FBC – Canada's Small Business Tax Specialist

On July 1, 2010, provincial sales tax (PST) in Ontario and British Columbia (BC) will be harmonized with the federal GST, resulting in a single, federally administered 13% HST in Ontario (5% federal and 8% Ontario) and 12% HST in BC (5% federal and 7% BC). The HST would generally follow the same rules and structure as the GST.

The implications for farm operations are somewhat different than for other businesses, mainly because of the advantages they had over other businesses in respect to PST. Most farms are not required to be registered as a vendor for PST and do not have to pay PST on most farm inputs. The main concern for most farmers will be one of cash flow.

HST and Farm Inputs

• Farmers would continue to pay no tax on the majority of inputs purchased, such as livestock, feed, seed, fertilizer, pesticides and farm machinery and equipment, which are currently GST-zero-rated and PST-exempt at the point-of-sale.
• Farm inputs that are currently taxed with the non-recoverable PST, such as pick-up trucks, light vans, computers and office equipment, would be subject to HST and also be eligible for an offsetting input tax credit (ITC) on HST returns.
• Farm inputs that are exempt from the PST but not the GST, such as contract work, freight and trucking, veterinary fees, machinery lease and rental, hand tools and fuel, would be subject to the HST and also eligible for an ITC.

Under HST, registered farmers will experience a net decrease in the sales tax they pay. OMAFRA estimates that Ontario farmers will save about $30 million annually under the HST on items that are currently not PST-exempt – about $600 annually per farmer.

HST-registered farms in Ontario with annual taxable sales of less than $2 million will be eligible for a one-time Small Business Transitional Credit from $300 up to $1,000 to help allay costs associated with the transition to the HST.

Under transitional rules, HST will have to be collected on amounts that are paid or become payable on or after the pre-implementation date of May 1, 2010, for goods or services to be provided on or after July 1, 2010.

Also, Ontario farms will not be subject to the temporary restrictions on ITCs that will apply to the provincial portion of the HST on certain inputs used by “large businesses” (generally those with annual taxable sales in excess of $10 million). Except for energy used for farming, BC has not yet announced a similar exemption from the ITC restrictions for large BC farms.

Preparing for the HST

With less than half a year to implementation, now is the time to be thinking about how HST will impact your farming business. The following are things that you need to think about as the transition to the HST approaches:

Conversion of Systems – Record-keeping systems will require changes to accommodate the new HST to ensure all HST amounts that are entitled to be recovered are captured and that you charge the new rate on sales of taxable goods and services such as custom work or land rental. Invoices, sales receipts, purchase orders and expense reports will also likely require changes.

Budgeting for HST – The impact of the HST on budgets and cash-flow statements will need to be evaluated. Costs should be reduced with the ability to recover previously unrecoverable PST as ITCs. Cash flows will also be impacted as more tax will be collected and remitted on a broader range of goods and services sold, and paid on business inputs.

Small Suppliers – Farmers that are small suppliers (i.e. those with annual taxable sales under $30,000) and not registered for GST may want to consider the advantage of registering for HST to recover 12/13% ITCs on business inputs (v. 5%). Harmonization also means a loss of their PST point-of-sale rebate on farm inputs.

Interprovincial Issues – Farms that operate in both Ontario or BC and other provinces will need to ensure that their systems enable them to calculate the 5% GST or the 12/13% HST on supplies of taxable goods or services such as custom work, which will depend on where the supply is provided.

Transitional Rules – Farmers need to consider how the transitional rules will apply to goods/services purchased before July 1, 2010 and delivered after that date to ensure HST compliance and any refund opportunities are considered.

Contracts – Businesses should review the impact of HST on their existing supply contracts and in negotiating new contracts that straddle July 1, 2010.

Planning – Businesses should review planned expenditures as the implementation date approaches and determine whether these expenditures (including leases) are subject to PST that cannot be recovered. If possible, these expenditures should be incurred after June 2010 so that the 7/8% provincial component of the tax qualifies for an ITC (e.g. pick-up trucks).

Also, farm businesses that file GST returns on an annual basis should consider filing on a more frequent basis such as quarterly or monthly. Similarly, those filing on a quarterly basis may want to consider filing monthly. Most farms are in a net refund position for GST/HST purposes because they sell mainly zero-rated commodities. Filing HST on a more frequent basis will permit the earlier recovery of the HST paid on business inputs.

Note: If you have any questions about how the transition to HST will impact your farming operation, please give FBC a call at 1-800-265-1002.