In accordance with its election promise, the Conservative government announced yesterday that the GST rate will be reduced to 5 per cent from 6 per cent effective January 1, 2008. The rate reduction will also reduce the combined HST rate that applies in the three "harmonized" provinces (Nova Scotia, New Brunswick and Newfoundland) to 13 per cent from 14 per cent.
As indicated, the reduced GST rate will apply to supplies of property or services made on or after January 1, 2008. There are also a number of transitional rules for transactions that occur close to or that straddle the implementation date. The general rule is that for supplies of property or services other than real property, the reduced rate will apply to the extent that GST in respect of the transaction either becomes payable on or after January 1, 2008 without having been paid before that day or is paid on or after January 1, 2008 without having become payable. The point in time when GST becomes payable is generally determined on the basis of when an invoice is issued. Where payment for a supply is governed by a written agreement, the date that payments are due under the agreement determines when GST is due. In the case of imported goods, the lower 5 per cent rate will apply to goods that are either imported on or after January 1, 2008 or that are released from Customs’ control on or after January 1, 2008.
For conditional and instalment sales of goods, a special "override" rule provides that the GST on any outstanding payments becomes due by the end of the month after the month in which ownership or possession of the goods is transferred. Accordingly, for conditional and instalment sales entered into on or after December 1, 2007, the 5 per cent GST (or 13 per cent HST) rate will apply to amounts payable after December 31, 2007.
Deposits, whether refundable or not, are treated as a "nothing" for GST purposes until they are applied as consideration for a supply. As a result, GST will apply at the reduced rate where a deposit is applied to amounts owing after December 31, 2007.
Special transitional rules will apply for sales of real property. The reduced rate will apply to taxable sales of real property where both ownership and possession are transferred after January 1, 2008. Where a written agreement for the purchase of new housing was entered into on or before October 30, 2007, the old 6 per cent GST (or 14 per cent HST) rate will apply although the purchaser may be entitled to a 1 per cent transitional rebate if both ownership and possession of the property are transferred on or after January 1, 2008. Purchasers of residential property under agreements entered into after October 30, 2007 do not qualify for the transitional rebate.
Businesses will have to ensure that as of the January 1, 2008 implementation date, they are charging the correct GST rate. Businesses will also have to ensure that they determine the correct tax rate for transactions that straddle the implementation date. Given that the standard practice of the Canada Revenue Agency is to assess a supplier for any tax collectable, businesses should be careful to ensure that they apply the correct tax rate.
Consumers and businesses that are not fully engaged in commercial activities (such as financial institutions) will want to carefully understand the rate reduction implementation rules and consider delaying any significant purchases involving unrecoverable GST to the appropriate time (which could be before January 1, 2008). Note, however, that there will be an anti-avoidance rule that should be considered before varying any arrangements entered into at any time before January 1, 2008.
The government’s October 30, 2007 economic statement also proposes a number of corporate and personal income tax measures which are not commented upon in this alert.