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Managing the Harmonized Sales Tax - What Auto Dealerships Need to Know

05/02/2010


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 changes will help businesses achieve greater efficiencies, you need to be aware of the specific issues that will affect you.

The Facts
This combined tax is comparable to the HST that exists in the Maritime provinces that harmonized their sales taxes with the GST more than a decade ago. Effective July 1, 2010, B.C.’s and 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 B.C. will be taxed 12% HST; while Ontario will be taxed 13% HST.

Value Added Tax
The GST/HST is a value added tax that applies to all parts of the supply chain. Therefore, GST/HST is not limited to sales for end users but to all purchasers in the supply chain. Some supplies are exempt and some are zero-rated, which means that GST/HST does not apply on the supply. The rules for determining exemption or zero-rating status are complex so it’s important to seek professional advice.
Businesses that make GST/HST taxable sales can claim the GST/HST that they pay on their purchases as Input Tax Credits (ITCs) against the GST/HST collectible on sales, so the net amount is remitted for each filing period.

How will the HST impact Car Dealers in BC?
HST will be applicable to the sales of all vehicles in BC.  The HST will replace the PST and GST currently charged on vehicle sales. There will no longer be a luxury tax on vehicles in B.C., all vehicles will be subject to HST at 12%. Therefore in some situations there will be a savings for your customers.
The dealership will also realize a savings in that it will be able to recover the HST paid on its operating expenses. The tax base under the HST will be broader than the current tax base that is subject to PST, as HST will apply to services as well as real property transactions.
 
Managing the Transition
It is imperative to set up business systems as soon as possible and to ensure those systems are set up correctly. Even on small dollar value sales or purchases; errors will multiply quickly and could lead to non-compliance and assessments plus interest.

The GST/HST affects almost everything a business or organization does, with few exceptions (e.g. payroll). The HST will affect:

  • Pricing of products or services
  • Cash flow
  • Invoicing systems
  • Contracts
  • Disclosure on sales invoices
  • Purchases, including purchases of ITC restricted items
  • Advertising
  • Taxable Benefits for employees
  • Transactions from May 1, 2010 forward may be affected, not just transactions on or after July 1, 2010
  • Returns of sales straddling July 1, 2010
  • Ontario and BC can still audit compliance with PST
  • Transactions with other provinces - the rate of tax applicable depends on what is being provided; a service or combination of goods.

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, MNP can perform a diagnostic analysis, establish priorities for necessary systems, process changes and help you minimize cost and cash-flow impacts.

For more information, contact your local MNP Advisor or Heather Weber, MNP Indirect Tax Leader at 250.763.8919.