Effective April 1, 2013, the 12% harmonized sales tax (HST) will no longer apply on taxable supplies made in British Columbia. Rather, the 5% goods and services tax (GST) will apply along with a provincial sales tax (PST). On February 17, 2012, the federal Department of Finance published transitional rules for the elimination of HST in B.C., and the B.C. Ministry of Finance published specific transitional rules with respect to new residential housing. In February 2012, the Canada Revenue Agency (CRA) published Notice 270, Elimination of the HST in British Columbia in 2013 – Questions and Answers (a revised version was published in March 2012). We will briefly summarize the B.C. transitional rules and discuss a number of planning opportunities to minimize the tax burden. B.C. has not yet released its PST legislation, and therefore it is not certain how, and to what specific types of supplies, PST will apply.
General Transitional Rule
The general transitional rule for GST/HST will operate on the basis of the time at which tax in respect of the supply becomes payable under the Excise Tax Act (Canada) (ETA). Pursuant to subsection 168(1) of the ETA, tax generally becomes payable on the earlier of the day that consideration is paid and the day that consideration becomes due. Where the tax is payable before April 1, 2013, HST will apply. Where the tax is payable on or after April 1, 2013, GST will apply, as well as PST, where applicable.
Application of the Transitional Rule
The date that consideration becomes due is generally the date indicated on an invoice. In Notice 270, the CRA clarifies, for example, that where a service provider (e.g., a lawyer, a contractor) issues an invoice on or after April 1, 2013, for services that are performed in March 2013, only GST applies. If the invoice were issued before April 1, 2013, HST would apply. Similarly, for leases of property (e.g., automobiles or commercial real property), GST applies to lease payments due on or after April 1, 2013 (unless it is paid before that date, in which case HST applies).
Where a person purchases equipment under a conditional sale contract, possession of the equipment transfers immediately, but ownership generally does not transfer until the final payment is made. If a conditional sales contract is entered into on February 1, 2013, and payments are made on a monthly basis, HST will be payable on the first payment on February 1, 2013, and on the second payment on March 1, 2013. The remaining tax is payable by the last day of the month following the month in which ownership or possession of the property transferred (i.e., March 31, 2013) pursuant to subsection 168(3) of the ETA, and therefore would be subject to HST. If the conditional sales contract was entered into on March 1, 2013, HST would be payable on the first payment, GST would be payable on the second payment (i.e., April 1, 2013), and subsection 168(3) of the ETA would deem any remaining tax to be due by April 30, 2013. GST would therefore apply to the remaining amount.
Where a person makes a partial payment to a service provider before April 1, 2013, and another payment on or after April 1, 2013, for services to be performed after April 1, 2013, HST will apply to the first payment and GST will apply to the second payment. Under long-term fixed-price contracts for services, HST will apply to payments made before April 1, 2013, and GST will apply to payments made on or after April 1, 2013.
For refunds and exchanges, if the seller accepts a return of goods purchased before April 1, 2013, and provides a credit note, HST may be returned to the purchaser, even on or after April 1, 2013. However, if the merchant accepts the goods on or after April 1, 2013, and provides an exchange and no refund, there is no HST refund available.
With respect to transfers of real property, tax generally becomes payable on the earlier of the day on which ownership is transferred to the recipient and the day on which possession of the property is transferred to the recipient under the agreement of purchase and sale. Therefore, generally, if ownership or possession is transferred prior to April 1, 2013, HST applies. If ownership and possession are both transferred on or after April 1, 2013, only GST applies.
Certain requirements are applicable to builders of new homes effective February 18, 2012, as described in further detail below.
Only GST, and PST where applicable, will apply to property brought into B.C. after March 31, 2013, and to property brought into B.C. before April 1, 2013, if it is delivered in B.C. to a consignee after March 31, 2013. Currently, the "place of supply" rules require a service provider located outside B.C. (e.g., a law firm located in Alberta) to charge HST on its supplies to B.C. residents. However, on or after April 1, 2013, it should charge only GST.
With respect to "imported taxable supplies" (which are generally supplies of intangible personal property and services that are made outside Canada and are not used by the recipient exclusively in commercial activities) made after March 31, 2013, registrants that are resident in B.C. will only be required to self-assess GST. With respect to "imported taxable supplies" made before April 1, 2013, HST will generally apply, but only GST will apply to the extent the consideration for that supply becomes due, or is paid without having become due, after March 31, 2013.
To encourage the purchase of new housing on or after April 1, 2012, to March 31, 2013, B.C. is "enhancing" its new housing rebates. Currently, B.C. provides a partial rebate of 71.43% of the provincial component of HST, up to a maximum purchase price of C$525,000, or C$26,250. The maximum purchase price will be raised to C$850,000, yielding a maximum "enhanced" rebate of C$42,500.
