In its recent Budget, the Government of Ontario announced that the province will harmonize the existing 8% Ontario retail sales tax (RST) with the federal goods and services tax (GST) effective July 1, 2010. The new Ontario harmonized sales tax (the HST) will be applied at a rate of 13%, the provincial component of which will be 8%.
Overview of Harmonization
Application of HST
Generally, the new HST will apply to the provision of goods and services in the same manner as GST currently applies. That is, property and services that are currently subject to the 5% GST will now be subject to the 13% HST (subject to full point-of-sale rebates for books; children's apparel, car seats, diapers; and hygiene products). The Ontario HST is expected to be substantially similar to the HST that was introduced in Newfoundland, Nova Scotia and New Brunswick in 1997.
For those businesses which are currently permitted to claim input tax credits in respect of GST paid on their expenses, the HST will represent a significant cost savings over the existing RST; no credit was available for RST paid on taxable goods and services, whereas a full input tax credit will now be available for HST paid on taxable goods and services, subject to the temporary restrictions discussed below.
The HST will be administered by the Canada Revenue Agency (CRA) under rules similar to the GST. HST registrants will file a single return for HST (i.e., replacing their GST and provincial sales tax returns). As is the case with the GST, businesses with taxable sales under $30,000 per year (or $50,000 for public service bodies) will be considered to be "small suppliers" and will not be required to register for HST.
Temporary Restrictions on Input Tax Credits for Large Businesses/Financial Institutions
Large businesses (with annual taxable sales in excess of $10 million) will be unable to claim input tax credits for five years following the implementation of the HST in respect of:
- energy (except when purchased by farms or used to produce goods for sale);
- telecommunications services (other than internet access or toll-free numbers);
- road vehicles weighing less than 3,000 kilograms and fuel, parts and certain services for such vehicles; and
- food, beverages and entertainment expenses.
Five years after implementation, the above restrictions will be phased out (over the following 3 years), with full input tax credits to be available commencing in 2018.
Exempt Financial Services
Financial services will be considered to be an exempt supply, as they are now under the GST (i.e., such services will not attract HST, but the supplier will not be entitled to claim input tax credits on expenses related thereto). Of note, Ontario's approach to the treatment of financial services is contrary to the approach adopted by the Province of Québec in its sales tax harmonization. In that province, financial services were treated as zero-rated (i.e., Québec Sales Tax (QST) is not applicable to financial services, but QST input tax refunds are allowed for QST paid on inputs to the provision of such financial services).
Also of note, notwithstanding that a financial service will generally constitute an exempt supply under the HST, the Budget proposes to continue to impose an 8% sales tax on insurance premiums that are currently subject to Ontario RST (e.g., property insurance).
Rebates of HST
(i) Residential Real Property
For buyers of newly constructed primary residences priced up to $400,000, there is a rebate of 75% of the provincial portion of the tax (i.e., a rebate of 6% (of the 8%) provincial component of the HST). The rebate is phased out for houses priced between $400,000 and $500,000. In other words, the full 8% HST is proposed to apply to the sale of all new housing in Ontario with a value greater than $500,000.
(ii) Public Service Bodies
Similar to the GST, there will be rebates of HST for public service bodies as follows:
- Municipalities: 78%;
- Universities and Colleges: 78%;
- School Boards: 93%;
- Hospitals: 87%; and
- Charities and Qualifying Not-for-Profit Organizations: 82%.
A Picture Frame, but Not a Complete Picture – Design Issues and Transitional Rules for HST Not Yet Announced
While the Budget sets forth a basic outline of the proposed harmonization, many of the most important details that will affect businesses (e.g., transitional rules, "place of supply" for goods and services, etc.) were not announced in the Budget materials. For many businesses, these transitional rules, "place of supply" rules and other technical design issues will be extremely important.
In the brief five pages of the Budget describing the proposed HST, one paragraph stands out:
Additional information on technical design issues and transitional rules will be released in the coming months to help taxpayers and businesses prepare for the proposed changes. The government will also establish an implementation panel to assist with the transition to the single sales tax. [emphasis added]
For those business sectors that may be adversely affected by the proposed change, the next six to twelve months of system design to be undertaken by the "Implementation Panel" may be particularly important. This time period will likely represent the best opportunity for affected businesses to approach the Ontario government with their input for the development of rules affecting the implementation of the HST.
For example, new home developers who have paid RST on the fixed cost of a building prior to July 1, 2010 should not be expected to also charge 8% HST on the final sale price of the home. Such an outcome would lead to double taxation. In a case such as this, it may be necessary to draft transitional rules that permit a rebate of RST paid on building materials where the HST is to be charged on the subsequent sale. Similarly, the financial services sector appears to be bearing a significant amount of new tax for which no offsetting relief has been proposed.
Industries wishing to influence the technical design and transitional rules for the HST should therefore prepare to address the Implementation Panel and other relevant Ontario officials promptly to ensure that their views are known before such issues are finalized.
The Osler Commodity Tax team has significant experience working with provincial and federal officials in connection with the development of legislation and policy and would be pleased to speak with interested parties about the development of technical design and transitional rules for the HST.
D'Arcy Schiemanis an associate practising in the Tax Department of the firm's Toronto office. He advises on both litigation and planning matters. Sean Aylward is a partner in the firm's Tax Department.