Brian Bonney of the Canadian Federation of Independent Business (CFIB) and Janet Kasun from the Ottawa office of Borden Ladner Gervais LLP (BLG) answered a selection of your questions about the harmonized sales tax (HST) that will be introduced in B.C. and Ontario on July 1.
Question from 'IdRatherBeCanoeing:' As a very small business, I did not collect GST but did collect PST. Do I have to collect HST?
Janet Kasun, a lawyer practicing in the Ottawa office of Borden Ladner Gervais LLP (BLG): No, you don’t. To understand the HST, it is simplest to just think of it as GST at a higher rate (13 per cent in Ontario) and forget everything you know about PST. Small businesses, generally those with less than $30,000 in annual revenues, are not required to register for and collect the GST. The same rule will apply to the HST. For very small businesses, this means one less set of forms to be completed and one less auditor that may come to visit. However, a small business may choose to register voluntarily for the GST/HST, collect the tax from its customers and recover the tax paid to its suppliers by way of input tax credit. Businesses that expect to grow quickly generally prefer to register early not only to be able to recover the GST/HST paid on their expenses but also to avoid having to closely monitor their sales to ensure they register as soon as they are required to do so. Now that the rate has increased, more small businesses may decide to voluntarily register.
Question from 'Howdja:' I own a second-hand book store and at present charge only GST. I have phoned the government and nobody seems to have a clear idea what the tax should be on used goods. Can you help, please?
Brian Bonney, the CFIB's director of provincial affairs for B.C., answers for B.C.: It should remain as it currently stands, meaning only the 5 per cent federal portion should apply. Our understanding is that used books are not distinguished from new when it comes to taxation. The 7 per cent portion of the HST after July 1 will be eligible for a point-of-sale rebate, meaning that the customer only pays 5 per cent tax.
Mr. Bonney's answer for Ontario: The government of Ontario has announced it will provide a point-of-sale rebate of the provincial portion of the HST payable on qualifying books. For more information and for the list of books that qualify for the rebate, go here.
Question from 'Ardouin:' I am a self-employed supplier of business services to the federal government. I reside in Ontario. Most of the departments for which I work are based in Ontario but some are based in Quebec. I am registered for the GST and currently charge it to all my clients. I would like to know the following: After June 30, do I need to charge HST to my federal government clients based in Ontario? After June 30, do I need to charge HST to my federal government clients based in Quebec? I have been reporting GST quarterly using the Quick Method to calculate the amount of tax I must remit. Can I continue to use this method, and what are the percentage rates I must apply?
Janet Kasun: When you are providing services to clients in more than one province, you will need to use the “place of supply” rules to determine the appropriate rate of tax. Generally, the appropriate rate applies to the province in which the client is located. If the client has more than one location, you choose the location that is most closely connected to your supply, generally the office that initially engaged you. Assuming your services are of an advisory nature and do not involve real or tangible personal property, the general rules will likely apply.
The GST/HST applies to the federal government, so where you are providing services to federal government departments located in Ontario, you will charge the 13 per cent harmonized rate. For those clients located in Quebec, you will only charge the federal 5 per cent rate of tax. Quebec has not harmonized its provincial sales tax (QST) with the federal GST. As the federal government does not pay the QST, you do not need to worry about whether or not that tax applies in your circumstances. Other businesses should be aware that the rules for the QST are also changing and many who may not have collected the QST in the past may find they are now required to do so.
More on the HST
You can continue to use the Quick Method, but right now there is no definitive answer as to the rates. As a service business located in Ontario, making supplies in Ontario and Quebec, you will be presently using a rate of 3.6 per cent. After July 1, you will be located in a participating province (Ontario) and making supplies in both a participating province (Ontario) and a non-participating province (Quebec), so you will likely be required to use two rates. The rates are set by regulation and as yet nothing has been released that specifically contemplates the changes to take effect on July 1. At present the rates that apply to a service business located in a participating province are 1.8 per cent for sales made in a non-participating province and 8.8 per cent for sales in a participating province. However, those rates were set when all participating provinces had the same rate of tax, 13 per cent. We expect new rules will be released shortly.
Normally once you have elected to use the Quick Method you may only revoke that election after it has been in effect for at least a year and only as of certain dates. However, residents of Ontario and British Columbia will have a special opportunity to revoke those elections should they wish to do so. If you feel this election may no longer be advantageous, you may wish to look into this alternative.
Question from 'Renfew Ontario:' Under the GST, an order for goods or services placed outside of Canada was not subject to tax. Does a similar exemption apply to the HST for goods or services order from and delivered off-shore?
