Canada: Ontario Announces HST Transition Rules

Today, the Ontario and British Columbia governments each released "General Transition Rules" for the Ontario and B.C. Harmonized Sales Tax (HST). We view this development as a positive step towards a truly national HST, with consistency between the provinces and a reduction in the potential for double tax and tax preferences that have historically plagued businesses operating in multiple provinces within Canada. We await similar commitments from Saskatchewan, Manitoba and Prince Edward Island, as well as Québec's final move from the nearly-parallel Québec Sales Tax. We anticipate that all of this will occur, particularly with some financial encouragement from the federal government. This Update focuses on the General Transition Rules released by the Ontario government (Ontario Rules). The General Transition Rules for B.C. largely parallel those for Ontario. A member of the Osler Commodity Tax team would be pleased to discuss particular differences between the rules for these two jurisdictions.

I. INTRODUCTION OF HST

As announced in the 2009 Ontario Budget, the new HST will generally apply to the provision of goods and services in the same manner as GST currently applies. That means that property and services that are currently subject to the 5% GST will now generally be subject to the 13% HST. For those businesses that 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 Retail Sales Tax (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.

As we noted in the Osler Update of April 1, 2009 which was released at the time of the Ontario Budget, many of the most important details that will affect businesses, such as transitional rules, were not announced in the Budget. Instead, the Ontario government stated at that time that the transitional rules would be introduced subsequently, after input from an Implementation Panel that would be established to assist with the transition to the HST. Those transition rules (i.e., Ontario Rules) were announced today.

The Ontario Rules relate to both transitional rules for the HST that will be proposed to be enacted in the federal Excise Tax Act (ETA) and provincial measures that will be proposed to be enacted to wind down the applicable provisions of the Ontario Retail Sales Tax Act (RSTA).

In particular, the transitional rules provide guidance in determining which tax - the existing RST or the Ontario component of the HST - will apply to transactions that straddle the July 1, 2010 implementation date for the HST.

The following dates are significant under the Ontario Rules:

  • July 1, 2010 - Implementation date for the HST:
    • May 1, 2010 - The HST will generally apply to consideration that becomes due, or is paid without having become due, on or after this date for supplies made on or after July 1, 2010;
    • October 14, 2009 - The HST will not apply to consideration that becomes due, or is paid without having become due, on or before October 14, 2009. Certain businesses and public service bodies may be required to self-assess the Ontario component of the HST on consideration that becomes due, or is paid without having become due, after October 14, 2009 and before May 2010 for property and services provided on or after July 1, 2010;
  • October 31, 2010 - Any outstanding RST will become payable by this date.

II. INTRODUCTION OF TRANSITION RULES UNDER THE ETA

The Ontario Rules contemplate triggering HST on goods, services, intangibles and leases by reference to both the date of the particular supply and the date on which consideration is due or paid.

Tangible Personal Property

Date of Delivery and Ownership

The HST will generally apply to a supply of goods by way of sale to the extent that the goods are delivered, and ownership of the goods is transferred, to the recipient of the supply on or after July 1, 2010.

Consideration Due or Paid On or After July 1, 2010

The HST will generally apply to consideration that becomes due, or is paid without having become due, on or after July 1, 2010 for a supply of goods by way of sale, to the extent that the consideration is for goods that are delivered, and for which ownership is transferred, to the recipient of the supply on or after July 1, 2010.

Consideration Due or Paid On or After May 1, 2010 and Before July 2010

The HST will generally apply to consideration that becomes due, or is paid without having become due, on or after May 1, 2010 and before July 2010 for a supply of goods by way of sale, to the extent that the consideration is for goods that are delivered, and for which ownership is transferred, to the recipient of the supply on or after July 1, 2010.

Consideration Due or Paid After October 14, 2009 and Before May 2010

Persons who are not consumers - such as businesses and public service bodies - may be required to self-assess the Ontario component of the HST on consideration that becomes due, or is paid without having become due, after October 14, 2009 and before May 2010 for a supply of goods by way of sale, to the extent that the consideration is for goods that are delivered, and for which ownership is transferred, to the recipient of the supply on or after July 1, 2010.

The requirement to self-assess HST will generally apply only to:

  • selected listed financial institutions;
  • non-consumers acquiring property or services for consumption, use or supply otherwise than exclusively in the course of their commercial activities;
  • non-consumers acquiring property or services for consumption, use or supply exclusively in the course of their commercial activities but in circumstances where the property or services will be subject to an input tax credit restriction or recapture; and
  • non-consumers that use simplified procedures available under the ETA for calculating their net tax (e.g., public service bodies).

