in certain cases in order to avoid or limit the net cost resulting from the ITR loss. It is further planned that the compensation tax applicable to designated financial institutions will be gradually eliminated by March 31, 2014.

Revenue Canada will henceforth be responsible for the administration of the GST/HST and QST for some financial institutions, including "selected listed financial institutions". Thus, the reporting period used for the QST will need to be aligned to the one used for the GST. In the event the reporting period of a selected listed financial institution registered in the QST register includes January 1, 2013, this reporting period will end on December 31, 2012. Therefore, a new reporting period will begin on January 1, 2013 and will be combined with the one used for the GST/HST. Currently registered financial institutions may retain their registration to the extent they qualify as a "designated financial institution" or if they hold the majority of shares of an operating corporation. The concept of optional registration will be eliminated. As a result, many financial institutions will have to cancel their registration as of January 1, 2013.

Thus, although these changes do not materially affect consumers, it nonetheless remains that they will significantly affect certain types of businesses. It would therefore be advisable to take the changes into consideration and possibly consult a tax advisor.

Footnotes

1. Memorandum of Agreement Concerning a Canada-Quebec Comprehensive Integrated Tax Coordination Agreement.

2. Special rules are provided for contracts which will be in force as of April 1, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.