Mr. Bonney's answer for BC: Yes, you’re right, the HST won’t apply. Here’s some information directly from Canada Revenue Agency (CRA): “Goods (other than excisable goods such as beer and tobacco) that are ordinarily GST/HST taxable supplies may be zero-rated if they are exported from Canada. This means that you do not charge GST/HST on taxable sales if you deliver the goods or make them available to a purchaser outside Canada.” The most important thing to remember is that the purchaser cannot be a consumer, whereby the consumption happens in Canada. There are a few other conditions. Please see more here.
Mr. Bonney's answer for Ontario: The general rule is that if the goods or services are subject to GST now, they will be subject to HST as of July 1. If they are ordered from and delivered outside of Canada no HST will apply. If the goods or services are imported in Canada, they will be subject to the federal portion of HST. More information on imports here.
Question from 'David S.13:' I am a consultant supplying services through my BC-based company. Many of my clients are in Alberta, and they will now see taxes on my services increase from 5 per cent to 12 per cent. This will put me at a disadvantage to competing consultants from Alberta. Can I avoid this increase by registering my company in Alberta?
Janet Kasun: You don’t need to register your company in Alberta. Whether or not the taxes on your services are charged at a rate of 5 per cent or 12 per cent is not determined based on where you are or where your company is registered, but by application of principles known as the place of supply rules. You and your competing consultants should all be charging the same client the same rate for the same type of service regardless of where you are located.
The place of supply rules can be complex but generally the tax rate is determined by where the client is located, not the service provider. If, for example, you are providing general advisory services to a client that operates from only one address in Alberta and your services have nothing to do with real or personal property situated in British Columbia, the place of supply will be Alberta and you will only be required to collect the 5 per cent federal rate of GST.
Question from 'Paul Bearer:' Would I be correct in stating the cost of hardwood flooring will be the same (tax-in) before and after July 1 (in BC)? PST will come off for lumber producers after July 1 (lower base cost) but for consumers will the lower cost of goods be replaced by the equivalent HST? And where could I get a complete list of goods and services that will have HST? Perhaps the list is not yet complete, and if that is the case there should be no implementation date in place until a list of goods and services is 100 per cent in place.
Mr. Bonney's answer for BC: Yes, the cost of the hardwood flooring would be the same before and after July 1. Before July 1, the product itself was subject to both GST and PST, and the service of the installation of hardwood flooring was considered to be an improvement to real property, and hence it was subject to both GST and PST. But there is a caveat to this answer: The government says that the various steps leading up to your purchase of hardwood floors used to mean that businesses in the supply chain paid 7 per cent PST but didn’t get it back in Input Tax Credits. With HST, a full 12 per cent will be returned at each step, meaning there should be savings passed along to the final consumer. What that translates to in terms of dollars off the product cost will be determined.
A good list of the tax changes put out by the BC government that’s easy to read and covers a lot of the things we’re all concerned about is available here.
Mr. Bonney's answer for Ontario: The Ontario Ministry of Revenue’s website specifies what is subject to the HST and what is not. There is also information on transitional rules about inventory and selling it, but no details as to how these will affect the cost of hardwood flooring.
Question from 'Internationalist:' For the sale of a residential building lot where the seller is a private individual non-GST registrant ... and the buyer is a builder and GST registrant ... Is the sale subject to GST/HST?... Who pays the tax and who collects and submits the tax?
Janet Kasun: Although it is generally the seller’s obligation to collect and remit the GST/HST, there is a special rule for real property transactions. Where the buyer is a GST registrant, as is the case in your question, it is the buyer’s obligation to self-assess and remit the tax. A GST registered buyer that is purchasing land for use in its business activities will generally be able to recover the tax paid by claiming an input tax credit. As the input tax credit will offset the GST/HST payable, the net result will be no tax actually paid.
It is important for sellers to be sure to confirm the registration status of the buyer on the date of closing. This can be done using the CRA’s GST Registry, which is available on the CRA website. A sale of vacant land by an individual may be exempt if the individual did not use the land for a business (including farming), the sale is not made in the course of the individual’s business or the individual did not subdivide the land more than once. In the transaction you describe, it is likely the buyer will be indifferent as to the tax status of the transaction. In those circumstances, unless the parties are absolutely sure the exemption is available, it is prudent for the buyer to simply self-assess the tax and claim the offsetting credit.