A person who is required to self-assess in these circumstances (Self-Assessor) will be required to account for the tax either:

  1. in its GST/HST return for the reporting period that includes July 1, 2010, if the due date for that return is before November 2010, or
  2. in any other case, in prescribed form and before November 2010.

Services

The HST will generally apply to a supply of a service to the extent that the service is performed on or after July 1, 2010. The HST will generally not apply, however, to a supply of a service if all or substantially all (90% or more) of the service is performed before July 2010. The rules described above for tangible personal property, determining tax by reference to the date on which consideration is due or paid, will with appropriate modifications generally be applied to the provision of services. There are also specific transitional rules for funeral and cemetery services, passenger transportation services and freight transportation services, which we would be pleased to discuss with interested parties.

Leases and Licences

The HST will generally apply to a supply of property by way of lease, licence or similar arrangement (including commercial leases and non-residential rental property) for the part of a lease interval that occurs on or after July 1, 2010. The HST will not, however, apply to a supply of property by way of lease, licence or similar arrangement if the lease interval begins before July 2010 and ends before July 31, 2010. The rules described above for tangible personal property, determining tax by reference to the date on which consideration is due or paid will, with appropriate modifications, generally be applied to the provision of leases and licences.

Intangible Personal Property

The HST will generally apply to consideration that becomes due, or is paid without having become due, on or after July 1, 2010 for a supply of intangible personal property by way of sale. There are also specific transitional rules for memberships, admissions and passenger transportation passes. We would be pleased to discuss these rules with interested parties.

Real Property (Other than Residential Housing)

The HST will generally apply to a supply of real property (other than residential housing) by way of sale in Ontario if both ownership and possession of the property are transferred to the purchaser on or after July 1, 2010. Detailed rules regarding the transitional rules for new residential housing are described in the Ontario Government's Information Notice No. 2, which was issued on June 18, 2009.

Property and Services Brought into Ontario from Other Provinces

The Ontario component of the HST will generally not apply to property and services that are brought into Ontario if they are acquired by a GST/HST registrant for consumption, use or supply exclusively in the course of its commercial activities.

If a person is not engaged in commercial activities, specific rules apply. The Ontario component of the HST will generally apply on a self-assessment basis to goods that are brought into Ontario on or after July 1, 2010, and to such property that is brought into Ontario before July 2010 by a carrier where the property is delivered in Ontario to a consignee on or after July 1, 2010.

The Ontario component of the HST will also generally apply to consideration that becomes due, or is paid without having become due, after October 14, 2009 for the part of a service performed on or after July 1, 2010 (unless 90% or more of the service is performed before July 2010), if the service is supplied in a non-participating province to a resident of Ontario who acquires the service for consumption, use or supply primarily in the participating provinces. Consideration that becomes due, or is paid without having become due, after October 14, 2009 and before July 2010 for a supply of such a service will be deemed to become due on, and not to have been paid before, July 1, 2010. For consideration that becomes due, or is paid without having become due, after October 14, 2009 and before May 2010, this rule will only apply to non-consumers.

The Ontario component of the HST will also generally apply to consideration that becomes due, or is paid without having become due, on or after July 1, 2010 for intangible personal property that is supplied by way of sale in a non-participating province to a resident of Ontario who acquires the property for consumption, use or supply primarily in the participating provinces.

The Ontario component of the HST will generally apply to consideration that becomes due, or is paid without having become due, after October 14, 2009 for the part of a lease interval that occurs on or after July 1, 2010 (unless the lease interval begins before July 2010 and ends before July 31, 2010), if the lease interval is with respect to intangible personal property supplied by way of lease, license or similar arrangement in a non-participating province to a resident of Ontario who acquires the property for consumption, use or supply primarily in the participating provinces. Consideration that becomes due, or is paid without having become due, after October 14, 2009 and before July 2010 for a supply of such a property will be deemed to become due on, and not to have been paid before, July 1, 2010. For consideration that becomes due, or is paid without having become due, after October 14, 2009 and before May 2010, this rule will only apply to non-consumers.

Imported Goods

The Ontario component of the HST will generally apply to commercial goods brought into Ontario from a place outside Canada on or after July 1, 2010; however, commercial goods that are brought into Ontario by a GST/HST registrant for consumption, use or supply exclusively in the course of commercial activities of the registrant will not be subject to tax.

The Ontario component of the HST will generally apply to non-commercial goods that are imported by a resident of Ontario on or after July 1, 2010.

Imported Taxable Supplies of Services and Intangibles

The Ontario component of the HST will generally apply to consideration for an imported taxable supply of a service made to a resident of Ontario who acquires the service for consumption, use or supply primarily in the participating provinces, to the extent that the consideration is for the part of the service that is performed on or after July 1, 2010.

