Harmonized Sales Tax
March 1, 2010
By James Ward, Rosenswig McRae Thorpe, LLP
Although the Maritime provinces apart from Prince Edward Island have had the Harmonized Sales Tax (HST) for over a decade, the tax is being adopted in Ontario and British Columbia for the first time t...
Although the Maritime provinces apart from Prince Edward Island have had the Harmonized Sales Tax (HST) for over a decade, the tax is being adopted in Ontario and British Columbia for the first time this year.
In these two provinces the HST is set to take effect on July 1. It will combine the provincial sales tax (8% Ontario; 7% B.C.) and the federal Goods and Services Tax (GST) of 5%, into a single tax that will be federally administered.
With the exception of a limited number of rebates (on the provincial component), the HST will apply to all goods and services, including those items previously not taxable under the provincial sales tax (PST) regime such as child care, condominium fees, commercial rents, utilities and engineering services.
What will be the impact for engineering firms?
In terms of billing, firms will encounter a very minimal difference when adopting the HST system. The principal change will be that instead of charging the historical 5% GST; firms will need to charge the combined HST of 13% in Ontario, 12% in B.C.
Under the GST/PST system, engineering firms were exempt from charging PST and were only obligated to charge the 5% GST for their services. So with HST at the end of the day your engineering services will cost your clients 8% more in Ontario, 7% more in B.C.
Claiming Input Tax Credits
In order to have a minimal impact on consumers and businesses the government has decided to operate the HST system the same way that they operated the GST system. Specifically, as mentioned above, when an engineering firm receives payment for their invoice, the portion relating to HST is payable to the Government of Canada. To help businesses offset this, any HST paid by an engineering firm for goods and services such as supplies, capital expenses, and subcontractors, can be netted against the HST your firm owes to the government as a result of billing.
How to submit HST forms
HST forms will be mailed to you monthly, quarterly, or annually based on how often you file. On these forms, you will need to indicate your total sales for the period, the amount of HST that you receive from billings, and the amount of HST you paid for goods and services. You will either owe money or be owed a rebate depending on the net amount of HST you paid and received.
Good news for engineering firms
For businesses, the obvious advantage to this system is that the entire 13% HST can be claimed as a tax credit. Under the former system, the GST could be claimed as a credit, but the PST could not. So businesses were stuck paying PST on items where they were considered the end user (property, equipment, supplies) and were receiving no credit. Because all HST paid by businesses will be refundable, if all else is equal, an engineering firm potentially can see a cash flow increase of 4-8%.
To assist small firms (defined as associated companies with taxable sales of less than $2 million) the government will be providing firms in Ontario and B.C. with a credit of up to $1,000 as a means of subsidizing HST transition costs that are incurred. This subsidy will be administered by the federal government and considered on a company by company basis.
A few key dates
• May 1, 2010 -when amounts are prepaid or become payable for goods or services that will be provided or delivered after June 30, 2010, HST will need to be collected.
• July 1, 2010 -all transactions after this date will be subject to HST except for the specific rebate detailed below.
• For those services that straddle the July 1, 2010 implementation date, the HST will need to be prorated for work billed after the implementation date.
Although there has been some public outcry regarding the implementation of HST, it is actually quite beneficial for businesses. In our view, at the end of the day, it will make businesses more profitable, and make the adopting provinces more appealing to investment.
James Ward practises with Rosenswig McRae Thorpe LLP, a Torontobased accounting firm specializing in the professional services sector.
To assist small firms, the government will be providing a credit of up to $1,000 to subsidize the transition.