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.
The HST uses a value-added tax structure that will allow most businesses to claim input tax credits (ITC) on the 13% HST paid. This is unlike 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. One of the purposes of the HST is to take away the hidden tax as well as lower administrative costs incurred by businesses.Â
Lawyers are among those that will partially benefit from harmonization. Currently, lawyers are charged the 5% GST and 8% PST (the 8% being non recoverable) for some costs incurred, such as capital expenditures like photocopiers, telecommunications and office supplies. Lawyers will now be able to claim the full 13% HST they have paid as an ITC. This means a cost savings for lawyers. 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. Exempt services, such as legal aid will be fully exempt under the HST rules, as they are now for GST purposes.
Your practice may 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 after June 30, 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.
When Will HST Apply?
For taxable services, HST will apply for services performed after June 30, 2010. For transactions that straddle the July 1, 2010 implementation date, there are also transitional rules that need to be considered.
Transitional Rules
The basic transitional rules are as follows for most goods and services:
- 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 require data 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 to get prepared. The transition rules are 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 ITC's recovered on these jobs.
- 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, to reimburse for PST imbedded in the home. This rebate may be assigned to the builder.
For sales where the HST applies, The Ontario New Housing Rebate will rebate 75% of the provincial part of the HST up to a maximum of $24,000. This credit is available regardless of the purchase price for the home. This credit 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, under the transitional rules, the stated price is 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 business that generate more than $1.5 million of sales per annum.
Five P's Lawyers Should Consider in Transitioning Towards the HST
Prepare
- Assign someone or a committee to learn about HST, the place of supply rules, the transitional rules and the new mandatory electronic filing requirements
- Prepare an estimate of decreased costs to assist in proper budgeting; and determine cash flow (eg: extra 8% receivables)
- Determine how the extra 8% tax on your services will affect business
Paper
- Review contracts, invoices, receipts, expense reports, etc. that will need to be updated to show HST
- Review employee taxable allowance and benefits, ensure proper HST charged and ITCs claimed
- Review current contracts to ensure they consider HST and make revisions accordingly
- Modify any pre-printed price lists
Procedure
- Review accounting system, ensure updated to be compliant with HST
- Registers, computer software and possibly websites will need to be updated to include HST
- Plan on doing a test run of your system prior to May 1, 2010
- Determine the level of training required for management and staff
Pricing
- Consider the effect HST will have on pricing of your services
- Consider effect on timing of work in the current year
- Unlike the current regime where the Government of Ontario is GST exempt on its purchases, they will now be subject to HST
Procurement Policy
- Consider leasing vs. buying for large purchases before July 1, 2010 or delay large purchases until after July 1, 2010
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