Canada: Federal Government Announces Transitional Rules For The Elimination Of The HST In British Columbia

On February 17, 2012, the federal government announced proposed transitional rules that would be enacted under the Excise Tax Act to deal with British Columbia's transition away from the Harmonized Sales Tax ("HST"). Last summer, following a referendum on the issue, the Government of British Columbia ("BC") announced that it would be reinstating its Provincial Sales Tax ("PST") and eliminating the HST. Effective April 1, 2013, the 12% HST in BC will be replaced by the 5% Goods and Services Tax ("GST") and a 7% PST. As the PST generally only applies to tangible personal property and some limited services, the proposed transitional rules, if enacted, will provide an opportunity for some businesses to reduce their tax expenditures by strategically planning the timing of certain purchases. On the other hand, poor timing could cause certain businesses to incur unnecessary double taxation.

It is important to recognize that these rules do not paint a complete picture of BC's transitional period. They address the transition from the federal perspective (ie. as it relates to the GST), but it still remains to be seen how the provincial government will address the transition to the PST. On February 17, 2012, BC also released transitional rules related to the purchase and sale of new homes, but it is expected that more complete transitional rules will eventually follow. The federal transitional rules described below will need to be read in conjunction with BC's transitional rules for new homes (described below), and with any other transitional rules eventually released by BC.

Supplies of property and services

Whether a taxable supply of a property or service is subject to HST or GST will depend on when it becomes payable. If it is paid or becomes payable before April 1, 2013 it will generally be subject to HST. Conversely, if it becomes payable on or after April 1, 2013 and has not yet been paid, it will generally be subject to GST. Generally, a supply of a property (excluding real property) or service is considered to become "payable" on the earlier of when it is paid, when an invoice is issued, or the date of the invoice.

Similar to the federal rules, in a February 17, 2012 news release, BC stated that PST would generally apply where tax becomes payable on or after April 1, 2013. Based on these proposed rules, companies who are entitled to claim input tax credits on their purchases should consider purchasing any tangible personal property (desks, computers, etc.) before April 1, 2013 so that they do not have to pay any unrecoverable PST.

Property and services brought into BC

Tangible personal property brought into BC on or after April 1, 2013 will generally not be subject to the provincial portion of HST. Similarly, property brought into BC before April 1, 2013, but not delivered to a consignee until or after that date will generally not be subject to the provincial portion of HST. Where a service or intangible property is supplied in a non-participating province to a resident of BC for consumption, use or supply in BC, the BC component of the HST will generally not apply if payment becomes due on or after April 1, 2013.

Financial institutions

Financial institutions with taxation years spanning April 1, 2013 will be required to assess their liability for the BC portion of HST on an apportionment basis. The ratio will be based on the number of days in the taxation year or reporting period prior to April 1, 2013, compared to the total number of days in the taxation year or reporting period.

Refunds and rebates

Eligibility for refunds and rebates for the BC component of the HST will generally remain in place until the existing limitation periods for claiming them have expired. However, there will be some exceptions (for example, no refund will be available for tangible personal property removed from BC on or after April 1, 2013). Consequently, certain businesses should be wary of the possibility that goods purchased and removed from BC could be subject to provincial tax in their destination province, resulting in double taxation with no available refund if the goods were purchased prior to April 1, 2013 and removed after that date, and the purchaser could not claim a full input tax credit for the HST paid.

Exchanges and refunds

If goods are purchased before April 1, 2013, but returned or exchanged on or after that date, a refund of HST can generally be given as long as a credit or debit note is issued.

New home buyers and builders - BC rules

Prior to BC's implementation of the HST, PST was not charged on the purchase price of new homes. Rather, BC generally only required that the builder pay 7% PST on its building materials. The government estimated that, under the PST system, the embedded PST accounted for approximately 2% of the cost of a new home. Under the HST, while builders could claim input tax credits for the HST on their costs, the entire cost of a new home became subject to HST. To address this tax increase, the BC government put in place a new housing rebate to effectively reduce the provincial portion of the HST to 2% for the first $400,000 paid for a new home.

Effective April 1, 2013, BC's portion of the HST will no longer apply to new home sales, and builders will once again pay 7% PST on their building materials. In order to deal with distortions in the housing market that would otherwise be caused by the transition, effective April 1, 2012, BC will increase its new housing rebate threshold to $850,000.

Where construction begins before April 1, 2013, but ownership and possession transfer after, purchasers will not pay BC's portion of the HST. However, they will pay a 2% transitional provincial tax on the full house price (meant to reflect the 2% embedded PST cost), and builders will receive temporary housing transition rebates to offset PST paid on materials. This rule, combined with the federal transition rules, and the increase in the rebate threshold to $850,000 means that houses valued at $850,000 or less should be treated the same regardless of when they are sold as long as ownership and possession transfer on or after April 1, 2012 (if ownership or possession transfer before April 1, 2012 and the house is sold for more than $400,000, additional taxes will apply). For houses worth more than $850,000, less overall tax should apply if ownership and possession transfer on or after April 1, 2013.

New home buyers and builders - federal rules

Currently there are transitional rules in place to deal with situations where housing transactions straddle July 1, 2010 (the date when BC implemented the HST). Generally, these rules will continue to apply. Under the existing transitional rules, sales of certain newly constructed or substantially renovated homes, where ownership transferred on or after July 1, 2010 but the purchase and sale agreement was entered into on or before November 18, 2009, were not be subject to HST. However, in these circumstances the builder was generally required to pay a transitional tax adjustment if the home was completed in whole or part after June 2010. This transitional tax adjustment will only continue to apply if HST becomes payable on the home before April 1, 2013.

Currently, the builder of a newly constructed or substantially renovated home that is a residential condominium, traditional apartment building, senior residence or long-term care facility may be entitled to a transitional housing rebate if more than 10 percent of the construction was completed before July 1, 2010. This rebate will continue to be available, but only in respect of homes where the HST or the transitional tax adjustment applies.

Other provisions

The proposed federal transition rules also contain specific rules dealing with self-supplies of real property; imported goods; imported taxable supplies; pensions plans (deemed supplies and rebates); taxable benefits; certain passenger vehicles and aircrafts; employee/partner rebates; rebates for charities, not for profits and public service bodies; streamlined accounting; calculations of basic tax content and performance bonds.

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.

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