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On July 1, 2010 the province of British Columbia will harmonize their sales tax. Harmonization brings many advantages and some disadvantages—this article will focus on some of the challenges that harmonization may bring. The proposed rate of harmonization is 12% which is made up of the 5% Goods and Services Tax (“GST”) and the 7% HST. Prior to implementation, there are still many questions being raised with few definitive answers right now.
Since the proposed legislation has not been drafted, the B.C. government isn’t able to provide detailed information at this time. However, by reviewing press releases and processes used by other HST jurisdictions, we have an indication of what may be implemented in B.C. and how forestry businesses could be affected.
Starting July 1, 2010, businesses will charge the HST at 12% on all goods and services that are made in the province of B.C. Businesses will also pay the 12% HST on most goods and services that are acquired for their business. The HST, in the same manner as the GST, will not be levied on items such as insurance and certain licenses. So essentially, the application of the harmonized sales tax will go relatively unchanged.
As with the GST, you will be able to recover the HST paid on purchases and remit or receive a refund of the difference between these amounts. However, there are some additional rules that will apply on the HST portion (7%) that will potentially restrict your Input Tax Credits (ITC).
B.C. (as well as Ontario) wants to restrict the recovery of the HST portion on certain purchases for businesses that have $10 million or more in taxable revenues. These restrictions will be for a period of five years followed by a three year phase-in period to eventually allow full ITCs on the HST portion.
Proposed restrictions on ITCs include common items in the forestry industry such as:
1) Energy – except where purchased by farmers or used to produce goods for sale.
2) Road vehicles weighing less than 3000 kg as well as the repair and maintenance costs.
3) Meals, beverages and entertainment costs.
All of the above definitions have NOT been defined by the B.C. government at this time, so there is little confirmed information. However, based upon information from Quebec, we can provide more insight.
How “Big” is Your Business?
The confusion begins at the size of businesses being $10 million in taxable sales. Is this based on your business or associated business entities? Clearly, this has a significant impact on a business’ status to claim the maximum eligible amounts. As these definitions gain clarity in B.C., businesses will need to consider their corporate structure as it applies to HST and the potential to claim input tax credits.
Energy, what is energy? Gas, diesel, natural gas and electricity are just a few types. The HST ITC is restricted if the organization does not use energy for farming or for manufacturing/production of goods. Is it the intention of the B.C. government to include the logging / forestry industry as a producer or manufacturer? This is very unclear and the government has not provided any information regarding this matter. The B.C. government has also indicated that there will be a “point of sale” rebate for gasoline and diesel on the HST portion, but again, no further details are available. Energy costs can form a significant portion of a forestry contractor’s business so it may be important to consider establishing a forest sector voice in the development of HST tax policy.
Light Duty Vehicles
Road vehicles weighing under 3000 kg as well as repairs and maintenance will be restricted. What impact will this have on service vehicles? What is the definition of a light duty service vehicle? There are still many questions and few definitive answers regarding an asset group that is so significant to the forestry industry. We expect this to be a major area of debate for forest industry stakeholders.
Meals, Beverages, and Entertainment
Costs relating to meals, beverages, and entertainment will also be restricted on the HST portion. Will this include meals in camps and special work locations? Will this impact the calculations on living allowances? By referring to Quebec’s guidelines, there is still limited relief, but the B.C. government may take a different stance.
Finally, what will happen to the old B.C. sales tax? There is discussion that it will just automatically end on June 30, 2010. However, this would not be fair should a business not have recovered any amount of the tax that may have been paid in error. Clearly, a transition plan will be necessary to wrap up historical sales tax accounts in order to ensure overall compliance with the old tax regime.
As you can appreciate, there are many issues that need to be resolved before the HST can be implemented in B.C. An opportunity exists for the forestry industry to ensure that their interests are addressed in this time of change. As information becomes more certain, forestry businesses should begin to develop tax management strategies to maximize benefits.
The purpose of the GST/HST is to ensure that businesses competing in global markets do not bear an imbedded amount of sales tax in their cost. The current transition to a harmonized sales tax provides an opportunity to voice your concerns about the potential impacts on the forest industry and ensure that you take part in defining the policies and developing strategies that will impact you and your forestry business.
For more information regarding the HST in the Forestry sector contact Anand Pandarinath, MNP’s Senior Forestry Services Manager or Mitch LaBuick, MNP’s Senior Manager Commodity Tax at 780.451.4406.
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