On August 26, 2011, British Columbians voted to scrap the Harmonized Sales Tax ("HST") and return to the Goods and Services Tax ("GST") and Provincial Sales Tax ("PST") regime that existed up to June 30, 2010. As a result, companies with business activities in Canada will once again be forced to change the way they collect and administer sales taxes in British Columbia ("BC").

Canada has a form of value-added tax called the GST that generally applies at a rate of 5%. On April 1, 1997, the provinces of Nova Scotia, New Brunswick and Newfoundland harmonized their provincial sales tax with the federal GST such that the GST and provincial sales tax were replaced by the HST in these provinces. Ontario and BC joined these provinces when they implemented the HST on July 1, 2010. The HST rate in BC is 12%, which is comprised of a 5% federal portion and 7% provincial portion.

Almost 55% of those British Columbians who voted in the province-wide referendum supported the elimination of the HST despite a promise by the provincial government to reduce the HST rate from 12% to 10% by July 1, 2014.

The BC Ministry of Finance (the "Ministry") has indicated that the transition period is expected to take a minimum of 18 months with the provincial portion of the HST remaining in place at the existing 7% rate during this period. The Ministry announced that the PST will be reinstated at a rate of 7% with "all permanent PST exemptions". Minister of Finance Kevin Falcon specifically cited restaurant meals, haircuts, bikes and gym memberships as items that qualified for exemption under the old PST regime which will qualify for exemption once the PST is re-introduced. However, the Ministry provided that there may be some "common sense administrative improvements to streamline the PST".

The Ministry has also advised that the Province is working on developing the legislation and regulations necessary to re-implement the PST. As the provincial PST transition rules need to mirror the federal HST transition rules, the Province will be required to develop the transitional rules in tandem with the Federal Government. In addition, the Ministry will need to rebuild its capacity to administer the PST as a large portion of its staff had moved to the Canada Revenue Agency following the implementation of the HST. In addition to figuring out the transition from HST to PST, the Province needs to deal with the repayment to the Federal Government of the $1.6 billion incentive payment it had received to assist with its transition to the HST system.

The return to the PST means that businesses operating in BC will need to change their electronic and manual systems and processes to assess, collect, report and remit the PST and other related taxes to the provincial government. In addition, 2 British Columbia's rejection of HST spells change for BC businessesAug 2011 while the transitional rules have not yet been established, it may be possible for some companies to obtain tax savings by planning for the transition. For example, businesses engaged in taxable activities may wish to consider accelerating their purchases of assets before the PST is reinstated so that they do not incur nonrecoverable PST thereon. Conversely, businesses engaged in exempt activities, such as financial institutions, may consider deferring purchases of PST-exempt items that are currently subject to unrecoverable HST. However, the availability of these tax-saving opportunities will not be known until the transitional rules are announced as the transitional rules may be drafted to reduce or eliminate them.

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