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Managing the Harmonized Sales Tax (HST) - What Physicians Need to Know

19/04/2010


On July 1, 2010, Ontario’s Provincial Sales Tax (PST) will be replaced by the HST. From this date forward, all sales of goods, services, certain real property and intangibles “supplied” in Ontario will be taxed 13% HST. Generally, the HST will follow the GST rules, with some exceptions, and will be administered by the Canada Revenue Agency (CRA). For physicians, GST paid on purchases is usually a non-recoverable tax (a cost). The following is a snapshot of how the HST will affect your practice and what you need to know.

Solo Physicians in Ontario

Your costs that were subject to the GST will now be subject to the HST, which will result in an increase of 8% (from 5% to 13%).  More of your purchases will be subject to HST at 13% than are currently subject to both GST and PST combined.  Examples include rent and many services (such as legal services) that you currently purchase.

If you provide non-medical taxable services --such as charging rent to others, and some uninsured services to patients, etc.-- and the total of these revenues is greater than $30,000 for you and all "associated persons", you are required to register for GST/HST and charge the tax on taxable transactions. Any purchases directly related to those taxable transactions are eligible for an input tax credit of the GST/HST paid.  If you are registered for GST you are automatically registered for HST and have to charge the HST where applicable.

Scenario # 1
A solo physician has billings of $175,000, none of which are subject to GST/HST, and has expenses and overhead of $75,000. We will assume that of the $75,000 approximately $30,000 is not subject to GST or PST (i.e. salaries for staff). We will also assume that of the remaining $45,000 that GST and PST currently applies on $23,000. That means an additional 8% will be payable as HST on $22,000. That translates to additional costs of $1,760.

If you Perform Non-Medically Required Cosmetic Surgery in Ontario

For purchases that are directly related to the cosmetic services you provide, your future costs may be reduced since you can claim back the HST paid as an input tax credit (ITC). In the past you may have paid the PST on some of your costs associated with providing taxable cosmetic surgery that were not recoverable; resulting in increased costs. Going forward you will pay HST on more purchases but it is recoverable if the purchase is directly related to the cosmetic surgery or other GST/HST taxable revenue.

However, you will be required to charge HST at 13% to your patients rather than GST at 5% so their total costs will go up.  Your cost savings may allow you to reduce your prices without suffering a financial loss.

Scenario #2
A physician performs non-medically required cosmetic surgery only and there is $100,000 in billings, with overhead and expenses of $40,000. Rather than billing $105,000 including GST, the physician will bill $113,000, including HST. We will assume that $20,000 of the expenses is not subject to GST and PST and that $10,000 of the remainder has both GST and PST included. Going forward the physician can claim ITCs of $2,600 ($20,000 times 13%), rather than $1,000 ($20,000 times 5%). That means the physician’s costs will decrease by $1,600 but they will be required to charge an additional $8,000 (the provincial component of the HST) to his or her patients.

If You Have Physicians that are Associates, Rent Your Premises, Provide Administrative Services to Other Physicians, etc.

If you have many physicians sharing premises and there is an amount paid from some of the physicians to one physician (or an associated company) for use of the premises, equipment, administrative fees, etc., the "cost sharing agreement" will need to be carefully reviewed to make sure there are no undesired GST/HST consequences. GST/HST may apply on the right to use premises and equipment, receive administrative services, etc. Alternatively, a "bona-fide cost sharing arrangement" would mean that GST/HST would not apply. It is a question of fact whether there are GST/HST taxable supplies by the physician receiving payment from the other physicians or a "bona fide cost sharing arrangement” so that GST/HST does not need to be charged by the physician receiving payment.

This already has been a potential issue for many practices. Going forward the amount of the potential exposure increases (13% versus 8%) and as explained below, we expect the Canada Revenue Agency (CRA) to increase its audit activity due the current state of the economy.

Scenario #3
For example if there are two physicians sharing premises, equipment and administration staff and ‘physician A’ reimburses $30,000 to ‘physician B’, the $30,000 may be subject to GST/HST depending on the facts surrounding the arrangement.  The agreement and other factors will need to be reviewed in detail to determine if GST/HST applies. If GST/HST should apply based on the interpretation of the facts, ‘physician B’ would be required to charge GST/HST to ‘physician A’ and if it wasn't charged the CRA could assess the amount plus daily compounded interest. We may be able to assist by reviewing these types of arrangements and strengthening the position that GST/HST should not apply.

Planning for the HST

Since there are substantial federal and provincial deficits, The CRA will be conducting GST/HST audits and so it is important to make sure you are handling GST/HST correctly. This should include:

  • Evaluating exactly how the HST will impact costs
  • Determining which items of revenue are subject to GST/HST
  • Charging the appropriate GST/HST where applicable
  • Reviewing cost sharing arrangements
  • Matching costs to revenues and claim input tax credits on costs directly related to taxable revenues
  • Establishing a reasonable allocation method for claiming partial input tax credits on indirect costs if you have a mixture of GST/HST taxable and non-taxable revenues
  • Looking into potential overall cost reduction strategies to minimize the upcoming HST where possible

Kal Ruprai brings more than 15 years of experience practicing exclusively in indirect tax in a government, corporate, and public accounting firm environment. Kal works closely with his clients in a variety of industries to address their complex tax issues and delivers effective tax planning strategies to help them achieve their goals. Kal provides relevant and effective tax planning and business advice to his national and international clients. He has extensive expertise in the areas of GST and PST planning, including advising non-residents on doing business in Canada. He has also provided clients with written interpretations of complex sales tax issues and has successfully represented clients during GST and PST audits. Kal is proficient in contingent-based sales tax recovery reviews, having conducted reviews for Fortune 500 companies in a variety of sectors.

For more details, please call Kal Ruprai, MBA, CMA, Partner Indirect Tax at Meyers Norris Penny LLP at 416.515.3811 or [email protected].

Meyers Norris Penny LLP (MNP) has submitted this article for information purposes for the Coalition of Family Physicians of Ontario (COFP).  The GST/HST legislation is complex and it is recommended that the readers review their specific fact pattern in light of the legislation.

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