TAX NEWS - JUNE 2010
Canada Tax: New Harmonized Sales Tax (HST) Regime in Ontario - Details and Planning Tips
I — Harmonized Sales Tax (HST) Basics
Ontario's move to the Harmonized Sales Tax (HST) makes it the fifth province to subject itself to the harmonized sales tax (HST) regime. Three Atlantic provinces (Nova Scotia, New Brunswick, and Newfoundland and Labrador) currently impose the harmonized sales tax (HST) on taxable supplies made in the provinces. British Columbia is set to join these three provinces and Ontario in imposing the HST from July 1, 2010. Ontario will be a "participating province," as defined in the ETA, from July 1, 2010.
The Harmonized Sales Tax (HST) is effectively the goods and services tax (GST) applied at a higher rate (13% in Ontario's case). In other words, the Harmonized Sales Tax (HST) is applied under the ETA, like the goods and services tax (GST), and to the same tax base, except that specific issues that come into focus in the context of supplies into and out of a province are factored in.
II — Residential Real Property
The Government of Ontario has also proposed transitional harmonized sales tax (HST) rules for residential real property in order to help homebuyers and builders transition to the new tax system. The proposed transitional rules, to be administered by the Canada Revenue Agency ("CRA"), will be similar to the rules applied when the GST was first introduced. The new harmonized sales tax (HST) regime will subject builders' sales of newly constructed or substantially renovated homes to the harmonized sales tax (HST) where both ownership and possession of the home are transferred after June 2010 (i.e., beginning July 1, 2010). Builders of newly constructed or substantially renovated single homes or residential condominiums who rent out such new homes or condominiums and are required to pay goods and services tax (GST) on self-supply after June 2010 will also be required to pay the provincial portion of the HST on self-supply.
1. Grandparenting
Sales of newly constructed or substantially renovated homes under written agreements of purchase and sale entered into on or before June 18, 2009, will be grandparented such that these sales will not be subject to the provincial portion of the harmonized sales tax (HST) even where both ownership and possession of the homes are transferred after June 2010. Purchases of newly constructed or substantially renovated single homes and condominium units for residential rental will be grandparented if the agreement of purchase and sale was entered into on or before June 18, 2009. However, newly constructed or substantially renovated homes built by owners for their personal use, and mobile and modular homes will not be grandparented.
2. Transitional Tax Adjustment
In order to prevent builders of grandparented homes from delaying construction until the commencement of the harmonized sales tax regime, Ontario has instituted the transitional tax adjustment, a tax on builders of grandparented homes and condominiums. Builders of grandparented newly constructed or substantially renovated single detached, semi-detached and attached homes will be required to pay a transitional tax adjustment where the home is completed in full or in part after June 2010. The tax, applicable at a maximum rate of 2%, will be calculated on the total purchase price of the home, as established for goods and services tax (GST) purposes, based on the extent of construction or substantial renovation completed as of July 1, 2010.
A table established for this purpose determines the percentage of tax payable depending on the degree of completion. The table is as follows:
Completion Schedule on July 1, 2010 Applicable Tax
< 10% 100% of TTAR (2%)
At least 10% but < 25% 75% of TTAR
At least 25% but < 50% 50% of TTAR
At least 50% but < 75% 25% of TTAR
At least 75% but < 90% 10% of TTAR
At least 90% 0% of TTAR
As may be evident from the table, a 45% completed home will attract a transitional tax adjustment of 50% of 2%. Therefore, if a home that is priced at $500,000 is grandparented and is 45% complete on July 1, 2010, the tax payable is $500,000 X 2% X 50% = $5,000. Builders of condominiums, however, will not be subject to a completion schedule and will be required to pay the full 2% tax based on the purchase price of a condominium.
The method used by a builder to determine the percentage of completion of a home must be fair and reasonable. The determination may be based on progress billings made prior to July 1, 2010, and the transitional tax adjustment must be accounted for in a builder's net tax calculation for a reporting period. In determining the percentage of completion of a home, the cost of land and the costs associated with the acquisition and maintenance of land, including servicing costs, legal and accounting fees, real estate taxes and financing charges, may not be included.
