GST/HST basics: five things you must know, old rules for BC.
Here are five fundamentals that businesses in Ontario and B.C. need to know about the new tax:
- HST combines the federal Goods and Services Tax (GST) with the provincial sales tax (PST) into a single tax (was in BC, still in some provinces).
- Ontario businesses will charge 13 per cent.
- B.C. businesses was charging 12 per cent (the lowest HST rate in Canada) – Now (BC) GST at 5% and PST at 7% as of April 1, 2013.
- HST applies to both goods and services, adding the provincial sales tax to services that would previously only have had GST applied.
- As of May 1, 2010 businesses that sell goods or services to be delivered, installed or performed on or after July 1, 2010 are required charge HST for ON and for BC until March 31, 2013.
Which businesses will need to charge GST/HST?
GST/HST will apply to goods, services, real property and intangible property, such as contractual rights and patents. (We’ve included two charts below to show how the tax status of many goods and services will change.)
You will need to charge GST/HST if:
- you have sales over $30,000 in the calendar year or any four consecutive quarters;
- your business is registered for the GST already.
Current GST registrants won’t need to apply for a new number. The business number (BN) you use for your GST account number will be the same number you will use for your HST account and your filing frequency stays the same.
In both Ontario and British Columbia until April 1, 2013, the HST is being introduced to help businesses cut red tape and save money. The purpose of harmonization is to make businesses more competitive and to stimulate the economy.
Here’s how this works.
Under the current tax system, you can claim back the GST you’ve paid on all of your business expenses, but you can’t do the same for PST. As a result, goods have a “tax history” that has PST added at every step of the supply chain. These hidden PST costs are included in the final price, with consumers paying tax on the embedded tax.
As a value-added tax, GST is different. There is no hidden tax, because businesses can use the GST they pay out as an input tax credit. The business only remits the difference between the GST it has collected and the GST it has paid.
Harmonization brings the same system and advantages to the collection of the retail sales tax portion. Every business expense that includes HST, from phone services to office supplies, will help reduce the total amount of tax remitted to the government.
Claiming input tax credits
Not all businesses will be able to claim input tax credits on the PST portion of the HST right away.
Small and medium-sized companies with annual taxable sales under $10 million will be able to claim input tax credits for the sales tax paid out after July 1, 2010. However, financial institutions and large businesses with annual taxable sales of more than $10 million will have to wait five years to claim input tax credits paid on the provincial portion of the HST for certain expenses. Then, full input tax credits will be phased in over a three-year period.
Once the HST is fully phased in, the estimated savings for business are substantial.
In B.C., it’s estimated that businesses will save $1.9 billion in input costs. In Ontario, the HST will slash about $4.5 billion annually in hidden sales taxes once it’s fully phased in.
Lessons learned from other provinces
The HST is not new to Canada. Already, Quebec and the Atlantic provinces have tax harmonization. And around the world, more than 130 countries have adopted value-added taxes.
Interestingly, prices actually dropped slightly in the eastern provinces after the HST was introduced. According to the C.D. Howe Institute, lessons from the implementation of HST in the eastern provinces suggest that harmonization in Ontario and B.C. will not lead to higher consumer prices.
In Ontario, businesses can expect to save more than $500 million annually in compliance costs while B.C. businesses can expect to save $150 million a year.
“Sales tax harmonization will simplify tax compliance for businesses since they will only have to manage one sales tax system,” says Ted Wigdor, vice-president, government and corporate affairs, with Certified General Accountants of Ontario. That means one harmonized tax base, one set of sales tax returns and one consistent reporting period, all of which will benefit small- and medium-sized enterprises.
HST implementation checklist
The following checklist will help you identify the systems you will need to change to be ready for the introduction of the HST on July 1, 2010.
- Do you need to modify your cash registers or point-of-sale systems?
- Do you need to update automatic payments to include HST?
- Do you need to update your e-commerce website to add the HST? (Remember, your business might be closed for the July 1 holiday, but your website is not!)
- Do you need to update your accounting software to accommodate the new tax?
- Do you need to update your accounts receivable / accounts payable / invoicing software?
- Do you need to make adjustments to the way you do your input tax/taxable benefits calculations?
- Are there any other aspects of your business that will be affected by the new tax?
Sample HST remittance calculation
To better understand how value-added tax works, let’s take a British Columbia accounting firm as an example.
Scenario: The firm hires an independent contractor to work on an accounting project. The contractor bills the accounting firm $1,000 and the accounting firm, after reviewing the work and managing the project, bills its client $2,000.
As of July 1, 2010: calculating the “value-added”
|Contractor’s fee to accounting firm||$||1,000|
|+ 12% HST||$||120|
|Accounting firm’s fee to client||$||2,000|
|+ 12% HST||$||240|
Total HST remitted to government: $240.
Even though $360 of HST is collected between the two companies, only $240 is remitted to the government. That’s because while the accounting firm collected $240 in HST, it keeps $120 of the funds collected to cover the money paid out to the contractor and only remits the remaining $120 to the government.
In reality, each business will likely have other qualifying HST deductions as well from the tax paid on other business expenses, so the amount paid to the government would likely be reduced even further.
