On July 1, 2010, Ontario will join Newfoundland and Labrador, Nova Scotia and New Brunswick in implementing the harmonized sales tax (“HST”). Whether you support the idea of HST or not, all organizations operating in Ontario must prepare for the sales tax reform or risk costly errors in the future.
Ontario’s Retail Sales Tax (“RST”) will be replaced by a single, value added sales tax and combined with the federal Goods and Services Tax (“GST”), resulting in the HST. For many not for profit organizations (“NPOs”) and charities, harmonization will introduce significant changes, the highlights of which are discussed below.
Not for profits and charities generally qualify as “public service bodies” (“PSBs”) for the purposes of the HST. As such, they will be covered by the HST rules pertaining to PSBs effective July 1, 2010, as well as by the transitional rules as they apply to PSBs for the period from October 14, 2009 to July 1, 2010.
B. EXEMPT STATUS
The federal government, recognizing the special role that PSBs play in society, has exempted most PSB goods and services. As a result, NPOs and charities generally will not be required to charge HST on many of the goods and services they supply, but NPOs and charities will also not be eligible for input tax credits on purchases made to produce exempt goods and services.
Though NPOs and charities will not be eligible to claim input tax credits in respect of the HST imposed on the purchases they make in producing exempt goods and services, they will be entitled to a 50% rebate of the 5% federal portion of the HST and an 82% rebate of the 8% provincial portion of the HST. Any rebates of the RST that NPOs and charities are currently eligible for will no longer apply as of July 1, 2010.
D. QUALIFYING V. NONQUALIFYING NPOS
Qualifying NPOs are NPOs that (a) receive government funding representing at least 40% of their total revenue in a fiscal year and (b) are eligible for rebates of the HST they pay in the manner outlined above. Non qualifying NPOs (i.e. NPOs that are not Qualifying NPOs) will bear the full burden of the HST to the extent they cannot claim input tax credits or other rebates that may be available to them.
E. STREAMLINED METHODS OF ACCOUNTING
Certain accounting methods can be used to streamline how NPOs and charities can track the HST they collect from their customers, clients and members and the HST they pay for goods and services. NPOs will generally be eligible to use the “Special Quick Method of Accounting” and charities will generally be eligible to use the “Special Accounting Method for Charities”. Charities can elect not to use the “Special Accounting Method for Charities” in very limited circumstances.
HST may apply to the proportion of a membership fee that can be allocated to a period on or after July 1, 2010 even if the membership fee is invoiced or paid for before July 1, 2010. The rules respecting the application of the HST to membership fees charged by NPOs and charities are complex and advice should be sought from a professional in determining the tax status of such fees.