3. Retail Sales Tax (RST) Transitional Housing Rebate
Ontario is also proposing to provide a rebate to builders (and in some circumstances, purchasers of homes) to return the embedded retail sales tax (RST) on the cost of inputs. The principle behind this rebate is that supplies used in the construction of a home are priced to include the retail sales tax (RST) paid by various persons in the production process since the retail sales tax (RST) cannot be extracted through an input tax credit and, therefore, with the commencement of the HST, builders (and purchasers in select circumstances) should be able to recover the "sunk" retail sales tax (RST) in the cost of inputs used in the construction of the home.
This rebate will be available for non-grandparented single homes, condominiums and traditional apartment buildings, as well as grandparented condominiums for which the transitional tax adjustment would be payable. For newly constructed or substantially renovated single detached homes, semi-detached homes, attached homes or duplexes, the retail sales tax (RST) transitional housing rebate will be available to individuals purchasing the home or to builders who first rent the home after June 2010. The rebate is only available where the harmonized sales tax (HST) will apply and not to grandparented homes. But for newly constructed or substantially renovated homes that are resident condominiums or traditional apartment buildings, the transitional rebate will be available to the builder rather than the purchaser. For these new condominiums, the transitional tax adjustments or the harmonized sales tax (HST) will apply, as applicable, i.e., condominiums may be grandparented and still be eligible for the rebate. Newly constructed or substantially renovated homes built by owners for their personal use, and mobile and modular homes, will not be eligible for the RST transitional housing rebate.
The RST transitional housing rebate will be calculated as a proportion of the estimated embedded RST in the home, based on the degree of completion as of July 1, 2010. Eligible applicants will be permitted to calculate the estimated embedded RST by choosing one of the following two methods:
(1) Estimated embedded retail sales tax (RST) calculated at a prescribed amount per square metre of floor space in the home (the prescribed amount has not been announced yet); or
(2) Estimated embedded retail sales tax (RST) based on the selling price of the home, calculated at 2% of the total price established for Goods and services tax purposes.
The embedded retail sales tax (RST) eligible for the rebate is computed at a notional rate of 2% based on the degree of completion of the home. Like the transitional tax adjustment, the retail sales tax (RST) transitional rebate also contains a table determining the level of rebate based on the degree of completion. The table is as follows:
Completion Schedule on July 1, 2010 Rebate Percentage
> 90% complete 100% of estimated embedded RST
At least 75% but < 90% 90% of estimated embedded RST
At least 50% but < 75% 75% of estimated embedded RST
At least 25% but < 50% 50% of estimated embedded RST
At least 10% but < 25% 25% of estimated embedded RST
< 10% 0%
When the rebate calculation is based on the floor space method above, an applicant will be eligible to file a rebate application commencing July 1, 2010. When the rebate calculation is based on the selling price method, an applicant will be eligible to claim the rebate no earlier than the day the harmonized sales tax or the transitional tax adjustment, as applicable, will be payable. The application for a rebate should be filed before July 1, 2014.
4. Builder Disclosure Requirements
The proposals contain certain builder disclosure requirements for transitional housing rebates. If a written agreement or purchase and sale for a newly constructed or substantially renovated home or rental home is entered into after June 18, 2009 and before July 1, 2010, the builder will be required to disclose in the agreement whether the provincial portion of the harmonized sales tax (HST) would apply to the sale and if so, whether the stated price in the agreement includes the applicable provincial portion of the harmonized sales tax (HST), net of the new housing rebate (discussed below). In the absence of such disclosure, the price in the written agreement will be deemed to include the provincial portion of the harmonized sales tax (HST).
5. New Housing Rebate
One of the main impacts of the harmonized sales tax will be felt in the housing industry. New home prices, hitherto subject to the goods and services tax (GST), will now be subject to the harmonized sales tax. This of course means an automatic rise in the price of a new home as a result of the increase in tax from 5% to 13%. In order to reduce the impact of the increased tax on new homes, the provincial government has instituted a new housing rebate that will be available to buyers of new homes in Ontario.
(a) Rebate Basics
The new housing rebate program will be available for the same types of new residential properties for which the goods and services tax (GST) new housing rebate is available. Qualifying houses will include substantially renovated housing, owner-built housing, housing on leased land, mobile homes and modular homes used as primary places of residence. Individuals will be required to file an application for the rebate with the Canada Revenue Agency if a builder does not pay or credit the rebate to the purchaser at the time of the purchase.
