The Ontario Minister of Finance has announced “significant sales tax reform” effective July 1, 2010. Ontario will harmonize its retail sales tax (“RST”) with the federal goods and services tax (“GST”).
Sales tax harmonization represents a tax regime change of significant proportions and will involve more proactive steps by business beyond a mere alteration of the tax rate in a point-of-sale computer program and accounting records. Many businesses will experience dramatic effects and need to prepare for the change far in advance of the July 1, 2010 date.
Harmonization Means Change
Harmonization means that a federal harmonized RST and GST (referred to herein as “RST/GST”) will be imposed with federal and provincial components and RST will remain for limited items.
Most significantly, most of the RST exemptions for goods will no longer be available. All services, intangible property and real property will become taxable under the harmonized RST/GST regime, unless there is specific relief.
It is not possible to list all of the changes in this article, but starting on July 1, 2010, consumers and businesses engaged in exempt activities will pay more sales tax on many purchases.
While businesses that are engaged in “commercial activities” should be able to recover the increased RST/GST costs, businesses engaged in exempt activities and purchasers that were not registered for GST purposes (including some non-residents) will not be able to recover the increased cost.
Ontario has announced temporary restricted input tax credits for large businesses (i.e., businesses with annual taxable sales in excess of $10 million) and financial institutions (including de minimis financial institutions) relating to energy (except where purchased by farms or used to produce goods for sale), telecommunication services (other than internet access and toll-free numbers), certain road vehicles, and foods, beverages and entertainment. After July 1, 2015, full input tax credits would be allowed on these purchases after a three-year phase-in starting July 1, 2012.
One of the more significant regime changes for Ontario-based businesses involves the requirement to determine whether the supply is inside or outside Ontario, or whether a pro-ration is required. Implementation of the RST/GST is expected to give rise to “place of supply” issues for any businesses that operate across Canada. Businesses that are engaged in the exempt activities may be incentivized to shift costs to a lower tax jurisdiction and the tax authorities will be interested in reviewing such transactions.
It is wise not to wait until June 2010, as there may not be sufficient time to make the needed adjustments. The following are a few examples of businesses that need to: (1) carefully consider how harmonization affects their business; and (2) take steps to prepare and/or consult with Ontario and/or the Government of Canada regarding the impact of harmonization.
- Importers of goods
- Service businesses
- Advisory businesses
- Multi-national businesses
- Financial institutions
- Builders of multi-unit residential complexes
- Builders/Renovators and operators of long-term care homes and retirement homes
Ontario businesses should take proactive steps to get ready for harmonization. Here are some of the many general prudent steps that should be taken by most businesses:
- Determine what taxes the business must charge, collect, remit and pay;
- Determine to whom the taxes should be remitted;
- Determine whether the business is making taxable, zero-rated or exempt supplies and make adjustments to internal controls and accounting systems;
- Determine whether the business must self-assess on imported taxable services and intangible property and make adjustments to internal controls and accounting systems;
- Determine whether the business is entitled to claim full or partial input tax credits or refunds and make adjustments to internal controls and accounting systems;
- Determine whether the business is to provide point-of-sale rebates and make adjustments to internal controls and accounting systems;
- Determine if there is any uncertainty concerning the application of the rules. If there is uncertainty concerning the application of the rules, seek an advance ruling or interpretation from the relevant tax authority as soon as possible;
- Determine if the business will not be able to recover all RST/GST paid on business inputs;
- If the business will not be able to recover all RST/GST paid or self-assessed, consider making representations to the government as soon as possible; and
- If the business will not be able to recover all RST/GST paid, or self-assessed, (e.g. financial institutions, real property contractors, long-term care home and retirement residence builders/operators, etc.) they should review their upcoming purchases, accelerate major acquisitions that are not subject to ORST, such as business assets, real property, computer software, advertising, etc. to reduce the cost for harmonization.
Some Final Remarks
The most significant audit problem is lack of documentation required to claim input tax credits. During an audit, the auditor will deny input tax credits if the taxpayer does not maintain adequate records which include all the required elements in the GST/HST Input Tax Credit Regulations.
If an Ontario business exports zero-rated goods, services and intangible property, documentation must be retained that is satisfactory to the Minister as proof of export. When the RST/GST rate increases to 13%, risk management should involve internal controls relating to review of documentation and retention of the required information.
If an Ontario business imports taxable services and/or intangible property, harmonization will result in transfer pricing issues relating to the self-assessment of the RST/GST on the imported taxable services and intangible property. When the RST/GST rate increases to 13%, risk management should involve internal controls and a transfer pricing agreement.
Apart from adjustments to internal controls and accounting systems, experience informs us to prepare for transitional rules that will apply to transactions and activities that straddle the July 1, 2010 implementation date. These rules are yet to be provided by the government.