Special rules for transactions that staddle the implementation date
Service businesses that have not charged provincial sales tax may need to charge both taxes on work that overlaps the July 1 implementation date.
If over 90 per cent of the work is done before July 1, the business will charge GST only. However: If more than 10 per cent of the work is done after July 1, the business will need to charge GST on the pre-transition portion of their work and charge HST on the remaining portion. These rules apply to the taxable supplies of personal property and services made in Ontario or B.C.
Consider a design firm that creates a brochure a client. Work begins in May and the brochure is completed at the end of July. Seventy per cent of the work is performed in May and June, while the remaining 30 per cent is performed in the month of July.
Since more than 10 per cent of the work overlaps the HST implentation date, the firm must charge both GST and HST. Here is an example of how the company would invoice both taxes:
Invoice for services rendered
|Brochure design (pre-July1)||$||7000|
|GST (5% of $7000)||$||350|
|Brochure design (post-July1)||$||3000|
|HST (12% of $3000 using the BC rate)||$||360|
|Total amount owing||$||10,710|
How goods & services will be taxed as of July 1, 2010
Wondering which products and services will see a change in their tax status as of July 1? Here’s a run-down of some of the key ones:
Goods & services that will have the HST added in both provinces
|Affected goods & services||Up to June 30||After July 1|
|Advertising services||GST only||HST|
|Cleaning services||GST only||HST|
|Custom software*||GST only||HST|
|Goods for resale and raw materials||GST only||HST|
|Heating fuels||GST only||HST|
|Manufacturing equipment*||GST only||HST|
|Membership fees (fitness, golf)||GST only||HST|
|Office rent||GST only||HST|
|Personal services (manicures, hair cutting, etc.)||GST only||HST|
|Professional services (accounting, legal, graphic design, etc.)||GST only||HST|
|Real property contracts (home improvements, office renovations)||GST only||HST|
|Safety clothing*||GST only||HST|
|Taxi and limousine fares||GST only||HST|
|Trade show admissions and conferences||GST only||HST|
|Training seminars||GST only||HST|
|* These items may be subject to certain conditions or, as in the case of safety clothing, be defined by the province.|
Goods and services with variable PST/HST status in Ontario and B.C.
|Goods/services||Current PST tax status||Current PST tax status||Tax status with HST|
|Admissions under $4||Exempt||Non-taxable||Taxable|
|Footwear under $30||Exempt||Taxable||Taxable|
|Restaurant and catered meals||Taxable (under $4, exempt)||Exempt||Taxable in B.C.; In ON over $4 is taxable, under $4 has a point-of-sale rebate on the provincial portion*.|
|Snack foods and soft drinks||Taxable||Exempt||Taxable|
|Internet access fees||Non-taxable||Taxable||Taxable|
|Newspapers||Exempt||Exempt||Taxable in B.C.; in Ontario, there is a point-of-sale rebate on the provincial portion of HST|
|Software services (subject to certain conditions)||Taxable||Exempt||Taxable|
|Adult-sized clothing for children under 15||Taxable||Exempt||Taxable|
* While the Ontario tax rate for prepared foods and beverages under $4 is often said to be tax exempt, that is not correct. According to a GST/HST bulletin GI-064, businesses will get an instant point-of-sale rebate on the 8 per cent provincial portion of the HST. There are strict guidelines for qualifying products as well as how the HST must be shown on the sales receipt.
Consumers will normally receive the rebate by being paid by the retailer at the point of sale. The consumer can file a rebate claim with CRA using Form GST189 within four years of the purchase if the vendor does not pay or credit the rebate amount at the point of sale. Be sure to visit the link in the further reading section below to learn more about which products qualify for this instant rebate.
For more on how transitional rules for the HST may affect your business, go to http://www.cra-arc.gc.ca/tx/pstr/trnstnl/menu-eng.html.
For more information on the HST and how to get registered, go to “Demystifying the GST / HST” at http://www.canadaone.com/ezine/oct03/gst.html.
For more information on qualifying products for Ontario’s Point-of-Sale rebate on Prepared Foods and Beverages http://www.crfa.ca/pdf/cra_pos_rebates.pdf.
For more information on point-of-sale rebates for Ontario newspapers visit http://www.cra-arc.gc.ca/E/pub/gi/gi-060/gi-060-e.pdf.
For more information on transition rules for services and personal property, visit http://www.cra-arc.gc.ca/E/pub/gi/notice247/notice247-e.html#P1.2
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Health care professionals
On July 1, 2010, the provincial sales tax (PST) will be harmonized with the federal goods and service tax (GST), resulting in a federally administered single sales tax imposed at 12%. The proposed harmonization will impose significant additional costs on the health care industry.
Now is the time for medical and health care professionals to consider the implications of harmonization on their costs, compliance systems and customers. Medical and health care professionals are persons licensed or otherwise certified to provide such services and include doctors, dentists, nurses, and other health care providers (e.g., chiropractors, orthopedists, optometrists, physiotherapists, podiatrists, chiropodists, osteopaths, audiologists, pathologists, occupational therapists, psychologists and midwives).