The new housing rebate is a 75% rebate on the provincial component of the harmonized sales tax (HST) on the price of a new home up to a maximum of $24,000. The rebate will be made available to all buyers of new homes (irrespective of the price of the new home) on the first $400,000 of the home price. Therefore, irrespective of the price of the home, the first $400,000 of the home price will be eligible for the new housing rebate. New homes are already eligible for a goods and services tax rebate and, therefore, the HST rebate will only be available on the provincial component of the harmonized sales tax (HST).
The following example illustrates the new housing rebate:
Price $400,000
Provincial component of HST (8% of $400,000) $32,000
Rebate (75% of $32,000) $24,000
Provincial component of HST after rebate ($32,000 - $24,000) $8,000
A new home priced at $400,000 would ordinarily attract $52,000 in HST, comprising a $20,000 goods and services tax (GST) component and a $32,000 provincial component. The 75% rebate will be available on the provincial component of the tax paid on the entire price of the home since the price does not exceed $400,000. The rebate will therefore be 75% of $32,000 or $24,000. Viewed differently, the rebate is 75% of the 8% provincial component of the tax, i.e., the provincial component of the tax will be levied at 2% on home prices up to $400,000.
The following two examples further illustrate the new housing rebate for homes priced above and below $400,000:
Example 1
Price $800,000
Provincial component of HST (8% of $800,000) $64,000
Provincial component of HST on $400,000 (8% of 400,000) $32,000
Rebate (75% of $32,000) $24,000
Provincial component of HST after rebate ($64,000 - $24,000) $40,000
Example 2
Price $200,000
Provincial component of HST (8% of $200,000) $16,000
Rebate (75% of $16,000) $12,000
Provincial component of HST after rebate ($16,000 - $12,000) $4,000
In the first example, the rebate will only be available on the first $400,000 of the purchase price of $800,000 whereas in the second example the rebate will be available on the entire price of the home since the home price is below $400,000.
(b) Availability of Rebate
As mentioned previously, the harmonized sales tax (HST) new housing rebate is available on the first $400,000 of the price of all new homes. The new housing rebate program will be available for the same types of new residential properties for which the goods and services tax (GST) new housing rebate is available. Qualifying houses will include substantially renovated housing, owner-built housing, housing on leased land, mobile homes and modular homes used as primary places of residence. Individuals will be required to file an application for the rebate with the CRA if a builder does not pay or credit the rebate to the purchaser at the time of the purchase. A similar rebate for new rental housing will also be available to builder / landlords and purchaser / landlords.
(c) Administration
The provincial component of the new housing rebate will be administered by the Canada Revenue Agency in much the same manner as the goods and services tax new housing rebate is administered. Builders will be able to pay or credit the rebate directly to a purchaser. Individuals may also file an application for the rebate directly with the Canada Revenue Agency if the rebate is not paid or credited by the builder. The Canada Revenue Agency has also stated that a single rebate application (for the GST and provincial portion of the HST) will be made available for use from July 1, 2010.
III — Non-Residential Real Property
The basic rule with respect to non-residential real property is the same as the rule with respect to residential real property except that there is no grandparenting available for agreements of purchase and sale signed prior to a certain date. The harmonized sales tax (HST) is applicable to the sale of non-residential real property where both ownership and possession of a property are transferred on or after July 1, 2010.
Leases of non-residential real property are also subject to the harmonized sales tax (HST) on or after July 1, 2010. In particular, consideration that pertains to a lease interval on or after July 1, 2010, is subject to the provincial component of the harmonized sales tax (HST) (whether paid before or after July 1, 2010) except that the provincial component of the harmonized sales tax (HST) is not applicable on lease payments for lease intervals beginning before July 1, 2010 and ending before July 31, 2010. If the consideration pertaining to the period on or after July 1, 2010 is paid anytime on or after May 1, 2010, the landlord is required to charge harmonized sales tax (HST) for the lease payment. However, if the consideration pertaining to the period on or after July 1, 2010 is paid after October 14, 2009 and before May 2010, certain payers are required to self-assess the harmonized sales tax (HST) on such consideration. The payers required to self-assess in such circumstances are non-consumers acquiring goods for consumption, use or supply otherwise than exclusively in the course of their commercial activities (e.g., businesses acquiring the goods to make exempt supplies), non-consumers acquiring the goods in circumstances where the goods would be subject to an input tax credit restriction or recapture, non-consumers using simplified procedures for calculating their net tax, and selected listed financial institutions that use a special attribution method in determining their net tax.
