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.

Most small businesses will realize the following two main advantages from the introduction of the HST:

1) Recovery of PST – Unlike GST, businesses pay PST on many business inputs with no ability to recover the tax that becomes part of the costs of the business. Under the HST, input tax credits (ITCs) will be available to recover the provincial component of the tax, which will result in lower costs.

Many services and some goods not subject to PST will be subject to HST, such as commercial rents, utilities and accounting services. Despite this broader tax base, many small businesses should end up paying less tax on their purchases when HST takes effect with the ability to claim offsetting ITCs on most of their expenses and capital assets. On the other hand, those providing HST-exempt goods or services, such as health care professionals and residential landlords, may see their operating costs increase because more goods and services will be subject to HST than were subject to PST. Suppliers of HST-exempt goods or services cannot claim ITCs for HST paid on expenses.

2) Reduction of Paperwork – Businesses that had to file provincial sales tax returns will find their sales tax burden and compliance costs substantially reduced by HST, since they will not have to deal with two sales tax systems. Only one HST return will need to be filed.

Both provinces have announced point-of-sale rebates to provide targeted relief for consumers from the 7/8% provincial component of the HST on certain items such as books and children's clothing and footwear. HST-registered businesses 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. Specific rules are proposed for funeral cemetery services and passenger and freight transportation services.

“Large businesses” (generally those with annual taxable sales in excess of $10 million) will be subject to temporary restrictions on the recovery of ITCs that will apply to the provincial portion of the HST on certain inputs, as follows: energy (except for energy used for the production of goods for sale); telecommunication services other than internet access or toll-free numbers; road vehicles weighing less than 3,000 kg and related fuel, parts and certain services; and food, beverages and entertainment.

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 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. Invoices, sales receipts, purchase orders and expense reports will also likely require changes. Retailers will need to ensure that their systems can handle point-of-sale rebates for the provincial component of exempt items.

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 – Businesses 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%).

Interprovincial Issues – Businesses 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, which will depend on where the supply is provided.

Transitional Rules – Business should 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, light vans).

Also, small businesses that file GST returns on a quarterly or annual basis should consider filing on a monthly basis if a significant number of their supplies are zero-rated. Filing HST on a more frequent basis will permit the earlier recovery of the HST paid on business inputs. This would include businesses such as exporters or grocery stores.