Just when you thought you were safe to buy services from an Alberta lawyer, or consultant, new “Place of Supply Rules” were recently announced by the Department of Finance. These are federal rules, but apply to all HST participating Provinces as well as non-participating Provinces. Of note, they are in effect May 1, 2010, as this is the date that suppliers are generally required to start collecting HST (13% in Ontario, 12% in British Columbia) for supplies made or deemed to be made after June 30 pursuant to the HST Transitional Rules.
The present Schedule IX of the GST legislation is to be replaced by significantly revised Regulations that change the focus from primarily an “Origin” based test for the most part (for example, Alberta service providers would not charge HST) to the more modern OECD “Destination” approach (or where the goods or services are consumed or utilized as opposed to being generated).
The Place of Supply (“POS”) Rules are the most important, complex and long term aspect of the HST (by contrast, the much talked about Transitional Rules are, essentially, functus this fall). As the economic model for the HST is based on assumed consumption, not the actual tax collected, the POS Rules are of primary importance for suppliers and recipients – both clients and professionals. It is necessary to understand the POS Rules in order to collect the proper amount of HST (if not, you are subject to assessment) or if you owe the HST (self assessment or otherwise). It is also important to determine where and what HST was paid for purposes of the ITC recapture rules (even businesses receiving 100% GST ITCs will be denied or, more accurately, must repay, HST ITCs for certain purchases (for example, energy, road vehicles, telecommunication, etc.)).
For exported services or goods, there is nothing new in terms of the POS Rules (if one exports out of the country, there is no GST or HST). However, a non-universal HST (participating and non-participating provinces) means intra-country imports/exports are important.
The General Services Rule is now Destination based. The Rule used to be a three part Orgin test:
- where performed - 90% ( what does “ performed” mean; for example, is it purely where the WIP is?);
- place of negotiation in province and >10% performance in that province equals that province; or
- primarily in participating province = go to province where greatest element performed.
Fortunately, this test was usually only in issue when the three Atlantic provinces were involved, which was rare.
However, the new general services POS Rule is based on the location (address) of the recipient. If the recipient has more than one address (business or personal, depending on the nature of the service), then the address “most closely connected” to the recipient’s business applies. The question is what does this phrase mean? Is it the old “place of negotiation” rule; presumably not? Is it the place where the instructions emanate from, or is it the place that benefits most from the services (and what if that is more than one location)? It is understood that the Department of Finance is looking at this POS rule more closely and there may be changes. If there is no address in Canada, then the place is where the greatest proportion of the services are performed. Alternatively, if none of the above apply or if you cannot determine the status, the Rule defaults to the highest tax rate (Nova Scotia now at 15%).
There are new financial services POS Rules (with more to come on the Financial Institution front in terms of making changes to the SAM (or Special Attribution Method) for investment funds. For services provided by trustees for certain types of fund such as RRSPs, RRFI, RESPs or TFSAs, the place of supply is deemed to be where the service is utilized, that is, the address of the recipient.
The tangible goods POS Rules are already destination based for the most part; that is, the place of delivery. In other words, the existing QST rule applies: if it delivered to or put on common carrier for delivery to the recipient, then the place of supply is the address of the recipient. The leases POS Rule is the ordinary location (cars are where they are registered for more than 3 months) of the recipient.
For services related to TPP, the POS Rule is the address of the recipient. If there are two or more addresses, then it is the place where the greatest proportion of services are performed or the “Default” rule (the place with the highest combined HST rate, which will be Nova Scotia or with the new proposed rate of 9.5%, Quebec, if it opts in to the federal POS Rules).
For IPP generally, the POS rule is where it can be used (primary use). For IPP related to Real Property Services or TPP, the rule is where it is primarily situated. There is a new default rule if equally based in 2 or more provinces. Then it is where the services are supplied.
For real property, the POS Rule is where the property is situated. For services related to real property, the POS Rule is where the property is situated. If it is equally situated in two provinces, then you default to highest tax rate at the time.
Telecommunication services POS Rules still use the 2 out of 3 rule, but for telecommunication facilities, if you are in a province or if part in a province and invoice is sent there, then that is the place of supply.
There is a new rule for Services related to an event. If it is a location specific event, then that is where the services are performed.
There is also a new customs brokerage POS Rule, which is where the recipient is located. Presumably, this means where the recipient’s office or home address to which the goods are delivered, if there is more than one address.
Place of Supply: General Services Example
Consider a client based in Toronto. Therefore, the place of negotiation is in Ontario under the old rules. The services are performed 80% in B.C. (out of the B.C. office of a law firm, for example). The old POS rule would look to who is on the WIP (an allocation of WIP may be necessary). Query though if WIP is even relevant. The issue is where the lawyer is located who performed the Services, that is, not where the lawyer is normally located, where was the lawyer when doing the services?
The New Rule is where the recipient uses the services, that is, where the recipient is located, that is, where is the firm engaged? As the client is in Ontario and the address was Ontario, 13% HST applies. This would be same if it was an Alberta firm providing the services. It can become complicated though if the law firm has multiple offices and a national client; for example, the Toronto office is retained by an Ontario based client, but the work is done mainly in B.C. and partly in Alberta and contact is made with the client in all 3 locations. Which client office is “most closely connected” is an interesting question.
Place of Supply: Imported Taxable Supplies
If a person is not entitled to full ITCs, then imported supplies of services and IPP are subject to tax under the self-assessment Rules. However, it is now 12% or 13% (not just the 5% GST). If the person misses this, it’s a big surprise e.g. for Charities and other non profits as well as some financial service providers.
There is both a self-assessment requirement and a rebate for entities engaged in non-commercial activities for inter-provincial supplies. Basically for supplies made in non-HST provinces imported into Ontario, self-assessment is applied at 8% or for supplies made in Ontario imported into non-HST provinces, the rebate is applied at 8%.
International Imports of Goods
The CBSA will not collect the provincial portion of the HST (8% Ontario, 7% B.C.) on commercial importations of goods into Canada (except for travellers, i.e. non business importation). However, for imported commercial goods acquired from an unregistered non-resident that are not acquired for use exclusively in commercial activities, a self-assessment of 8% is required (again Charities and non-profits beware). Therefore, imported taxable supplies not acquired for use exclusively in commercial activities must be self-assessed (at 13%) by the recipient.