Ontario Harmonized Sales Tax (HST)

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.

Public service bodies, which include organizations such as Municipalities, Universities/Colleges, School Authorities and Hospital Authorities (MUSH group) as well as Non-profit organizations and Charities will see some costs increase because the GST has a broader tax base than the current PST regime.  To help offset this cost increase and leave the public service bodies in a neutral position, the Ontario government has announced a rebate for the provincial portion of the HST.  This rebate will be offered over and above the current Federal rebate available.   

The following chart details the percentage of the Federal portion and Provincial portion of the HST that each type of Public Service Body will be able to claim as an input tax credit.

When Will HST Apply?

For goods, HST will apply when goods are delivered and ownership transferred after June 30, 2010.  As 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

There are some key dates to be aware of when considering the transitional rules:

• July 1, 2010 - Implementation date
• October 14, 2009 - Certain organizations may need to self-assess the Ontario portion of the HST on amounts paid or payable between this date and May 1, 2010 for goods or services provided on or after the implementation date
• May 1, 2010 - HST will apply to amounts paid or payable on or after this date for goods or services that will be provided on or after the implementation date.

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.
• For organizations that purchase goods or services that will not be used exclusively in the course of their business, or that will be used in the course of offering exempt services, they may be required to self-assess the Ontario portion of the HST 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 30, 2010.

It is important to note that there are other industry specific rules that could apply to public service bodies.

Transitional Credit for Small Businesses

To help businesses with this change, a one-time transitional credit for small businesses was introduced to assist with the additional costs that will be incurred to implement the changes.  This credit is based on the level of taxable sales in the first full quarter commencing after June 30, 2010.  The credits will range between $300 for businesses with sales under $15,000 in the quarter to a maximum of $1,000 for businesses with sales over $50,000 but less than $500,000 in the quarter.  If sales exceed the $500,000 threshold in the quarter, there will be no credit available.

Five P's Public Service Bodies Should Consider in Transitioning Towards the HST

Prepare

• Assign someone or a committee to learn about HST and the transitional rules
• Prepare an estimate of increased or decreased costs to assist in proper budgeting and determination of cash flow needs; consider inputs which are currently only subject to GST such as rent and utilities
• Municipalities need to review current sub entities to ensure they will function properly with the new rules

Paper

• Review contracts, invoices, receipts, expense reports, etc. that will need to be updated to show HST
• Review employee taxable allowances and benefits, ensure proper HST charged and ITCs claimed
• Review current contracts to ensure they consider HST and make revisions accordingly

Procedure

• Review accounting system, ensure updated to be compliant with HST
• Cash 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, including transitional rules and rebates
• Consider changing the HST reporting period to assist with cash flow

Pricing

• Consider the effect HST will have on pricing
• 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
• Understand the effect of HST on major suppliers
• Consider buying PST exempt supplies and assets now, unless it will be used in offering exempt supplies

For more detailed information on the implications of the Harmonization of the PST with the GST for your business, contact your Collins Barrow advisor.