Harmonized Sales Tax

 

Introduction

The Ontario Government is in the process of abandoning its retail sales tax and replacing it with a value added tax. This change was initially laid out in Ontario’s 2009 Budget, effective July 1, 2010 and since then details have been gradually released on the proposed rules including transitional rules, implementation dates, administration and filing obligations.

The basic concept will be that Ontario will combine its current 8% Retail Sales Tax with the federal 5% GST tax to create a single 13% value-added sales tax, that they are calling the “Harmonized Sales Tax” or “HST”. This page summarizes the general implications of this new tax. Should you required any additional information on the impact of this tax on specific industries and/or practical tips to ensure that the transition to the new system is impacting you in the most tax efficient way possible, please do not hesitate to contact us.

Sales Tax Harmonization

General

On July 1, 2010 Ontario will introduce the HST. This tax will be combined with the federal Goods and Services Tax (“GST”) to create a federally administered single sales tax. The HST will replace the existing Ontario Retail Sales Tax (“RST”). The HST will have a 13% rate, representing a 5% federal portion and an 8% Ontario portion (the same rate as the current RST). The HST will be largely consistent with the GST. It will tax a wide range of goods and services but will not be charged on items such as basic groceries, prescription drugs and medical devices. To provide targeted tax relief while maintaining a single administration of sales tax in Ontario, sales would be non-taxable for the provincial portion of the tax on: books, children’s clothing and footwear; children’s car seats and car booster seats; diapers; and feminine hygiene products.

HST Application

The HST would generally apply to the supply of goods – by way of sale – if the goods are delivered and ownership of the goods is transferred after June 30, 2010. This is the case even when a purchase agreement is entered into before July 1, 2010.

The HST would generally apply to the supply of a service that is performed after June 30, 2010.

Please see the Transitional Rules section for detail on cases where the sale of goods or services straddles July 1, 2010.

Transitional Rules

Key Dates

 

• October 14, 2009 – Self-assessment rules can apply – in limited circumstances – after this date. This is discussed further in the ‘Special Rules’ section.

• May 1, 2010 – HST would generally apply to consideration that becomes due, or is paid, on or after this date for property purchased and services provided after June 30, 2010.

• July 1, 2010 – implementation date for the HST.

• October 31, 2010 – The date on which any outstanding RST would become payable under the transitional rules.

 

General Rules

Goods

The HST would generally apply when delivery and ownership of the goods are transferred to the recipient after June 30, 2010 and the related payment is due or paid on or after May 1, 2010.

Services

The HST would generally apply if the service is performed after June 30, 2010 and the related payment is due or paid after April 30, 2010. If performance straddles July 1, 2010, and payment is due or paid after April 30, 2010, pro-ration must occur. The portion of the services that occur before July 1, 2010 will include GST and RST (if they would normally apply) and the portion of the services that are performed after June 30, 2010 will include HST. Note that if 90% or more of the service is performed before July 1, 2010, the HST will generally not apply. Services include general services, supply of a memberships (but not a lifetime membership), and admissions (to a place of amusement, a seminar, an event, or an activity).

 

Example: In May 2010 payment is made for seasonal yard maintenance service and 50% of the service will be performed after June 2010. The HST would apply to 50% of the payment. The supplier would account for the Ontario portion of the HST in the HST reporting period that includes July 1, 2010.

The above general rules are summarized in the table below.

Table 1: When the HST applies
 

	Goods delivered/ownership transferred after…		Services performed…(1)
Payment due or paid…	…before July 1, 2010	…after June 30, 2010	…before July 1, 2010	…before and after July 1, 2010	…after June 30, 2010
… before May 1, 2010	No	No	No	No	No
… May 1, 2010 to June 30, 2010	No	Yes	No	Yes (1)	Yes
… after June 30, 2010	No	Yes	No	Yes (1)	Yes

(1) The HST will apply to the portion of the services performed after June 30, 2010, provided no more than 90% of the services were performed before this date. Invoices must be pro-rated. GST and RST will be charged for the portion before July 1, 2010, and HST for the portion on or after that date.

Specific Rules

Subscriptions

The HST would generally not apply to consideration that is paid before July 2010 for a subscription to a newspaper, magazine, or other periodical publication regardless of when delivery of the publication occurs.

 

Example: In June 2010, payment is made for an annual magazine subscription. Editions will be delivered each month for 12 months starting in July 2010. The HST would not apply.

