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Managing the Harmonized Sales Tax - How will the HST affect business and consumer contracts?


Significant changes to Canadian sales taxes in Ontario and B.C. are taking place, which may be the most important change in Canadian taxes since the introduction of the GST in 1991. The governments say harmonizing their respective sales tax with the federal Goods and Services Tax (GST) will reduce compliance costs and attract new investment and jobs. And while the government touts the Harmonized Sales Tax (HST ) changes will help achieve greater efficiencies, its important for businesses and consumers to be  aware of the specific issues that will affect their contracts.

As a consumer, you could be seriously impacted if the wrong rate of GST or HST is applied since consumers generally cannot recover the HST paid if used personally. On the other hand, businesses must understand what rate of GST or HST to apply to all their contracts before and after July 1, 2010. This is to prevent interest and penalties from being assessed if GST or HST is not applied correctly to a particular contract.

Residential Property
HST will be applicable on the sale of new homes where ownership and possession occurs after July 1, 2010. However , the matter is complicated depending on when a contract to purchase a new home occurs. Generally, any contract initiated before November 18, 2009 will not be subject to HST since they will be ‘grandparented’. If the contract was initiated after November 18, 2009, HST would be applicable.

As a consumer who purchases new residential property, there is some relief to offset the increase in cost overall. For example, a consumer may apply to the Government for a new housing rebate for the provincial component of the HST paid. The rebate available is subject to a maximum claim of $26,250.

Most businesses will be impacted, including   landscapers, computer consultants, and interior designers. It’s important to note that some of the services you provide may straddle the July 1, 2010 implementation date. As a general rule, if the service is all or substantially (90% or more) completed before July 1, 2010, then HST will not apply to the contract. However, if this is not the case, than HST will be applicable to the extent of services performed after July 1, 2010.

Tangible Personal Property
Consumers and businesses may engage in contracts for the purchase and selling of personal property. These may include the requirement for down payment upon initiation of the contract for property such as customized furniture, vehicles, or made to order parts. In theses circumstances, where a deposit was received before July 1, 2010 and the goods are delivered or ownership transferred after July 1, 2010; HST will be applicable.

Leases of personal property may also be impacted by HST rules. Some types of leases will include automotive, equipment, and tangible personal property (i.e. furniture). Lease payments due before July 1, 2010 will be subject to GST, lease payments commencing after July 1, 2010 will be subject to HST.

The rules surrounding the HST transition are complex. That’s why it’s important to work with a professional who can help you understand the rules, set up the proper systems, and take advantage of all the tax savings. By working closely with you, an indirect tax specialist can perform a diagnostic analysis, establish priorities for necessary systems, process changes and help you minimize cost and cash-flow impacts.

Stay tuned for MNP’s next article that will address shipping across provinces and the potential issues you need to be aware of. For more information, contact Heather Weber, MNP Indirect Tax Leader at 250.763.8919 or visit the MNP Library for further reading on the HST.