Most services provided by medical and health care professionals are not currently subject to either the GST or the PST. Under B.C.’s proposed harmonization with the GST, these services should remain exempt from B.C. HST with no direct impact to the consumer. However, where supplies made by a medical or health care professional are taxable (e.g., therapeutic massages, cosmetic surgery, sales of certain goods such as toothbrushes, etc.) these supplies will be subject to the B.C. HST. This represents a significant increase to the price of these supplies to consumers, and it is recommended that the tax status of these items be reviewed in detail prior to the introduction of the B.C. HST.
Impact on purchases made by medical and health care professionals
Currently, the PST applies to a relatively narrow base of goods and services used by medical and health care professionals in their practices. The B.C. HST will apply to a much broader base of goods and services. As a result, medical and health care professionals will be required to pay additional non-recoverable tax on the purchase of goods and services that are not currently subject to the PST. Consequently, their overhead costs will likely increase, and these professionals may be forced to pass on the additional costs to their customers.
The following table highlights a number of typical expenses that are currently subject to the GST but not the PST. Acquiring these items under the B.C. HST will become more expensive than under the current regime.
Other issues to consider
With the implementation of the B.C. HST fast approaching, medical and health care professionals should consider a number of strategic planning activities:
- Timing of purchases – stocking up on purchases of goods that do not currently attract the PST but that will attract the B.C. HST on July 1, 2010, will assist in reducing overall costs.
- Real estate issues – consider purchasing real property prior to the implementation of the B.C. HST to minimize the taxes due on the purchase (i.e., 5% GST instead of 12% B.C. HST on the purchase of real property).
- Corporate structure – consider reviewing the structure to determine the optimal treatment for income tax and B.C. HST purposes.
- Current contracts – discussing the impact of the B.C. HST on suppliers will assist in determining whether a supplier’s costs will be positively affected by the implementation the B.C. HST and, as such, allow the medical or health care professional to purchase these products at a lower price.
Farmers in BC
Currently, farmers are exempt from paying PST on the cost of many items purchased for use in the farming business. If a farmer is registered to collect GST/HST, any HST paid on costs for the farming business are recoverable as input tax credits. As most agricultural products are zero-rated (they are considered taxable, but the HST rate is zero), very little or no HST would be collected. Many farmers are small suppliers, so registering to collect GST/HST is not mandatory, but would probably be to their advantage. See Who has to register to collect GST/HST?
Proposed General Transitional Rules for BC HST
Transitional rules are required to determine which tax – the existing PST (Social Services Tax) or the BC component of the HST – would apply to transactions that straddle the July 1, 2010 implementation date.
November 18, 2009 – New home sales – Grandparenting
Where written agreements of purchase and sale are entered into on or before November 18, 2009, and both ownership and possession of the homes are transferred under the agreement after June 2010, the sales will be subject to the federal component of the HST, but not the provincial component. This would apply to sales of newly constructed or substantially renovated single-unit homes to individuals, and to sales of residential condominiums to all persons including individuals.
Sales of these grandparented homes would not be eligible for the new housing rebate or new rental housing rebate.
Certain purchasers that are non-consumers may have to self-assess the BC component of the HST on consideration that becomes due, or is paid, after October 14, 2009 and before May 1, 2010 for goods and services provided on or after July 1, 2010. This would not apply if the non-consumer is a GST registrant and would therefore be entitled to an input tax credit.
Note: Consumer means an individual who acquires goods or services for the individual’s personal consumption or use or for the personal consumption or use of another individual. See the detailed information in Canada Revenue Agency’s Notice 247 regarding this topic.
A GST registrant in BC or Ontario should not be collecting the provincial portion of the HST prior to May 1, 2010, for goods or services provided in BC or Ontario, even if the goods or services are to be provided on or after July 1, 2010. Prior to May 1, only the 5% GST should be collected for these goods or services.
May 1, 2010
The HST would generally apply to consideration that becomes due or is paid on or after this date, for property and services provided on or after July 1, 2010.
Funeral services – HST will not apply to funeral services where the contract is entered into before July 1, 2010.
Transitional PST inventory rebate for residential real property contracts – A rebate will be available for PST embedded in construction materials purchased before July 1, 2010, but used in residential property contracts on or after July 1, 2010.
Subscriptions to newspapers, magazines and other periodical publications – HST will not apply to subscriptions paid before July 1, 2010.
Passenger transportation services – HST will generally not apply to the cost of continuous journeys that commence before July 1, 2010.
Freight transportation services – HST will generally not apply to the cost of a freight transportation service performed on or after July 1, 2010 if the service is part of a continuous freight movement of goods that begins before July 2010.
For further information on the BC HST and the proposed transitional rules, see the following on the BC Ministry of Finance website
Notice247 Harmonized Sales Tax for Ontario and BC – Questions and Answers on General Transitional Rules for Personal Property and Services
Notice246 Harmonized Sales Tax for BC – Questions and Answers on Housing Rebates and Transitional Rules for Housing and Other Real Property Situated in BC.
Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.