Leases and Licenses

The HST would generally apply to a supply of property by way of lease, licence, or similar arrangement for the part of a lease interval that occurs after June 30, 2010. This applies if the related payment is made after April 30, 2010. The HST would not, however, apply to a lease, licence, or similar arrangement if the lease interval begins before July 2010 and ends before July 31, 2010.

 

Example: A car lease payment is made for the lease interval from June 28, 2010 to July 28, 2010. The HST would not apply to the payment.

Freight Transportation Services

Notwithstanding the general transitional rules for supplies of services, the HST would not apply to consideration for the part of a freight transportation service that is performed after June 30, 2010 if the service is part of a continuous freight movement of goods that begins before July 2010.

Intangible Personal Property

Intangible personal property includes intellectual property and contractual rights. The HST would generally apply to the sale of intangible personal property when consideration becomes due or is paid after June 30, 2010.

Real Property

The HST would generally apply to a supply of real property (other than residential housing) by way of sale in Ontario if both ownership and possession of the property are transferred to the purchaser after June 30, 2010.

There are specific rules dealing with the sale of new housing and rebates that are available to consumers and landlords. We will address these in a separate bulletin and if you would like a copy, please contact your Millards advisor.

Continuous Supplies

Continuous supply refers to a supply of property or services on a continuous basis by means of wire, pipeline, or similar conduit or satellite or other telecommunications facility (ie: natural gas, electricity, cable/satellite television or cellular telephone services). The HST would generally apply to consideration for continuous supplies if the property or services are delivered, performed, or made available to the recipient of the supply after June 30, 2010. If the supplier cannot reasonably determine when the property or services are delivered, performed, or made available, the consideration for the supply would be prorated in equal parts according to the number of days in the period to which the consideration is attributable.

Combined Supplies

If any combination of property and/or services is supplied together and one item is supplied before July 2010 and the other is supplied after June 2010, they will be deemed to have been supplied separately. Consequently, the item supplied before July 2010 would not be subject to the HST while the item supplied after June 2010 would be subject to the HST.

 

Example: In May 2010, a contractor supplies and installs a dishwater at a restaurant for a single consideration. The dishwater is delivered and possession transferred in June 2010 while it is not installed until July 2010. The HST would apply to the installation but not to the sale of the dishwasher.

Self-Assessed HST

There are special circumstances in which the Ontario portion of the HST must be self-assessed. The circumstances will only apply if payment becomes due or is paid after October 14, 2009 and before May 2010 and relates to a post June 30, 2010 purchase. The circumstances include the following and apply to non-consumers only (ie: businesses and public service bodies):

• Acquisition of property, service, or lease/licence that would be subject to an input tax credit restriction or recapture. Examples of restrictions and recapture include:

  • Property: Electricity subject to the input tax credit restriction for large businesses (discussed further below)

  • Services: Entertainment expenses subject to the 50% input tax credit recapture rules in the Excise Tax Act

  • Leases: Leased passenger vehicles where the monthly lease payment exceeds $800

• Acquisitions of property and services by entities not engaged in “commercial activities” as defined in the Excise Tax Act. This would include medical professionals, insurance companies, insurance brokers, public service bodies, charities and other entities that generally do not collect GST or claim GST input tax credits.

• Use of the simplified procedures available under the Excise Tax Act for calculating net tax

The self-assessed tax must be accounted for either (i) in the HST return for the period including July 1, 2010, if the due date for the return is before November 2010, or (ii) in any other case, in prescribed form and before November 2010.

Businesses that are carrying on commercial activities have no obligation to self assess during this period, unless the purchases are subject to the input tax credit restrictions discussed above.

Temporarily Restricted Input Tax Credits

Restricted ITCs will be imposed on financial institutions and on large businesses with annual taxable sales in excess of $10 million. The restriction will apply only to the provincial portion of the HST and will be in place for the first 5 years and will then be phased out over the following 3 years. Purchases subject to the ITC restriction include:

• Energy (ie electricity, gas, steam, combustibles), except where purchased by farms, used in self propulsion engines purchased for resale or used to produce goods for sale

• Telecommunication services except internet access, web hosting and toll free numbers

• Road vehicles weighing less than 3,000 kilograms including certain parts and services

• Fuel costs for road vehicles weighing less than 3,000 kilograms, and

• Meals and entertainment expenses that are only 50% deductible under the Income Tax Act.

