Ontario and BC recently announced that they will harmonize their
provincial sales tax (PST) with the federal goods and services tax
(GST) effective July 1, 2010. In BC, the harmonized sales tax (HST)
will apply at the rate of 12 per cent, compared with 13 per cent
for Ontario and the other GST-harmonized provinces (Nova Scotia,
New Brunswick, and Newfoundland & Labrador), and will be
recoverable to the extent the recipient of the supply is fully
engaged in commercial activities.
The HST will apply to the same tax base as the GST, with some
limited point-of-sale rebates on the provincial portion for a few
products. The major benefit of harmonization is that it will
eliminate unrecoverable PST for most organizations in these
provinces. Currently, organizations pay PST on a broad range of
goods (and a limited range of services) acquired in or imported
into the province, unless they qualify for a specific exemption
such as the production machinery and equipment exemption. The HST
will generally eliminate the non-recoverable PST burden. The
provincial budget papers indicate that studies have shown that most
of these tax savings are passed on to consumers through lower
Businesses (particularly in the financial and public sectors)
that have large service or outsourcing agreements in place, that
are looking to make large-scale purchases or are considering
entering into significant service contacts in the near future,
should factor into consideration the impact of the HST, as this may
result in significant additional costs or savings to them.
Likewise, tech companies that sell software, hardware and services
should take the HST into account in their sales efforts as there
may be opportunities for accelerated deals in certain
McCarthy Tétrault Notes:
To benefit from potential tax savings or minimize tax liability,
as the case may be, it is extremely important that businesses
promptly review and consider the impact of HST on their current
service and outsourcing agreements and on their procurement plans.
In certain instances, businesses may wish to delay significant
capital purchases until after July 1, 2010 to take advantage of the
available input tax credits.
On the other hand, financial institutions and those public
sector bodies (such as provincial lottery corporations) that do not
charge GST on their services, and cannot take advantage of input
tax credits, may wish to expedite some of their expenditures or
rethink some of their existing service and outsourcing agreements.
Once the HST is implemented, the costs under existing service and
outsourcing agreements will immediately increase — the
unrecoverable tax portion will climb from approximately five per
cent to 12 per cent in BC and 13 per cent in Ontario (depending on
the extent of the particular organization's level of commercial
Before entering into or renewing significant outsourcing or
services agreements, organizations should seek tax and legal advice
on structuring their supplier arrangements to achieve their
business objectives in a tax-efficient manner. Vendors that can
propose novel ways to address this significant problem for these
types of customers could have a material advantage over their
Ontario and BC have released detailed transitional rules. These
rules will be important to understand as they will govern
transactions occurring around the July 1, 2010 HST implementation
date and may have a marked effect on hardware and software sales
during this period.
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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