On July 1, 2010 the Ontario 8% Provincial Retail Sales Tax (RST / PST) and the 5% Goods and Services Tax (GST) will be replaced by a 13% Harmonized Sales Tax (HST). The change to a single value added tax is intended to provide a more cost effective and administratively efficient tax for businesses, however the HST will result in a real cost increase on services that were previously not subject to PST. There are several transitional issues that legal service providers need to take into consideration leading up to harmonization.
Registration for GST
Registrants for GST are automatically registrants for HST. There are not additional forms required. The criteria for mandatory registration remain the same for HST as GST.
If a service was zero rated (taxable supply at 0% GST such as professional, advisory or consulting services made to a non-resident) or exempt for GST purposes, (such as legal aid) it will continue to be zero rated or exempt for HST purposes.
Invoicing requirements
As of May 1, 2010 registrants will be required to charge the Ontario portion of HST on the portion of products or services that will be delivered after June 30, 2010. The GST collected is remitted with the return for the period in which the invoice was issued, the Ontario portion is to be remitted with the HST return for the period that included July 1, 2010.
As of July 1st, HST will replace the GST. Point of sale terminals should be updated to include the new amount.
Prepayment versus deposit
In an attempt to avoid paying the HST under the May 1st transitional rules, some vendors were asking customers to prepay before May 1st for goods or service to be delivered after July 1st and charged only the 5% GST at that time.
The general rule for when GST/HST is payable is the earlier of the day the amount is paid and the day the amount is due (typically the invoice date). However a deposit, whether refundable or not, is not considered to be an amount paid until the supplier applies the deposit against the amount for the good or service. Where a good or service is delivered after June 30th and a deposit is applied against the amount, the entire amount would be subject to HST.
This may create a problem identifying the character of the payment as a pre-payment or deposit since outwardly, there may appear to be little difference between the two. Ultimately, the character may be determined by reference to the supplier’s financial statements and records. To strengthen the argument that a pre-payment is a pre-payment, identify the amounts as such on financial statements, avoid terms like “less deposit” in favour of “less pre-payment” and apply HST only on the additional amounts on subsequent invoices and ensure that the GST on the prepayment is reported and remitted in the proper period.
Self Assessment
Even though invoicing requirements begin May 1st, there is a requirement for registrants who purchase goods and services to be delivered or performed after July 1st to self assess the Ontario portion of HST on these amounts in the reporting period which includes July 1st.
Transitional rebate
Most small businesses will incur some costs in transitioning from RST to HST such as updating their point of sales machines and software. To support small businesses, Ontario will provide a one-time transition credit of up to $1,000 for businesses with less than $2 million in annual revenue.
The credit is calculated based on taxable sales in the first full quarter following June 30, 2010 as follows:
- Taxable revenue less than $15,000 receive $300 credit
- Taxable revenue between $15,000 and $50,000 received a credit of 2% revenue
- Taxable revenue between $50,000 and $500,000 receive $1,000
The credit will be claimed on the first HST filing following June 30th as an offset to net remittable tax.
Final PST Returns
On July 1, 2010 RST is generally no longer applicable to sales in Ontario. The final RST return is due to the Minister of Finance by July 23, 2010 and supplemental returns can be filed for RST on taxable transactions prior to July 1st where amounts did not become due or payable (ie. not invoiced) until after July 1st. The date of the final supplemental RST return is November 23, 2010.
It had been announced that commissions paid to RST filers would be discontinued at the end of March, however the provincial government has changed their position and will pay commissions to the end of June 2010.
Two taxes under one regime
The HST consists of two portions, the 5% federal goods and services tax and the provincial portion of the goods and services tax. This is an important distinction to make under certain circumstances
Point of Sale Rebates
Some supplies that were previously exempt from RST will not be subject to the Ontario portion of HST (OHST) by offering a point of sale rebate. Retailers of these exceptions need to ensure that their point of sale terminals and invoicing reflect the rebate which can be disclosed by either showing the full portion of the HST and a POS Rebate, or by netting the amounts. OHST is not applied are on the following items:
- Children’s clothing and footwear;
- Children’s car seats and car booster seats;
- Diapers;
- Feminine hygiene products;
- Books and audio books;
- Printed newspapers;
- Prepared food sold for $4 or less
Retail Sales tax will continue to apply to insurance premiums and private sales of used vehicles.
Restricted ITCs
During the initial period of Ontario HST, certain large businesses with annual taxable sales over $10million and financial institutions will be required to recapture (repay) their input tax credits on certain items which include:
- Road vehicles less than 3 tonnes, include parts, service and fuel
- Energy (electricity, gas, fuel and steam) except in manufacturing and production activities
- Tele-Communications except internet and toll free numbers
- Food, beverage and entertainment subject to 50% restriction
These restrictions do not apply for goods acquired for resupply (ie. car dealerships are not restricted by the road vehicle rule for inventory)
The recapture is temporary and will be phased out as follows
- 100% ITC recapture from July 1, 2010 to June 30, 2015
- 75% ITC recapture from July 1, 2015 to June 30, 2016
- 50% ITC recapture from July 1, 2016 to June 30, 2017
- 25% ITC recapture from July 1, 2017 to June 30, 2018
- No recapture thereafter
Place of supply
Determining the province in which a service is provided it key in determining whether to charge HST on services provided in participating provinces or GST on service provided in non-participating provinces.
Effective February 25, 2010 there have been changes to the place of supply rules for services. The HST rules had historically favoured the location of the service provider, however the new rules put the emphasis on the purchaser.
There are several instances where there are specific place of supply rules for certain circumstances. The following four general place of supply rules do not apply where there are specific place of supply rules. The general rules summarized as follows:
Rule 1: Where the supplier obtains a particular address of the recipient in the ordinary course of business, the service will have been regarded have been made in the province of the address of the recipient.
Rule 2: If Rule 1 doesn’t apply, the supply will be made in the province where the greatest portion of the service was provided.
Rule 3: If Rule 1 doesn’t apply and services are performed equally in participating provinces, the service is provided in the province with the highest HST rate
Rule 4: If Rule 1 doesn’t apply and the work it primarily performed in a non-participating province, GST will apply.
The general place of supply rules will not apply to certain services including amongst others:
Personal services
- Services in relation to real property
- Services in relation to tangible personal property
- Services in relation to a location specific event
- Passenger and certain other transportation services
- Postage, telecommunication, telephone, internet
It is important for businesses to identify whether or not the service is a specified service so that, for example, a barber in Manitoba doesn’t worry about trying to charge HST on a haircut to a vacationer from Ontario because the barber is trying to apply the general rules (customer address), rather than the specific personal services rule (location of service).
