HST
On July 23, 2009, the BC Government announced its plans to harmonize the provincial sales tax ("PST") with the federal Goods and Services Tax ("GST") effective July 1, 2010. As a result, the BC Harmonized Sales Tax ("HST") rate will be 12% (7% provincial and 5% federal) effective July 1, 2010. On October 14, 2009, the BC government released the transitional rules in respect to the implementation of HST. The transitional rules provide a guideline on the transition to the HST system.
The change to an HST system may have a significant impact on you. We have highlighted some of the key considerations in moving from PST to HST, as well as some of the transitional issues surrounding the implementation date of July 1, 2010. We will be providing more information as it becomes available.
If you have any questions regarding HST, contact your Smythe Ratcliffe Tax Partner.
GST/HST Versus PST
Effect on Businesses
Effect on Consumers
Low Income Credit
New Housing Rebate
Rebates for Charities and Non-Profit Organizations
Transitional Rules
Prepayments on Goods or Services
Services
Leases
Real Property
Overall Comments
GST/HST versus PST
GST/HST is considered a "value-added" tax levied on the consumption of goods and services that is designed to be paid by the ultimate consumer or purchaser. Most businesses are entitled to input tax credits ("ITCs") on the GST/HST they pay on their purchase of goods and services. The amount of GST/HST remitted to the government is the difference between the amount collected from customers and the amount paid to vendors/suppliers.
On the other hand, PST does not have a similar ITC mechanism for businesses. While there are exemptions for certain types of businesses, for most businesses PST paid is non-refundable. PST is considered a "cascading" tax because it is ultimately passed on to the consumer in the form of higher prices, on which PST is again applied.
Subject to exemptions on certain items, GST/HST is generally charged on the purchase of all goods and services; while PST is charged on the purchase of goods. As a result of harmonization, any goods and services that were previously subject to the GST will now be subject to the HST. This will include services that were not previously subject to PST.
Effect on Businesses
The HST will be administered by the Canada Revenue Agency in the same way as it currently does for the GST. The reporting requirements for the HST will be identical to the current GST reporting requirements. This will simplify compliance as it eliminates the need for a separate PST return (and potential PST audit).
Businesses that are currently restricted from claiming ITCs on GST will also be restricted under the HST. This includes businesses involved in health and dental services, financial services and child-care services.
There will be certain restrictions on the ability to claim ITCs for financial institutions and large businesses (annual taxable sales in excess of $10 million).
It is also important to note that businesses will need to update their accounting systems to ensure they charge the correct amount of the applicable sales tax.
Effect on Consumers
Consumers will have to pay 12% HST on purchases starting July 1, 2010. Under an HST system, there will be a limited number of products exempt from the 7% provincial portion (i.e., sales tax rate will remain at 5%). These products are:
- Fuel for motor vehicles, trains, boats and aircraft (gasoline, ethanol, diesel, biodiesel, locomotive fuel, marine diesel, aviation fuel, and jet fuel)
- Books
- Children's-sized clothing and footwear
- Children's car seats and car booster seats
- Diapers
- Feminine hygiene products.
All items currently exempt from GST will also be exempt from HST (e.g., basic groceries, prescription drugs and residential rent).
Low-Income Credit
In addition to the quarterly GST credit, low-income families and individuals will receive a BC HST credit of up to $230 for individuals with income up to $20,000, and $230 per family member for families with incomes up to $25,000.
New Housing Rebate
PST is not currently charged on the purchase of new housing, whereas HST will be applicable. However, an HST rebate of 5% on the first $525,000 of the cost of a home, up to a maximum rebate of $26,250 will be available. The rebate will be available whether the new housing is to be owner occupied or rented. As is currently the case with GST, HST will not be applicable on used residential housing.
Rebates for Charities and Non-Profit Organizations
A rebate of the provincial portion of the HST is proposed for charities and qualifying not-for-profit organizations that are eligible for GST rebates. The rebates will be administered by the Canada Revenue Agency in a consistent manner with current GST rebate practices. No further details have been released by the government at this time.
Transitional Rules
Generally, HST will apply to the sale of taxable goods and services if the goods are delivered and ownership is transferred on or after July 1, 2010. A full analysis of the various transitional rules on the implementation of HST is beyond the scope of this article. However, we have outlined some key transitional rules below.
Prepayments on Goods or Services
The transitional rules for prepayments on goods where ownership will be transferred or services rendered on or after July 1, 2010 fall into three categories:
- Payment becoming due or made prior to October 14, 2009 – HST is not applicable;
- Payment becoming due or made between October 14, 2009 and May 1, 2010 – HST will not be charged by the vendor, but may be subject to self-assessment by certain businesses; and
- Payment becoming due or made on or after May 1, 2010 – HST is applicable.
The self-assessment requirement for prepayments made between October 14, 2009 and May 1, 2010 is applicable for businesses where the goods/services acquired are not used exclusively in its commercial activities or the goods are subject to a restriction on the ITCs. The business would be able to claim ITCs on the self-assessment if they are not subject to any restrictions.
Services
In most cases, when the performance of services straddles the July 1, 2010 transition date, HST will apply to the portion of the services performed on or after July 1, 2010. For example, for a 2-month service contract where 50% of the service is performed in June 2010 and 50% is performed in July 2010, HST will apply on the 50% relating to July. HST will not apply if the service is substantially all (90% or more) performed prior to July 1, 2010.
Leases
Similar to services, HST will be applicable to the time interval of the lease that relates to the period on or after July 1, 2010. For example, for a 6-month lease interval from May to October, HST will apply to the 4-month portion from July to October.
HST will not apply if the lease interval begins before July 1, 2010 and ends on or before July 31, 2010.
Real Property
HST will apply to taxable non-residential real property sales if both ownership and possession are transferred to the buyer on or after July 1, 2010.
HST will apply to progress payments to the extent that the work can be attributed to performance occurring on or after July 1, 2010. Any holdback payments will be attributed to the period for which the original progress payment was.
Overall Comments
The implementation of an HST system will have a significant impact on business and individuals. As many of the details have yet to be finalized by the government, we will be providing further details as they are released, and identifying opportunities and pitfalls with the new system. As a general rule of thumb, businesses eligible for ITCs should consider the timing of making significant purchases in light of the transition from PST to HST.
For more information contact your Smythe Ratcliffe Advisor.
Current as of December 22, 2009