Input Tax Credits

Most businesses that are currently claiming input tax credits of the 5% percent GST will generally be eligible to claim an input tax credit of the 13% HST on supplies provided on or after July 1, 2010.   There will be a temporary restriction on certain input tax credits (ITC) for large businesses (annual taxable sales in excess of $10 million).  These large businesses will not be able to claim the provincial component of HST on certain expenses.  System changes may be required for these businesses.

General Rules

Suppliers will begin charging HST on supplies of goods and services made in Ontario on or after July 1, 2010.  However, there may be situations where suppliers have to charge HST on supplies made in Ontario where the consideration for the supplies become due, or is paid without having become due, on or after May 1, 2010 and before July 2010 and some or all of the property or services are provided on or after July 1, 2010.  (See Transitional Rules for further details).

The HST would not apply, however, to a supply of a service if all or substantially all (90 per cent or more) of the service is performed before July 2010. 

HST will apply to a supply of property by way of lease, license or similar arrangement for the part of a lease interval that occurs on or after July 1, 2010.  However, only GST would apply to the supply of property by way of lease, license or similar arrangement if the lease interval begins before July 2010 and ends before July 31, 2010.

Transitional Rules

Transitional rules are required to determine which tax - the existing RST or the Ontario component of the HST - would apply to transactions that straddle the July 1, 2010 implementation date for the HST.

The transitional rules would operate on the basis of the following key dates:

• § July 1, 2010 - Implementation date of the HST in Ontario.
• § May 1, 2010 - HST would generally apply to consideration that becomes due, or is paid without having become due, on or after this date for property and services provided on or after July 1, 2010.
• § October 14, 2009 - The HST would not apply to consideration that becomes due, or is paid without having become due, on or before October 14, 2009.
• § October 31, 2010 - The date on which any outstanding RST would become payable under the transitional rules to facilitate the efficient wind-down of the RST.

Some examples of the transitional rules are as follows:

Example 1 - In June 2010, a person pays for a sailboat, but the sailboat will not be delivered, and ownership will not be transferred, to the person until August 2010. 

The HST would apply to the sale and the supplier would account for the Ontario component of the HST in the GST/HST reporting period of the supplies that includes July 1, 2010.

Example 2 - My accountant provides accounting services from June to August, and issues an invoice for the services in September 2010.  One third of the service is performed in each of the months of June, July and August. 

GST would apply to the services provided in June and HST would apply to the consideration for the services performed in July and August.

Certain businesses and public service bodies may be required to self-assess the Ontario component of the HST on consideration that becomes due, or is paid without having become due, after October 14, 2009 and before May 2010 for a supply of goods or a supply of a service to the extent that the consideration is for property or service provided on or after July 1, 2010.   The requirement to self-assess would generally apply to non-consumers (businesses and public service bodies) acquiring the goods and services for consumption, use or supply otherwise than exclusively in the course of their commercial activities. 

Special transitional rules are provided for subscriptions, passenger transportation services, freight transportation service, prepaid funeral and cemetery services, memberships and admissions.

Small Supplier Threshold

To reduce the administrative burden for small businesses, Ontario will parallel the federal small supplier threshold.  Businesses with sales under the threshold (those with total taxable sales of $30,000 or less in the last year or $50,000 or less in the case of a public service body) will not be required to register and collect the single sales tax.

Small Business Transition Credit

Most businesses will have to make some changes to their point-of-sale and accounting systems in order to collect the single sales tax.  To support small business, Ontario will provide a one-time transition assistance to small business in the form of a transition credit.  Most businesses with less than $2 million in annual revenue from taxable sales would be eligible for the Small Business Transition Credit.  The credit will be based on taxable sales in the first full quarter commencing after June 30, 2010, as follows:

• businesses with taxable revenues of $15,000 or less will receive a $300 credit;
• businesses with taxable revenues between $15,000 and $50,000 will receive a credit of 2% of taxable revenue; and
• businesses with taxable revenues between $50,000 and $500,000 will receive a credit of $1,000.

Administration

Currently under Ontario's RST administration, the province compensates vendors for collecting and remitting the tax.  Vendor compensation will continue to apply for RST returns filed up to and including those filed for the period ending March 31, 2010 under the existing RST system.

Invoicing Requirements

The HST rate is to be shown as a single total at 13 percent.  The federal and provincial components of the HST should not be shown separately.  During the transition period, you may need to show both taxes.

New Reporting Requirements

Mandatory electronic filing requirements will become effective to all reporting periods ending on or after July 1, 2010 if any of the following apply:

• Registrants (except charities) with greater than $1.5 million in annual taxable supplies (including associates);
• Registrants required to recapture ITC; and
• Builders affected by the HST transitional housing measures

Returns and Exchanges

Where goods are purchased before July 2010 and returned on or after July 1, 2010 and before November 2010, the RST would be refunded if the property is returned and a full refund is given.  If an exchange is made resulting in neither a refund nor an additional payment, there would be no RST refund and the Ontario component of the HST would not be payable. 

Planning Considerations

While it may be advantageous for consumers and charities to purchase certain goods or services prior to July 2010 for savings of the Ontario component of HST, businesses may want to consider delaying the  purchase of goods and services that are subject to PST until after July 1, 2010 to take advantage of eligible ITC's.

As the 8% provincial component of the HST may be recoverable, overall operating costs will be lower.  Some consumers will be expecting to see cost adjustments to lower their costs.  You should consider the impact of HST on your pricing competitiveness.

For those non-consumers not entitled to ITC's, the HST may affect the cash flow due to HST that will be paid on purchases that are currently exempt of provincial tax (i.e. commercial rent, utilities, consulting and professional fees).

How to Prepare for Implementation

• Amend automated system-generated entries (monthly rent charges or management fees) to reflect the HST amount.
• Amend software and tax codes used for invoicing customers to accommodate the various tax rates (0%, 5%, 12% and 13%).
• Ensure that systems are in place if you are required to collect or pay HST before July 1, 2010 and that the Ontario component of the HST collected or paid is reported in the GST/HST that includes July 1, 2010. (Example 1).
• Ensure your accounting system is able to account for both GST and HST on the same invoice if necessary (Example 2).
• If you are part of a charity or a qualifying non-profit organization, you need a system to calculate your rebate based on the prescribed rates for the federal and provincial portions of the HST.

New Place-of-Supply Rules

On February 25, 2010, the Department of Finance announced proposed changes to the HST place of supply rules.  Many of the current HST place-of-supply rules for property and services rely on the location of the supplier to determine whether a sale is subject to the provincial component of the HST.  It is proposed that the HST place of supply rules for intangible personal property and services be changed so that there is less reliance on the supplier's location and greater reliance on where the consumer is located.  The proposed changes to the place-of-supply rules would generally apply to taxable supplies made in Canada on or after May 1, 2010.

Please contact our office if you need assistance in interpreting these new rules.

Additional information available at:

Ontario Ministry of Revenue

www.ontario.ca/taxexchange

Ontario Budget hotline 1-800-337-7222

Canada Revenue Agency

www.cra.gc.ca/harmonization

CRA information line 1-800-959-8287