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With recent announcements from the provincial governments of Ontario and British Columbia (B.C.) 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.
On June 30, 2010 B.C.’s provincial sales tax (PST) will be eliminated and replaced by the Harmonized Sales Tax (HST), a larger version of the GST. This is similar to the HST that exists in Nova Scotia, New Brunswick and Newfoundland and Labrador who harmonized their sales taxes with the federal GST more than a decade ago. On July 1, 2010 all sales of goods, services, certain real property and intangibles “supplied” in BC will be taxed at 12% HST.
Good News for Most Businesses
Sales tax harmonization makes sense for most businesses. All companies, even manufacturers, currently absorb some PST as a cost on some purchases made, but can claim back all GST paid on purchases as input tax credits (ITC). Consequently, the existing PST in both provinces increases the cost of doing business putting companies at a disadvantage on the national and global playing fields.
End Consumer Individuals will Pay More
Under the harmonized regime, individuals in B.C. will pay more since some items, such as utilities for example, are currently exempt from PST. However, since the costs for businesses will decrease it is believed that the savings will be passed on to consumers in the form of lower prices. If the savings are not passed on to the consumer, some businesses may experience a decline in sales since end consumers may not be prepared to pay more on some purchases.
Certain Organizations will Pay More
Financial services providers, including banks and insurance companies, will see an increase in costs since they will pay HST on purchases and cannot recover it as ITCs on most purchases. Costs will also increase for non-profit organizations, charities, municipalities, educational institutions and hospitals since they are not eligible to recover most of the GST/HST paid on purchases. Ontario has announced some relief for these entities in the form of rebates, however at the time of writing, the BC government has only released preliminary information with the promise that more is to follow.
The current cash flow impact experienced by a business relating to GST, whether positive or negative will be amplified due to the increased rates. The effect could be magnified further if, for example, goods were purchased in B.C. at 12% HST and were sold in Alberta at 5% GST.
Where is the Supply (Sale)?
If a business located inside or outside of BC sells goods to a customer in BC, HST is relatively straightforward and easy to apply. Any goods delivered in BC will be taxed at a rate of 12 % instead of 5 %. But B.C.’s PST doesn’t apply on most services, intangibles such as trademarks or real property; making the new rules difficult to interpret for some businesses. For example, if a company enters into a national services contract which means performing services in all Canadian provinces, what rate applies? There are currently “place of supply” rules in the Excise Tax Act that determine if a supply takes place in the current HST provinces (NS, NB and NL) and it is believed that those current rules will also apply for B.C. and Ontario. Because there are different GST/HST rates (5%, 12% and 13%) it will be important to apply the correct rate. If a person charges a lower rate than the correctly applicable rate, the Canada Revenue Agency (CRA) will assess the difference under audit and charge interest.
Managing the Transition
It is imperative to set up your 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 government will be providing transition rules in the fall of 2009 and those rules may be complex. At the end of the day, businesses will benefit from reporting to fewer sales tax authorities than before. In the long run, this will make it easier for businesses. However, in the short term, accommodating the rate changes will involve retooling point-of-sale systems, 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.
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