March 2010
ONTARIO HST: AN EXECUTIVE SUMMARY
BACKGROUND
Effective July 1, 2010, Ontario and British Columbia will both replace their provincial retail sales taxes with the Harmonized Sales Tax (“HST”). The HST will be a single value added tax that will be comprised of the Federal goods and services tax (“GST”) and a provincial value added tax. The rates for the provincial component have been set by Ontario and British Columbia at 8% and 7%, respectively. Accordingly, the HST rate will be 13% in Ontario, identical to the HST rate in the harmonized provinces of Nova Scotia, New Brunswick, Newfoundland and Labrador. The HST rate in British Columbia will be 12%.
The HST will be administered by the Canada Revenue Agency. Existing GST registrants will automatically become HST registrants. Subject to certain exceptions in the case of large businesses, GST/HST registrants who provide taxable goods and/or services will generally be entitled to claim full input tax credits with respect to the HST paid on their expenditures.
LARGE BUSINESSES
Recaptured input tax credits
In both Ontario and British Columbia large businesses and all financial institutions will be required to repay or “recapture” the provincial value added tax component of the HST with respect to four types of expenditures incurred on or after July 1, 2010:
1. energy (electricity, gas, steam) except where used in farming or manufacturing
2. telecommunication services except internet access, website hosting and toll-free numbers
3. road vehicles under 3000kg plus parts and repairs
4. meals and entertainment subject to the 50% deductibility for income tax purposes
Large businesses are defined as those with annual taxable revenues over $10 million including the taxable revenues of associated businesses.
The rate of recapture of the provincial portion of HST for the first five years of the new tax regime will be 100% and then it will then decline by 25% on each anniversary date (July 1st) until the requirement to repay is totally eliminated on July 1, 2018.
Because of the requirement to recapture the provincial portion of the HST paid on the above-noted expenditures, large businesses will be required to report the total input tax credits being claimed and the total provincial input tax credits being recaptured separately in their GST/HST returns.
New electronic filing requirements
All GST/HST registrants with annual taxable revenues of over $1.5 million, including the taxable revenues of all associated businesses, will be required to file their GST/HST returns electronically for returns due after June 30, 2010.
PLACE OF SUPPLY RULES
Overview
Under the Excise Tax Act, the place of supply rules determine the province in which goods and services are considered to be rendered, and consequently the rate of tax to be charged. In the case of goods and services supplied to non-residents of Canada who are not GST/HST registrants, other rules define such supplies to be zero-rated exports.
Supplies of real property
A sale or lease of real property is regarded as being supplied in the province in which the real estate is located.
Supplies of tangible personal property
Tangible personal property is regarded as being supplied in the province in which the tangible property is delivered or made available. A lease of tangible personal property of 3 months or less is regarded as being made in the province in which possession of the leased property is first taken. In the case of a lease extending over 3 months, the supply is regarded as being made in the province in which the property is ordinarily located.
Supplies of intangible personal property
Under current place of supply rules, a supply of intangible personal property is regarded as being made in a province if:
1. 90% or more of the intangible property can only be used in the particular province, or
2. the place of negotiation is in the province and more than 10% of the intangible property is used in the particular province.
If neither of these rules apply a 50% fallback rule applies that regards the place of supply to be the province with the greatest proportion of usage, provided that more than 50% of usage of the intangible property is within harmonized provinces.
On February 25, 2010, the Federal government proposed changes to the place of supply rules for intangible personal property. Under the proposed new rules, the place of negotiation rule will be eliminated and the location of the customer/payer will principally be used to determine the place of supply.
Supplies of services
Under the current place of supply rules for services, a supply of a service will be regarded as having been made in a participating province if:
1. 90% or more of the Canadian element of the service is rendered in the province, or
2. the place of negotiation is in the province and more than 10% of the service is rendered in the particular province.
If neither of these rules apply, a 50% fallback rule applies that regards the place of supply to be the participating province providing the highest proportion of the Canadian element of the service, provided that more than 50% of the Canadian element of the service is rendered within participating provinces.
In the case of a service rendered in relation to real property, the above rules are modified by substituting the location of the real property for the location of the service.
Under proposed new rules announced by the Federal government on February 25, 2010, a service will be regarded as having been rendered in the province in which the customer or recipient has provided a business address, or where more than one address is given, the address most closely connected to the service. Where no Canadian address is provided, a service will be regarded as being made in the participating province providing the highest proportion of the service performed, provided that more than 50% of the service is rendered in participating provinces. In the event of a tie, the service will be regarded as having being made in the harmonized province with the highest HST rate.
In the case of services rendered in relation to real property, under the proposed new rules such services will be regarded as having been provided in the participating province with the highest portion of real property situated therein. In the case of a tie, the service will be considered to be rendered in the participating province with the highest HST rate.
Supplies of transportation, telecommunications and prescribed services
Supplies of transportation services, telecommunication services and certain prescribed services, such as those provided by trustees and custodians, are subject to specific place of supply rules for which no changes have been proposed.
WHEN TO CHARGE THE HST
Goods and services
For sales of goods made on or after July 1, 2010 for which there are no prepayments made before May 1, 2010, GST/HST registrants must charge the HST. In the case of leases, the HST will generally apply to the part of the lease intervals that occur on or after July 1, 2010 except if the leases expire in July 2010, in which case the July lease payments will be subject to GST.
For services rendered on or after July 1, 2010 for which there are no prepayments made before May 1, 2010, GST/HST registrants must charge the HST. However, where 90% or more of the service has been rendered before July 1, 2010, the remainder is also subject to GST.
Where goods and services are supplied on or after July 1, 2010 and prepayments have been made during the period May 1, 2010 to June 30, 2010, GST/HST registrants will be deemed to have made the supplies on July 1, 2010. In these circumstances, GST/HST registrants should initially charge GST on the prepayments and should render further bills in July 2010 for the additional percentage due on account of the provincial portion of the HST.
Real estate
HST must be charged on the sale of a commercial property where ownership and possession are transferred on or after July 1, 2010. In the case of a lease of commercial property, the HST must be charged for the lease interval that occurs on or after July 1, 2010.
For a newly constructed or substantially renovated residential property, GST/HST registrants must generally charge the HST where both ownership and possession are transferred after June 30, 2010. However, where the written purchase and sale agreement was entered into before June 18, 2009, the sale will be “grand-parented” and GST should be charged.
For further information please contact a member of the Shimmerman Penn taxation team at 416 964 7200 or via email:
© 2010 Shimmerman Penn LLP
The content of this bulletin is for general information purposes. Recipients and readers are advised that they should always seek professional advice in connection with their particular circumstances. Shimmerman Penn LLP and Shimmerman Penn Title & Associates Inc., their partners, shareholders and employees cannot accept responsibility for any loss incurred by an individual, company, entity or organization as a result of actions taken or not taken in relation to the content of this bulletin.
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