In 2009, Ontario and British Columbia announced that their provincial sales tax systems would be harmonized with the federal GST effective July 1, 2010. The harmonized sales tax (HST) will consist of a five per cent federal component and a provincial component of seven per cent in British Columbia and eight per cent in Ontario (for a combined HST rate of 12 per cent and 13 per cent, respectively). The HST will be levied under Part IX of the Excise Tax Act (ETA) and will generally apply to the same tax base and be subject to the same rules as the GST, although there will be some "province-specific" rules in British Columbia and Ontario such as point-of-sale rebates for a limited range of consumer products and special rules restricting input tax credits for the provincial component on certain expenses incurred by large businesses. British Columbia and Ontario follow Newfoundland, Nova Scotia and New Brunswick, all of which harmonized their sales tax systems with the GST on April 1, 2007.
The federal government has passed legislation to amend the ETA to include Ontario and British Columbia as "participating" HST provinces. The amending legislation provides that many of the specific rules that will govern the application of the HST in the two provinces will be prescribed by regulation. However, those regulations have yet to be released. Ontario has also passed amending legislation to wind down the existing provincial sales tax as of July 1, 2010. British Columbia has not released its amending legislation at the time this article was written.
HST Issues for Businesses
1. Transitional Rules
The federal, Ontario and British Columbia governments have issued information notices describing the HST transitional rules that will apply to various types of transactions that occur in Ontario and British Columbia (including complex transitional rules for sales of residential real property). Under the transitional rules, payments made on or after May 1, 2010 will generally be subject to GST to the extent they are for supplies of property or services made on or after July 1, 2010. Sales of goods will be subject to HST where payment is made after April 30, 2010 and where the goods are delivered and ownership is transferred after June 30, 2010. For services, HST will generally apply to payments made after April 30, 2010 for services performed after June 30, 2010. Supplies of intangible property such as contractual rights and intellectual property will be generally subject to HST when payment is made or becomes due after June 30, 2010. Special transitional rules will apply to specific types of services and intangibles. Sales of non-residential real property in Ontario and British Columbia will be subject to HST where both ownership and possession is transferred after June 30, 2010. Leases of commercial property will be subject to HST where a lease interval (i.e., rental period) begins on or after July 1, 2010. However, only the five per cent federal component will apply where the lease interval begins before July 2010 and ends before July 31, 2010.
2. Collecting GST/HST
Businesses that make taxable supplies that are not zero-rated in both HST and non-HST provinces will have to determine whether they are required to collect tax at the five per cent rate or the 12 per cent or 13 per cent HST rate. Determining the correct rate of tax will depend on the application of the place of supply rules for participating provinces set out in Schedule IX to the ETA. These rules will pose a significant degree of complexity for businesses. Failure to collect the provincial portion of the HST where applicable will create exposure to a potential assessment for the uncollected tax plus non-deductible interest.
3. Restricted Input Tax Credits
Both Ontario and British Columbia will impose restrictions on the ability of large businesses (those with annual taxable sales of over $10,000,000) and financial institutions to claim input tax credits for the provincial portion of the HST on certain expenses. The restrictions will apply to expenses for most types of energy, telecommunication services, road vehicles under 3,000 kilograms, and meal and entertainment expenses that are currently subject to the 50 per cent input tax credit and income tax deduction limits. The restrictions on recovering the provincial portion of the HST will be in place for an initial period of five years followed by a three-year phase-out period. The restrictions are similar to those that have applied to large businesses under the Québec sales tax for a number of years.
On February 1, 2010, Ontario released an information notice discussing the rules for restricted input tax credits (RITCs). British Columbia has not released a comparable notice to date. The Ontario notice states that the restrictions will not apply to the specified categories of expenses where the property or service is purchased for re-supply, e.g., by sale or lease, or to energy used to produce goods for sale or used in qualifying scientific research and experimental development activities or farming. The information provided by British Columbia to date only indicates that the restrictions in that province will not apply to energy used by farms or to produce goods for sale.
The Ontario notice states that Ontario will use a recapture method for RITCs rather than denying the credit, which is the system used in Québec. This will impose special GST accounting obligations on businesses subject to the RITC rules. Large businesses subject to the rules will claim input tax credits for the total HST paid or payable in their GST return, and deduct the RITC amount in the same return. In addition, businesses subject to the rules will have to self-assess the RITC amount on the specified services and property acquired outside Ontario for use in Ontario. Businesses will be permitted to use allocation proxies to determine the RITC amount for energy used in both excluded and restricted uses (e.g., producing goods and space heating) and for telecommunication expenses that include both specified services and other goods and services not subject to the RITC rules. Businesses will also be able to make an election to use an estimation, instalment and reconciliation approach to account for RITCs. The election will have to be filed before July 1, 2010, and will apply for at least one year. On January 4, 2010, the Canada Revenue Agency announced that all businesses subject to the RITC rules will be required to file their GST/HST returns electronically beginning July 1, 2010.
McCarthy Tétrault Notes
The full implementation of HST is now just over four months away, and the transitional rules already apply to taxable transactions that straddle the implementation date. Businesses will have to identify how the introduction of the HST in Ontario and British Columbia will impact their operations. Businesses subject to the RITC rules will also have to address the impact of those rules and consider issues such as whether the use of the allocation proxies will be advantageous.
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