Question from 'Albin:' I agree that in many cases there are supply-chain cost savings that will offset the final tax, both for consumers and newly covered HST businesses. But not in my case, or my barber's, since he has been the most vocal objecter to the new tax. Do you have a sense of how many newly paying businesses will not have supply chain offsets to the cost of the new tax, and who are therefore feeling pressured to "eat" the tax and lose business income?
Mr. Bonney's answer for BC: Yes, it is true that businesses that are heavily dependent upon labour (such as a barbers) will probably not benefit from the HST. This is because they have few purchases to make that they would now benefit from having a 12 per cent input tax credit (getting the 7 per cent PST back as well as the 5 per cent GST) but would feel pressure to drop their take-home revenue to offset the increased cost to their customers of paying 12 per cent for their services instead of only the 5 per cent GST.
From the March, 2010 BC budget (page 121), one figure to note is the breakdown of goods and services for personal expenditures were 60 per cent on services and 40 per cent on goods. Thus, while the HST is a huge boost to the goods-producing sector, for services that weren’t subject to PST, the benefits are harder to find.
Mr. Bonney's answer for Ontario: Many CFIB members have also expressed their concern about the pressure of “eating” the tax, which will ultimately lower their margins. In terms of financial support available from government, Ontario’s small businesses will receive a one-time transitional credit. Most businesses (other than financial institutions) with less than $2 million in annual revenue from taxable sales will be eligible for a transition credit of up to $1,000. In addition, some businesses (such as the barber) will be able to claim input tax credits on their business purchases.
Question from 'Davey100:' I am currently making quarterly payments. The schedule for payments is based on what I collected last year. Does the switch to HST have an impact on my quarterly payments for the balance of 2010?
Janet Kasun: If you are a resident of either Ontario or British Columbia, yes, the switch to HST will have an impact on your quarterly payments for the balance of 2010. Assuming that you are not a “financial institution” for GST purposes, and that your fiscal year is the calendar year, you can expect your instalment payments to at least double for the last two quarters.
In December, the government passed legislation giving it broad powers to pass regulations in relation to harmonization. In particular, regulations may be made to determine the amount of instalment payments. Unfortunately, we have not seen any such regulations. So for now, all we can say with authority is that if no new regulations are made, the rules from 1997 will apply and your payments will double. The rates doubled in 1997 because at that time the federal GST rate was 7 per cent, the new harmonized rate was 15 per cent, so double was approximately the amount of the tax increase.
If new regulations are passed, you can likely expect a greater increase (5 per cent compared with 12 per cent or 13 per cent). If not, it is likely that your payment at the end of the year will be higher than normal.
Question from 'workerbee:' Apparently there is no PST or GST on fees paid to doctors, physiotherapists, naturopaths, optometrists, massage therapists, etc., and there also isn't any tax at all paid to opticians for glasses or to pharmacists for medicines. But apparently the pharmacist and the optician will get all the HST back that they pay for rent, utilities, telephone, supplies, etc., but the doctors, physiotherapists, massage therapists don't get back any of the HST that they pay for these things. What gives with that? Why does the pharmacist get back all of the HST he pays and the doctor get back none of it?
Mr. Bonney's answer for BC: The difference lies in the distinction between being “exempt” from GST/HST and being “zero-rated” for GST/HST. If you are exempt, it means GST/HST does not apply to goods or services provided by you to customers, but also that you do not claim input tax credits. Businesses that are exempt from GST/HST, including doctors, physiotherapists, optometrists (but not massage therapists or naturopaths, as they are subject to GST and will become subject to HST) do not get HST back from business costs, as the business-cost HST rebate is to offset the HST that is paid by those who have to pay HST in the first place.
While massage therapists and naturopaths will now have to charge 12 per cent HST instead of only 5 per cent GST, they will be able to claim the 12 per cent input tax credits. This applies so long as the business has above $30,000 in revenue. Drug dispensing fees are technically “zero-rated”, which means that GST/HST is not charged on the supply of these goods and services. However, a GST/HST registrant can claim an input tax credit for the GST/HST paid or owed on expenses made to provide zero-rated sales or supplies.
The BC government is providing a partial rebate of the provincial portion of the HST for eligible public service bodies. The rebates are designed to mitigate the impact of the HST while providing certainty for eligible entities. Public service bodies include municipalities and other eligible local government entities, eligible school authorities, universities, public colleges, and hospital authorities, and eligible registered charities and qualifying non–profit organizations.
Mr. Bonney's answer for Ontario: The general rule is if you collect GST/HST, you may recover the GST/HST you paid or owe on purchases and expenses related to your commercial activities by claiming input tax credits (ITCs) on line 106 of your GST/HST return. For complete details, go here.