The Provinces of British Columbia and Ontario will replace their respective provincial sales taxes (the social services tax in British Columbia and the retail sales tax in Ontario) with a Harmonized Sales Tax ("HST") that will displace the existing federal Goods and Services Tax ("GST") effective July 1, 2010. It is hoped that the relatively late date for harmonization will give businesses adequate time to adapt to the new collection and remittance regime.
The HST rate will be 12% in British Columbia and 13% in Ontario. Like the existing 5% GST, the HST will be administered by the Canada Revenue Agency and imposed under the Excise Tax Act (Canada) following the necessary amendments.
The HST will be the same as the HST that has been in place in New Brunswick, Nova Scotia, and Newfoundland and Labrador since those Provinces harmonized with the GST in April 1997.
The change from a provincial sales tax to a multi-stage value added tax in the form of the HST should benefit many businesses. It will allow businesses to comply with one transaction tax, rather than two, saving millions of dollars in compliance costs for business and in administration costs for the Ontario and British Columbia governments.
Most businesses that currently make GST taxable supplies or that supply goods or services on a GST zero-rated basis, including franchisors that collect GST on initial franchise fees and royalty fees, should be entitled to recover the higher HST that they will pay on inputs into their businesses. They will no longer have to pay unrecoverable provincial sales taxes on purchases of goods and the limited range of currently taxable services.
However, some aspects of the new HST will be costly to certain medium and large-sized businesses. All businesses that make more than $10 million in GST/HST taxable sales will be unable to claim input tax credits to recover the provincial portion (8% in Ontario, 7% in British Columbia) of the 13% HST payable on a limited range of inputs that would otherwise be creditable. These will include energy, along with telecommunications services (other than internet access or toll-free numbers), road vehicles under 3,000 kg (including parts, services and fuel), food, beverages and entertainment.
The restriction on recoverability for inputs of energy should have the most significant impact as energy inputs are currently fully exempt under the existing provincial sales tax regimes. By contrast, telecommunications services and road vehicles are already subject to the unrecoverable provincial sales taxes, such that there should be not be a net change.
There will be a number of exemptions from the British Columbia and Ontario provincial sales taxes that will be eliminated in the transition. One of these is the exemption from Ontario provincial sales tax for prepared foods at $4.00 or less. These same prepared foods have always been subject to the 5% GST, but will be subject to the 13% HST following implementation.
Businesses will need to adapt their accounting and computer systems to cope with the restricted recoverability of the provincial component of the HST for these inputs. These restrictions are supposed to apply for five years, with a three year phase-in of credit relief thereafter. The phase-in means that accounting and computer systems will have to adapt to these changes as well.
Ontario has publicly committed to releasing its draft legislation to wind down its provincial sales tax regime in the fall of 2009. British Columbia has made no similar announcement yet. The federal government has committed to releasing its legislation implementing the HST by March 2010.
The most common compliance issue for businesses operating in more than one province will be determining the correct province of supply. The difference in HST rates of 12% in British Columbia, 13% in Ontario, New Brunswick, Nova Scotia and Newfoundland, the 5% GST rate in the rest of Canada, as well as the 7.5% Quebec Sales Tax rate in Quebec, will make these determinations very relevant.
Ontario and British Columbia have announced a limited range of point-of-sale relief for the provincial component of the HST for books, children's clothing and car seats, diapers, and feminine hygiene products. British Columbia will also provide point-of-sale relief for gasoline and diesel fuel for motor vehicles.
It is likely that British Columbia and Ontario will agree to begin paying the HST following harmonization. Neither Province currently pays GST as they are not required to do so under the Canadian Constitution. However, the existing HST provinces agreed to begin paying the HST following their harmonization, and Ontario and British Columbia are expected to do the same. The Provinces would recover the HST through a rebate mechanism that is yet to be determined. Accordingly, HST should be considered in contracting with the British Columbia and Ontario governments or when preparing and submitting bids for new contracts.
The Ontario Budget contemplates a one-time transition credit of up to $1,000 for businesses with less than $2 million in annual revenues from GST/HST taxable sales. British Columbia has not yet announced a similar credit.