With introduction into the Provincial Legislature, the implementation date of the BC Harmonized Sales Tax (“HST”) is fast approaching. To help you prepare for the transition we have summarized the main issues that you should be aware of.
In its simplest terms, HST is GST just at a higher rate. However, HST can have some awkward twists that make it more complicated than GST. Since covering every detail of the HST rules is impossible and goes beyond the intent of this memo we ask that you contact us to discuss any specifics and questions that you may have. Together we can make the transition as smooth as possible.
HST Basics
- A single tax rate of 12% in BC will replace the Federal GST rate of 5% and the provincial PST rate of 7%.
- The tax rate charged by a business will depend on the “place of supply” rules.
- The HST will operate under the same rules governing the GST. Current GST registrants will automatically become HST registrants and will claim HST as Input Tax Credit (“ITC”) similar to what businesses have been doing with the GST for over 18 years.
Impact of HST
- Consumers will pay more tax since the HST applies more broadly than the current PST.
- Costs will go down for businesses not subject to the temporary five-year ITC restrictions applicable to “large business” (defined financial institutions and as businesses having greater than $10 million in taxable sales) since the majority of businesses will generally be able to recover most HST paid.
- Business costs will go up for exempt sectors due to the broader scope of application when compared to the current PST.
Important Dates, Prepayments and General Transitional Rules for Businesses
Pre-October 15, 2009
Prepayments made before October 15, 2009 for post-June 30, 2010 purchases of goods, services, or for leases, licenses or similar arrangements are not subject to HST.
October 15, 2009 to April 30, 2010
Businesses must self-assess the 7% provincial part of the HST on prepayments made during this period for post-June 30, 2010 purchases of goods, services, and leases or licenses if the businesses are not entitled to the full ITC on these items.
May 1, 2010 to June 30, 2010
Vendors must collect the 7% provincial part of the HST on prepayments made during this period for post-June 30, 2010 purchases of goods, services, and leases or licenses. As such, the full 12% HST rate will apply.
October 31, 2010
Services performed prior to July 2010 must be invoiced by October 31, 2010 to avoid the application of the HST unless special relief applies.
Special Transitional Rules
In addition to the above general transitional rules, special transitional rules apply to lifetime memberships, freight shipments, passenger transportation services, funeral and cemetery services, and newspaper, magazine or other periodical subscriptions. Real property sector has its own set of rules.
Real Estate Sector
Currently, purchasers pay GST of 5% on commercial property and new residential properties. Starting July 1, 2010, purchasers will have to pay the HST on the properties unless the sale is “grandfathered” (ie – entered into contract prior to November 19, 2009 for residential properties).
HST rebate on new housing:
To reduce the impact of HST on residential property purchasers, the BC government provides a new housing rebate of 5% to a maximum rebate of $26,250 equating to a housing price of $525,000. Houses purchased for more than this amount are still eligible to claim the full $26,250 rebate (which is different from the Federal GST rebate which is phased out when the home price is over $450,000).
The BC HST new housing rebate is available only to individuals who are acquiring the home as a primary residence. The rebate is also applicable for persons acquiring new, non-commercial rental properties.
There are HST rebate rules for owner built homes, transitional taxes on builders depending on the percentage of completion of a building at June 30, 2010, and transitional rules for grandfathered agreements for residential properties. Due to the complexities of these rules we ask you to contact us to discuss any specific details.
The implementation of the HST will have no impact on purchasers eligible to claim ITC’s.
Place of Supply Rules
The current GST/HST place of supply rules were introduced in 1997 when the three Atlantic Provinces implemented the HST. The rules determine whether GST registrants are required to charge GST or HST on their sales made in Canada. If a sale is deemed made in Canada in a “participating province”, the GST-registered supplier is required to charge HST. On the other hand, if a sale is deemed made in Canada in a non-participating province, the supplier is required to charge only GST. Specific rules apply depending on the types of supplies – tangible personal property (i.e. – hard goods), services, intangible personal property and many other less common supplies. As the GST/HST place of supply rules for all the various categories goes beyond the intent of this memo, we will focus on two of the most common types of supplies: sales of tangible personal property (“TPP”) and sales of services.
Sale of TPP
A sale of TPP is deemed to be made in a province if the supplier delivers or makes the property available in that province to the purchaser. The TPP is deemed to be delivered in a particular province if the supplier ships the property to a destination in the particular province that is specified in the shipping contract, or if the supplier transfers possession of the goods to a common carrier or consignee that it has retained to ship the property to that particular province on the recipient’s behalf. Therefore, whether a province has its own HST (a “participating province”) can determine the ultimate rate of tax to be charged.
Example 1
A supplier in BC sells goods to a purchaser that is a resident of Alberta. The purchaser picks up the goods at the supplier’s premises in BC.
The goods are delivered to the purchaser in BC. Therefore, the supply of the goods is made in BC and is subject to HST at a rate of 12%.
Example 2
A supplier in BC sells goods to a purchaser in Ontario. Based on the terms of delivery in the agreement, legal title of the goods transfers to the purchaser in BC. However, the supplier agrees to have the goods shipped to the purchaser in Ontario.