 

Compliance

Registration

Provided that your business is already registered for the GST (has a GST number), there is no need to apply for an HST number. Your business’ current GST number will simply become the HST number as of July 1, 2010.

Filings

Filing deadlines and filing frequency will remain the same as for the GST.

Effective July 1, 2010, registrants will be required to file their returns electronically if any of the following conditions are true:

• Registrant has annual taxable supplies (on an associated basis) exceed $1.5 million

• Registrant’s input tax credits are temporarily restricted due to ‘large business’ classification (outlined above)

• Registrant is a builder affected by the transitional housing measures announced by Ontario

 

Payments

Payment deadlines and instalment rules will remain the same as for the GST.

Cancelling/Winding Down the RST

There is no need to cancel your business’ RST number.

Final RST returns are generally required to be filed with the Ministry of Revenue on or before July 23, 2010. If an RST amount is collected or becomes payable after June 2010, the vendor is required to account for that amount in a supplemental RST return to be filed on or before the 23rd day of the following month. All supplemental returns are required to be filed by November 23, 2010.

Refunds and rebates of RST would remain in place until the existing time limits for claiming them have expired, or June 30, 2014, whichever is earlier. An exception is provided for refunds of returned goods.

Returns and Exchanges

If a return is made between July 1, 2010 and October 31, 2010, and the returned property was purchased before July 2010 and subject to RST, the following rules generally apply:

• If a full refund is given, the RST would be refunded

• If an exchange is made and neither a refund nor an additional payment results, no RST would be refunded

• If an exchange is made that results in a partial refund, the Ontario portion of the HST would generally not be payable on the replacement property and the purchaser would be entitled to recover the RST applicable to the amount refunded

• If an exchange is made resulting in an additional payment, no RST would apply but the HST would apply to the additional payment

If the RST did not apply to the original purchase (before July 2010) and it is exchanged after July 1, 2010, the Ontario portion of the HST would apply to the full value of the replacement property.

 

Example: In June 2010, a person purchases an RST-exempt bicycle for $500. In July 2010, that person exchanges the bicycle for another bicycle that costs $600. At the time of exchange the vendor would collect the Ontario portion of the HST on the full value ($600) of the new bike.

If property is returned after October 31, 2010, no RST adjustment is available at the point of refund. However, the purchaser may apply to the Ministry of Revenue for a refund of RST for tax paid in error.

Point of Sale Exemptions

Point of sale exemptions will provide targeted relief for consumers on the provincial portion of the HST. Exemptions will provide relief on:

• Books,

• Children’s clothing,

• Children’s footwear,

• Children’s car seats and car booster seats,

• Diapers,

• Feminine hygiene products,

• Print newspapers, and

• Qualifying prepared food and beverages (non-alcoholic) that are ready for immediate consumption and are sold for a total price (excluding HST) of not more than $4.00

More specific information can be found at:
www.news.ontario.ca/rev/en/2009/11/more-point-of-sale-exemptions-for-ontario-hst.html

Imported Goods and Taxable Supplies

Imports by Ontario Residents

The Ontario portion of the HST would generally apply to goods that are imported by a resident of Ontario after June 30, 2010. Importations include goods brought from other countries and from other provinces. Goods and services imported by GST registrants who will be using the goods or services exclusively in a commercial business will not be subject to the HST. These would include inventory, supply and capital asset purchases. In addition, to the extent that the goods would be exempt from the HST if purchased in Ontario (for example, medical equipment) they would not be subject to HST on importation.

Imports by Non-Resident Suppliers

Goods and services

Vendors must collect the Ontario portion of the HST on supplies of goods delivered or transferred or services provided after June 30, 2010, to a resident of Ontario.

Intangible Personal Property

Vendors must collect the Ontario portion of the HST on an imported taxable supply of intangible personal property (made by way of lease, licence or similar arrangement) that is for a lease interval occurring after June 30, 2010, to a resident of Ontario who acquires the service for consumption, use or supply primarily in the participating provinces.

In all cases, persons liable to pay the Ontario component of the HST in the outlined circumstances are required to self-assess the tax in cases where the supplier did not charge it.

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This page is a general summary of the new Ontario HST rules and how they may impact you and your business. If you wish to find out how your industry will be affected or have specific questions, please contact us at your convenience.