A supply of commercial parking passes is treated as a supply of non-residential real property by way of lease or licence and is, therefore, subject to the rules above.
IV — Transitional retail sales tax (RST) Inventory Rebate for Residential Real Property Contracts
An retail sales tax rebate will be available with respect to the retail sales tax (RST) embedded in construction materials used in residential real property contracts subject to harmonized sales tax.
The rebate will be:
(1) available to real property contractors for the retail sales tax paid on construction materials purchased or produced for the contractor's own use;
(2) held in inventory at the end of the day on June 30, 2010; and
(3) used in a residential property contract to which the harmonized sales tax (HST) will apply.
The rebate will not be available with respect to inventory for which the retail sales tax (RST) is otherwise recoverable by the contractor or any other party.
Contracts to improve land and items permanently attached to land and residential real property contracts for repair or improvements to rental housing, condominiums, apartment buildings, and long-term residential care facilities may qualify for this rebate.
V — Transition Rules for Property and Services
Along with the rules pertaining to residential and non-residential real property, Ontario has also issued bulletins on the treatment of tangible and intangible personal property and services under the new harmonized sales tax (HST) regime.
1. Tangible Personal Property
Consideration after July 1, 2010 : harmonized sales tax (HST) applicable to consideration for goods delivered and ownership transferred on or after July 1, 2010
Consideration after May 1, 2010 and before July 1, 2010 : harmonized sales tax (HST) applicable to consideration for goods delivered and ownership transferred on or after July 1, 2010
Consideration after October 14, 2009 and before May 2010 : Self-assessment requirement on select non-consumers for consideration for goods delivered and ownership transferred on or after July 1, 2010
The select non-consumers required to self-assess are non-consumers acquiring goods for consumption, use or supply otherwise than exclusively in the course of their commercial activities (e.g., businesses acquiring the goods to make exempt supplies), non-consumers acquiring the goods in circumstances where the goods would be subject to an input tax credit restriction or recapture, non-consumers using simplified procedures for calculating their net tax, and selected listed financial institutions that use a special attribution method in determining their net tax.
A specific exception has been provided for magazines and periodicals if an annual subscription is paid before July 1, 2010, even if such magazines or periodicals are delivered on or after July 1, 2010.
2. Intangible Personal Property
Consideration after July 1, 2010 : harmonized sales tax (HST) applicable to consideration for property delivered and ownership transferred on or after July 1, 2010
Consideration after May 1, 2010 and before July 1, 2010 : harmonized sales tax (HST) applicable to consideration for property delivered and ownership transferred on or after July 1, 2010
Consideration after October 14, 2009 and before May 2010 : Self-assessment requirement on select non-consumers for consideration for property delivered and ownership transferred on or after July 1, 2010
3. Services
Consideration after July 1, 2010 : HST applicable to consideration paid for part of service performed on or after July 1, 2010
Consideration after May 1, 2010 and before July 1, 2010: HST applicable to consideration paid for part of service performed on or after July 1, 2010
Consideration after October 14, 2009 and before May 2010 : Self-assessment requirement on select non-consumers for consideration paid for part of service performed on or after July 1, 2010
The list of non-consumers required to self-assess is the same list applicable to the rules for tangible personal property.
Specific exemptions have been provided for prepaid funeral and cemetery services (harmonized sales tax will not be applicable on consideration for such services performed on or after July 1, 2010, if the services are supplied pursuant to an arrangement in writing entered into before July 2010 and at the time the arrangement was entered into, it was reasonable to expect that all or part of the consideration would be paid (or put into trust) before the service is performed), and passenger and freight transportation services (harmonized sales tax will not be applicable on consideration for the part of the service performed on or after July 1, 2010, if the service is part of a continuous journey or freight movement beginning before July 1, 2010).