Although legal title of the goods passes to the purchaser in BC, delivery of the goods to the purchaser is deemed to occur in Ontario because the supplier ships the goods to Ontario. The supply of the goods is therefore made in Ontario and is subject to HST at a rate of 13% since Ontario has its own HST and is a “participating province”.
Example 3
A mail-order company located in BC sells greeting cards to customers across Canada. The company places the packages of greeting cards in the mail, or uses a common courier, for delivery to its customers in Manitoba and Nova Scotia.
The supply of the greeting cards delivered to Manitoba is made in Manitoba and is subject to GST at a rate of 5% since Manitoba is not a “participating province” and does not have its own HST. The supply of the greeting cards delivered to Nova Scotia is made in Nova Scotia and is subject to HST at a rate of 13% since Nova Scotia has its own HST and is a “participating province”.
Services – current rules
Generally, a service is considered to be supplied in a particular province if all or substantially all (90% or more) of the Canadian element of the service has been performed in that province. For example, if greater than 90% of a taxable service is performed in BC, the HST at 12% would be applicable even if the recipient is located in Alberta.
Services – proposed new rules
On February 25, 2010 the Department of Finance released proposed changes to the current place of supply rules. Although no changes are proposed for TPP, significant changes are proposed for services. The proposed general rules for services will rely more on the location of the recipient (i.e. – the place of consumption) than the current rules, which rely heavily on the location of the supplier to determine whether a service is subject to HST. Generally, for services for which the supplier obtains an address of the recipient, this will determine the place of supply of the services and the rate of tax charged. If no address is obtained in the normal course of the supplier’s business, the place of supply will typically be based on the location where the services are performed. The proposed general rules do not apply to certain specific services, which will have their own separate place of supply rules. Please contact us to discuss any particular circumstances that you believe could affect your business.
The new place of supply rules would, subject to legislative approval, apply to the GST registrants in all provinces for any supply made on or after May 1, 2010. Supplies made between February 26, 2010 and April 30, 2010 would also be subject to the new rules if the consideration for the supply has not become due and has not been paid before May 1, 2010.
Temporary ITC Restrictions
“Large” business will be denied ITC’s in respect of the 7% provincial part of the HST on a select list of items. The 5% GST part would remain eligible as an ITC credit. BC has not yet introduced legislation regarding the definition of large business; however, it is anticipated to mean financial institutions and any business which is part of an associated group with more than $10 million in taxable sales (including zero-rated sales). The full restrictions will be applicable for five years with a phase-out over a three-year period thereafter.
The items subject to the ITC restrictions are: energy – except for use in producing goods for sale, telecommunications – except for internet access and toll-free numbers, road vehicles weighing less than 3,000 kg, and meals & entertainment.
HST Exempt Items
Certain items will be exempt from the HST at the point of sale and will include certain motor fuels, books, children-sized clothing and footwear, children’s car seats and car booster seats, diapers and feminine hygiene products. In addition, province of BC government will provide a rebate for residential energy.
Planning and Preparation
Preparation for businesses:
- Cash registers should be ready for the new rate and the point-of-sale exclusions.
- Invoicing and billing procedures should be designed and implemented to determine the place of supply rule and billing systems should be modified to implement the tax collection rates at 0%, 5%, 12% and 13%.
- Large businesses have to get ready to track the ITC restrictions.
- Small businesses should make sure both Federal and the provincial portion of the taxes are claimed as ITC.
- Businesses need to look at “straddle contracts” to assess if they have to self-assess the provincial part of the HST or collect the provincial part of the HST before July 1, 2010.
Planning opportunities for businesses:
- Since most businesses will be able to recover the majority of HST paid through claiming ITC’s, they should hold off making purchases of items that are not for resale until after July 1, 2010 to avoid paying the PST that is not refundable. Therefore, consideration should be given to delay major office equipment upgrades and purchases of other large assets.
- If a business is currently not a GST/HST registrant, consider becoming one to reduce business costs.
Planning opportunities for consumers:
- Pre-payment for goods and services: As it is ultimately the personal consumer who will pay the HST with no ability to claim the ITC, consideration should be given to pre-purchasing some items not currently subject to PST (but subject to full HST come July). This would include items such as bicycles and safety supplies. The items could be purchased either before July 1, 2010 or pre-ordered and paid prior to May 1, 2010 if they are to be received after July 1.
- Similarly, if annual subscriptions and membership fees are pre-paid prior to May 1, 2010 the fee will only be subject to the 5% GST.
- Purchase of private vehicles: Currently the Provincial government only charges the 7% PST on the purchase of vehicles bought privately. Effective July 1, 2010 the government will increase the tax to 12% to equal the HST rate. Therefore, if considering the purchase of a private vehicle, buy and register it prior to July 1.
- On the “flip side” the provincial “luxury” tax on vehicles costing more than $55,000 (which maxes out at a combined GST/PST rate of 15% when the purchase price exceeds $57,000) is disappearing effective July 1. As the tax will not exceed the HST rate of 12%, consideration should be in delaying the purchase of a “luxury” vehicle until after July 1, 2010.
- Finally you may consider stocking your chocolate & junk food now!