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April 16, 2024

Tax Perspectives

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Please note that these publications may not be up-to-date as taxation matters are subject to frequent changes.

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Spring 2010
Volume 10, Number 1

The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting and TSG member firms cannot assume any liability for persons who act on the basis of information contained herein without professional advice.

GST + PST = HST: A Tale of Two Provinces

By Barry Hull, BPE
Hull & Daye Company (Edmonton)

By Michael Cadesky, FCA, TEP
Cadesky and Associates LLP (Toronto)

On July 1, 2010, in a move thatis already proving unpopular with voters, Ontario and British Columbia will harmonize their provincial sales taxes (PST) with the federal goods and services tax (GST). This will be done by scrapping the existing retail sales tax system and increasing the rate of GST to cover the provincial component. The harmonized sales tax, or HST, will apply at 12% in British Columbia and 13% in Ontario.

Fundamental Change

The impact of this change can be understood in broad terms by considering that the provincial sales tax is applied to goods, and not generally to services. The HST will, however, apply to both goods and services. This means that services previously subject to only the GST at 5% will now become taxable at 12% or 13%. Consumers will notice this in everything from haircuts to dry cleaning, appliance repairs to health club memberships, plane tickets to theatre tickets — even the golf course will not be spared. In Ontario, professional fees for lawyers and accountants will increase by 8% (British Columbia already levies sales tax on such fees).

What the consumer will not see directly is the impact on businesses. This will be more subtle. For certain businesses, costs will increase while, for others, they will decrease. To understand this, one first has to appreciate how the existing GST system works.

Types of Businesses

Under the GST system, businesses with annual revenue of more than $30,000 (excluding exempt supplies) must register.

Supplies (sales of goods and services) are categorized as taxable, exempt, or zero-rated.

For a taxable supply (the default category), GST must be charged on sales, but can be recovered on expenditures. Accordingly, an increase in the tax rate should not have a significant effect on such a business, except in terms of cash flow. While many things will cost more, because of the increased sales tax on purchases, the business can recover those costs. If the business paid significant amounts of retail sales tax prior to the transition, this may actually result in an advantage, in that this tax, paid as HST, will now be recoverable. It is speculated that prices in some sectors might actually decrease, because costs to these businesses decrease through recovery of the sales tax. Whether this actually happens remains to be seen.

For a zero-rated supply, the business can claim a refund of any GST or HST paid, but need not charge the tax on sales. These zero-rated supplies include the sale of basic food items and export sales. Accordingly, the grocery store, for example, should be relatively unaffected by the new HST, as will its customers.

The last category, the tax-exempt supply, will potentially be the hardest hit by the change to HST. A business providing exempt supplies does not charge sales tax on its sales, but also cannot claim back any sales tax paid.

As a result, an increase in the general rate of sales tax directly affects this type of business and increases its costs.

Formerly, common activities, such as medical services, financial services and renting of residential properties were tax exempt. These businesses will now see their costs increase significantly.

A series of activities are defined to be tax exempt. The most common ones include medical services, financial services and renting of residential properties. These businesses will see their costs increase, in some cases significantly, without the ability to recover the additional tax paid.

An example would be one's local doctor or dentist. The rent paid for the office and fees to nurses or dental hygienists (working as self-employed persons and not employees) would attract GST at 5%. After the transition, HST will be charged at 12% or 13%, with no ability to recover this.

Preparing for the Transition

Consumers don't have to do much to prepare for the transition to HST in Ontario and British Columbia. The main impact will apply in the area of services and, at this stage, prepaying for services will not excuse payment of HST if the services are performed after June 30.

For businesses, it will be important to determine how the change in the sales tax system will affect the costs and selling prices of the business. Also, it will be important to take into account certain transitional issues. Most important, businesses must "get it right." Each business must understand how and when to charge GST or HST, and at what rate.

A business providing tax exempt supplies (medical, financial services, residential rental) may find it possible to restructure certain activities to minimize HST. As an example, if the dental hygienist were an employee and not self-employed, the dentist would not be charged any HST on this expense.

Special rules are provided for larger businesses with more than $10,000,000 in sales on a combined (associated company) basis. These rules, unfortunately, restrict claiming back the provincial portion of HST for vehicles, energy costs and certain other items. Retailers must be aware of certain exemptions from the higher rate of tax for such things as books and children's clothing. Special transition rules are provided for the real estate industry, which require careful and detailed study.

All in all, while the transition should go reasonably smoothly for those who are well prepared, there will be still be unanswered questions and anomalies for some time to come.

To assist businesses with the transition, we have made available a special part of the TSG website, where we have compiled extensive notes and resources, which are publicly available from the Federal, Ontario and British Columbia Governments. This may be accessed directly on the TSG website at www.taxspecialistgroup.ca under the heading "HST Transition."