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With recent announcements from the provincial governments of Ontario, British Columbia and Quebec touting the merits of harmonizing their respective sales tax with GST, many businesses are asking what this ultimately means for them. And while harmonization has its benefits, there are some issues to be aware of. Here’s what you need to know.
Known as HST (Harmonized Sales Tax), British Columbia plans to harmonize its provincial sales tax with the GST effective July 1, 2010. The HST rate for B.C. will be 12% (the 7% PST combined with the 5% GST). Ontario will bring in a HST on the same day, with an HST rate of 13%.
If you are a grower, you will see little change under the HST as to how your business functions. The 12% HST will be payable on all the costs you’re currently paying GST on; however, the full 12% HST will be recoverable as an Input Tax Credit (ITC).
The sale of your product, the grapes, the fruit, the vegetables, will continue to be zero-rated under the HST system. In addition, if a purchase is zero-rated for GST (GST payable at 0%), such as a tractor, it would also be zero-rated for HST.
One of the big changes with the HST system is that farm property; real property, will be subject to the 12% HST. This 12% tax will encourage more farmers to be registered for GST/HST even if they do not exceed the small supplier threshold of $30,000 right away. There will be a number of transitional rules to deal with the HST.
Labour services for contract workers who are not employees will also be subject to HST (if the contractor is registered for GST/HST). Although it is the contractors responsibility to collect GST/HST if it is applicable, should they be audited later, the contractors may come back to their customers looking to recover the GST/HST. Depending on the timing, these surprises could impact a farmers cash flow.
Wine-Making – Manufacturing
Currently under the PST system there are a number of exemptions for manufacturers; specifically they do not have to pay the PST on their manufacturing equipment. It was not known at press time whether there will be any specific exemptions for the provincial portion of the HST on manufacturing equipment. We expect the HST will be applicable on manufacturing equipment and then recoverable as an ITC.
As a wine-maker, HST will be applicable on all sales, even those to retail operations where the wine will subsequently be resold. The premise of the HST is that it will be applicable at each stage of production, but also recoverable on each layer of production so the tax will just be applicable on the final sale of the product to the consumer.
Winery – Retail Operations
As this business deals with the end consumer, there will be significant changes as to how the taxes will be collected. This part of the business operations should experience some savings in having to comply with one less tax and filing one tax return instead of two; however, there will also be challenges as some of the products sold by the winery will now be subject to the HST that were previously only subject to the GST.
Wine Tours and other activities facilitated by a winery, such as hosting group functions, will now be subject to the HST instead of just the GST.
The current cash flow impact of the GST, whether positive or negative, will be amplified due to the increased rates. Consumers will now be able to see how much tax they are paying rather than have it layered into the cost of the goods and services they are acquiring. At the end of the day, businesses will benefit from reporting to less sales tax authorities than before. Of course, accommodating the rate change will involve some changes to record keeping, computerized accounting software and A/P and A/R systems.
To effectively manage the transition, it is important to seek the advice a professional business advisor who can assist you in understanding the rules and setting up the proper systems. A business advisor will also be able to help you take advantage of the tax savings and other ways to improve your business performance.
Heather Weber, CGA is a Commodity Tax Specialist with Meyers Norris Penny in Kelowna. She works closely with
Geoff McIntyre, CA to provide specialized tax advice for his winery and grape grower clients.
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