Harmonized Sales Tax for Lawyers

The Ontario government announced in its March 26, 2009 Budget that it will adopt a single sales tax system effective July 1, 2010. This new system will combine the 5% Federal Goods and Services Tax (GST) and the 8% Ontario Retail Sales Tax (PST) to create a 13% Harmonized Sales Tax (HST). The HST will be administered by the Canada Revenue Agency and will substantially follow the GST regime, with a few key differences.

This article discusses the new HST regime specifically from an Ontario perspective, though the concepts and principles have general application to the other HST provinces: Nova Scotia, New Brunswick, and Newfoundland and Labrador. British Columbia has also announced a new HST regime, also effective July 1, 2010.

The HST uses a value-added tax structure that will allow most businesses to claim input tax credits (ITCs) on the 13% HST paid. This is in contrast to the PST, which applies to many purchases made by a business and is not refunded, leaving the PST embedded in the price of the finished goods and services as a sunk cost to the business. The HST aims to take away that "hidden tax" and lower administrative costs incurred by businesses. 

Lawyers are among those who stand to benefit, in part, from this tax harmonization. Currently, lawyers are charged the 5% GST and 8% PST (the 8% being non-recoverable) on such expenses as capital expenditures like photocopiers, telecommunications and office supplies. However, they are only permitted ITCs for the GST portion. But as of July 1, lawyers will be able to claim the full 13% HST as an ITC. On the revenue side, however, lawyers will now be required to charge an additional 8% when providing taxable services. Unlike the current regime, the Provincial governments will now pay the HST. GST-exempt services, such as legal aid, will continue to be fully exempt under the HST rules.

Some law practices will qualify for a maximum one-time transitional credit of up to $1,000 if taxable sales are less than $500,000 in the first full quarter commencing July 1, 2010. Large businesses with sales in excess of $10 million (for associated group) will face a temporary restriction on the provincial portion of the ITC for the first 8 years for certain expenditures.

Transitional rules

The HST will apply to taxable services performed after June 30, 2010. For transactions that straddle the July 1, 2010 implementation date, the following transitional rules will apply.

• If consideration is due or paid on or after May 1, 2010 and before July 2010 then HST would apply to the extent that the consideration is for goods or services that are delivered, performed, or for which ownership is transferred after June 2010.
• HST is not applicable to any part of a service performed before July 1, 2010, or if all or substantially all of the service is performed before July 1, 2010.
• For businesses that purchase goods or services that will not be used exclusively in the course of their business, or for businesses that offer exempt services, there will be a requirement to self-assess, if consideration is due or paid after October 14, 2009 and before May 2010 and the goods or services are not provided until after June 2010.

Real property transactions

Special rules will apply to the sale of new homes. These rules are quite detailed and in some cases may depend on the percentage of completion of the home at June 30, 2010. Lawyers in the real estate sector are advised to familiarize themselves with these rules and advise their clients accordingly. The transition rules can be summarized as follows:

• If possession and ownership is transferred after June 30, 2010, and the new home contract was signed before June 18, 2009, the transaction is "grandparented" and not subject to the new HST rules. Builders may be required to pay a transitional adjustment tax, based on percentage of completion at June 30, 2010, to remove the benefit of ITCs recovered on these jobs.
• If the contract was signed after June 18, 2009 but before June 30, 2010, the sale will be subject to HST and the buyer may qualify for a PST transitional rebate, based on percentage of completion at June 30, 2010. This rebate may be assigned to the builder.
• For sales subject to the HST, the Ontario New Housing Rebate will refund 75% of the provincial portion of the HST up to a maximum of $24,000. This credit is available regardless of the purchase price for the home and can be claimed by the purchaser or assigned back to the builder. There is also an Ontario New Rental Housing Rebate.
• Clear disclosure and contract terms are necessary. If the transaction is subject to HST and clear disclosure is not made, the stated price will be deemed to include the provincial portion of the HST.

Mandatory electronic filing

Electronic filing will be mandatory as of July 1, 2010 for residential builders who are reporting transitional tax adjustment amounts and transitional rebate amounts and for all businesses that generate more than $1.5 million in annual sales.

Five "P's" lawyers should consider in transitioning towards the HST

Prepare

• Assign a dedicated staff member or a committee to learn about the HST, the transitional rules, the place of supply rules, and the new mandatory electronic filing requirements.
• Prepare an estimate of decreased costs to assist in proper budgeting and to determine cash flow (i.e. extra 8% receivables).
• Determine how the extra 8% tax on your services will affect business.

Paper

• Contracts, invoices, receipts, expense reports, pre-printed price lists, etc. will need to be updated to show HST.
• Review employee taxable allowances and benefits to ensure the HST is charged and the ITCs are claimed properly.

Procedure

• Review accounting systems to ensure HST compliance.
• Registers, computer software and websites will require updates to include HST.
• Determine the level of training required for management and staff.

Pricing

• Consider the effect the HST will have on pricing of your services.
• Consider the effect on timing of work in the current year.

Procurement Policy

• Consider leasing rather than buying for large purchases before July 1, 2010, or delay large purchases until after July 1.

Guy A. Desmarais, B. Com., LL.B., TEP, is a partner in Collins Barrow's Sudbury-Nipissing member firm. Contact Guy at gudesmarais@collinsbarrow.com, to discuss the implications of the HST on your law practice.