The Ontario component of the HST will generally apply to consideration for an imported taxable supply of intangible personal property that is made by way of lease, licence or similar arrangement to a resident of Ontario who acquires the property for consumption, use or supply primarily in the participating provinces, to the extent that the consideration is for the part of the lease interval that occurs on or after July 1, 2010.

Other Supplies

The Ontario Rules provide specific rules for Direct Sellers, Continuous Supplies, Combined Supplies, Budget Payment Arrangements, and Progress Payments/Holdbacks. We would be pleased to discuss these rules with interested parties.

III. ELIMINATION OF RST

General RST Wind-down Rules

On July 1, 2010, the existing Ontario RST will generally cease to apply to:

  • a sale of goods where the goods are delivered, and ownership of the goods is transferred, to the purchaser on or after July 1, 2010;
  • a sale of services to the extent the services are performed on or after July 1, 2010 (however, the RST will apply where all or substantially all of the service is provided before July 1, 2010);
  • a supply of property by way of lease, licence or similar arrangement for the part of the lease or licence interval that is on or after July 1, 2010 (however, the RST will apply if the lease interval begins before July 1, 2010 and ends before July 31, 2010);
  • a sale of property or a service delivered or performed on a continuous basis by means of a wire, pipeline or similar conduit or satellite or other telecommunications facility to the extent the property or service is delivered, performed or made available on or after July 1, 2010;
  • goods brought into Ontario or imported by a resident of Ontario on or after July 1, 2010; and
  • a sale of an admission for entry to a place of amusement on or after July 1, 2010.

Notwithstanding these general RST wind-down rules, the RSTA will apply where consideration for a sale of goods, services or admissions becomes due or is paid:

  • on or before October 14, 2009; or
  • after October 14, 2009 and before May 1, 2010, except with respect to:

    (i) goods, services or admissions purchased for use exclusively in the course of commercial activities; or

    (ii) goods, services or admissions for which the self-assessment rules in respect of consideration due or paid after October 14, 2009 and before May 1, 2010 will apply.

Any applicable RST not otherwise payable on or before October 31, 2010 will become payable on October 31, 2010.

Final RST Returns

Final RST returns will generally be required to be filed with the Ontario Ministry of Revenue on or before July 23, 2010.

Where an amount is collected or becomes payable as (or on account of) RST after June 30, 2010, the vendor will be required to account for that amount in a supplemental RST return to be filed on or before the 23rd day of the following month. All supplemental RST returns will be required to be filed no later than November 23, 2010.

RST Refunds and Rebates

Generally, refunds and rebates of RST will remain available until the earlier of the expiration of the existing time limits or June 30, 2014. The following exception will be provided where a person purchases property that is subject to RST before July 1, 2010, but returns it on or after July 1, 2010 and before November 1, 2010:

  • if the property is returned and a full refund is given, the RST will be refunded;
  • if an exchange is made resulting in neither a refund nor an additional payment, there will be no RST refund and the Ontario component of the HST will not be payable;
  • if an exchange is made resulting in a partial refund, the Ontario component of the HST will generally not be payable on the replacement property and the purchaser will be entitled to recover the RST applicable to the amount refunded; and
  • if an exchange is made resulting in an additional payment, no RST will apply but the HST will apply to the additional payment.

If the RST did not apply to property that was purchased before July 1, 2010, and it is exchanged on or after July 1, 2010, the Ontario component of the HST will apply to the full consideration for the replacement property.

If property is returned on or after November 1, 2010, no RST adjustments will be available at the point of sale. However, the purchaser may make an application for a refund of RST for tax paid in error.

Assessments, Objections, Appeals and Enforcement

Assessment, objection, appeal and enforcement provisions under the RSTA will generally apply to past transactions where the applicable limitation periods have not expired.

Transitional RST Inventory Rebate for Residential Real Property Contracts

An RST rebate will be available to provide relief with respect to the RST embedded in construction materials used in residential real property contracts that are subject to the HST.

This rebate will be available to a real property contractor for the RST paid on construction materials that are purchased or produced for the contractor's own use, held in inventory at the end of the day on June 30, 2010 and used in a residential real property contract to which the HST will apply. The rebate will not be available with respect to inventory for which the RST is otherwise recoverable by the contractor or any other party.

IV. DEVELOPMENT OF HST LEGISLATION AND POLICY

Further specific transitional rules are expected to be announced over the coming months. Osler's Commodity Tax team has significant experience working with provincial and federal officials in connection with the development of legislation and policy. We would be pleased to speak with interested parties about the further implementation of the HST.

D'Arcy Schieman is an associate practising in the Tax Department of the firm's Toronto office.

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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