To partially recoup PST that will not be paid on building materials purchased before the elimination of HST, B.C. intends to impose a 2% transition tax (the Transition Tax) on the purchasers of newly constructed or substantially renovated housing (New Housing). The Transition Tax will generally apply on purchases of New Housing where HST does not apply (i.e., GST applies), the construction or substantial renovation is 10% or more completed as of April 1, 2013, and ownership or possession is transferred, or a deemed sale of the New Housing occurs, before April 1, 2015. The Transition Tax will be payable by the purchaser to the builder, and the builder will be required to collect and remit the Transition Tax, even in cases where the purchaser is required to self-assess and remit GST directly to the CRA. Even with the Transition Tax, there will still be savings for purchasers of residential housing on or after April 1, 2013, where the purchase price is higher than C$850,000.
Where the Transition Tax applies, a transition rebate may be credited to the builder if the builder can certify that it paid PST on substantially all of the building materials that were incorporated into the New Housing on or after April 1, 2013. The amount of the rebate will depend on the degree of completion of the New Housing as of April 1, 2013, and the consideration paid for the New Housing (or in the case of a self-supply, the fair market value of the New Housing).
Builder Disclosure Obligations for New Housing
The transitional rules impose disclosure requirements effective February 18, 2012, and further state that B.C. intends to impose penalties on builders who do not comply with the disclosure requirements. In particular, if a builder fails to fully and accurately disclose the required information, a penalty applies of up to 1% of the home price, to a maximum of C$10,000 per home. In circumstances of intentional non-compliance or gross negligence, a penalty may apply of up to 4% of the home price, to a maximum of C$40,000 per home.
For written agreements of purchase and sale for New Housing, entered into after February 17, 2012, and before April 1, 2015, a builder must disclose in the agreement of purchase and sale that the contracted price is exclusive of any Transition Tax and that the associated rebate may apply. The builder must also disclose whether the contracted price is inclusive or exclusive of the B.C. provincial component of HST (i.e., 7%) and the B.C. transition rebate, if applicable. The builder must also include the following statement in the agreement of purchase and sale (or in a similar document):
"If ownership and possession of a newly constructed or substantially renovated home transfer on or after April 1, 2013:
- the 7 per cent provincial component of the HST and the B.C. new housing rebate for primary residences will generally no longer apply;
- a B.C. transition tax of 2 per cent may become payable; and
- the builder may become eligible for an associated B.C. transition rebate."
Furthermore, at the time the statement of adjustments is made, the builder must disclose to the CRA on a specified form and in a specified manner, and to the purchaser in writing, the following information:
- the amount of consideration, for GST purposes;
- the amount of Transition Tax charged;
- the degree of completion of the New Housing as of April 1, 2013; and
- the amount of the B.C. transition rebate, if any, for which the builder is eligible in respect of the New Housing.
For agreements of purchase and sale for New Housing entered into before or on February 17, 2012, and where the Transition Tax applies (i.e., closing is after April 1, 2013) no disclosure obligations are imposed with respect to the written agreement of purchase and sale, but similar disclosures are required at the time the statement of adjustments is made.
Special sectors may be subject to more specific timing rules with respect to the transition from HST to GST. For example:
- Financial institutions will be required to determine certain liabilities for HST on an apportionment basis, based on the number of days in its fiscal year that precede April 1, 2013.
- A participating employer of a pension plan who is deemed to make a taxable supply to a pension entity on the last day of its fiscal year will be required to determine whether the actual property or service giving rise to the deemed tax was acquired or imported prior to April 1, 2013.
- Public service bodies (e.g., charities, not-for-profit organizations) may claim rebates of HST for claim periods that include March 31, 2013, if the tax became payable, was deemed to have been paid or collected, or was required to be added to their net tax before April 1, 2013.
More details regarding these rules will be forthcoming.
Anti-avoidance rules will likely ensure that service providers cannot simply issue invoices after April 1, 2013, solely to avoid HST, but there are legitimate planning opportunities available to entities with respect to timing of purchases.
Businesses that are entitled to claim full input tax credits may wish to accelerate purchases of tangible personal property (e.g., computers, office furniture and equipment, vehicles) to before April 1, 2013. These items will be subject to the same effective tax rate (HST (12%) vs. GST (5%) + PST (7%)), but HST is fully recoverable as an input tax credit, whereas if such items are purchased after that date, PST will not be recoverable. Such businesses may also want to consider accelerating reorganizations and large asset transfers involving taxable tangible personal property located in B.C.
It may be advantageous for businesses to delay the purchase of items that are subject to HST but likely not subject to PST, such as certain real property. This is especially the case for businesses with restricted input tax credits (e.g., financial institutions, residential landlords, medical clinics), where the elimination of HST will result in actual, as opposed to cashflow-only, savings.
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.