However, a passenger transportation pass is deemed to be a supply of intangible personal property and the provincial component of the HST will apply to consideration for such a pass that becomes due, or is paid without becoming due, after October 14, 2009, to the extent that the consideration is for the part of the pass period that occurs on or after July 1, 2010.
Payments of lifetime memberships for clubs and associations have also been earmarked for special treatment. The supply of a membership in a club or other association is deemed to be a service and is subject to the treatment listed in the table above. However, if consideration for a lifetime membership becomes due, or is paid without having become due, after October 14, 2009 and before July 2010, and the consideration so paid exceeds 25% of the total consideration for such lifetime membership, the amount in excess of the 25% portion would be subject to the provincial portion of the harmonized sales tax (HST). The rule applies equally to supplies of lifetime memberships made in Ontario and to supplies of lifetime memberships made outside the participating provinces to a person resident in Ontario.
4. Other Property
Among the transitional rules released for specific supplies other than the general ones discussed above are the following:
(a) Direct Sellers
If a direct seller (or approved distributor) uses the alternative collection method on July 1, 2010, and independent sales contractors of the direct seller hold exclusive products in their inventory at the beginning of July 1, 2010, that were sold to them by the direct seller and are intended for sale in Ontario, the direct seller is deemed to have made a supply of the products on July 1, 2010 and, therefore, the direct seller would be required to account for the Ontario component of the harmonized sales tax HST on such products. A similar requirement would apply to products delivered on or after July 1, 2010, by the direct seller for which consideration becomes due, is paid without having become due, after October 14, 2009 and before July 2010.
(b) Continuous Supplies
The provincial component of the Harmonized sales tax (HST) will be applicable to consideration for a supply of property or services delivered, performed, or made available on a continuous basis by means of a wire, pipeline or similar conduit or satellite or other telecommunications facility to the extent that the consideration is for property or services that are delivered, performed or made available on or after July 1, 2010.
(c) Budget Payment Arrangements
If property or services (other than newspapers, magazines and periodical publications) are supplied under a budget payment arrangement during a period that straddles July 1, 2010, and the reconciliation of payments for that period occurs prior to July 2011, the supplier would be required to make an adjustment at the time of the reconciliation to account for any difference between the Ontario component of the harmonized sales tax (HST) that would have been payable if the consideration for the property or services became due on July 1, 2010, without having been paid before that date and the Ontario component of harmonized sales tax (HST) that was payable by the recipient during that period for the property or services.
(d) Combined Supplies
If any combination of property and/or services is supplied together as a single supply and one of the items supplied does not attract harmonized sales tax (e.g., if ownership or possession transferred prior to July 1, 2010), the supply of that property will be deemed to be separate supply (except that this rule does not apply to sales of newly constructed or substantially renovated homes).
(e) Progress Payments/Holdbacks
The provincial component of the harmonized sales tax (HST) will generally apply to progress payments on construction contracts (e.g., contracts for the construction, renovation, alteration or repair of real property or ships) to the extent that the progress payment can reasonably be attributed to property delivered or services performed on or after July 1, 2010. A holdback from a progress payment is considered to be part of the progress payment from which it was held back and will be subject to the same harmonized sales tax (HST) treatment as the progress payment itself.
(f) Property and Services Brought into Ontario
The provincial component of the harmonized sales tax (HST) will be applicable to goods brought into Ontario on or after July 1, 2010, and to such property that is brought into Ontario before July 2010 but where the property is delivered to a consignee on or after July 1, 2010.
The provincial component of the harmonized sales tax (HST) will also apply to consideration due, or paid without having become due, after October 14, 2009, for the part of a service performed on or after July 1, 2010 if service is supplied in a non-participating province to an Ontario resident who acquires the service for consumption, use or supply primarily in the participating provinces.
A similar rule is also in place for the sale or lease of intangible personal property.
(g) Imported Goods, Services and Intangible Personal Property
The provincial component of the harmonized sales tax (HST) will apply to non-commercial goods imported by a resident of Ontario on or after July 1, 2010, and to non-commercial goods imported prior to that date but that are accounted for under the relevant provisions of the Customs Act (Canada) on or after that date. The provincial component of the harmonized sales tax (HST) will also apply to specified motor vehicles and commercial goods imported from outside Canada into Ontario on or after July 1, 2010, except that this rule will not apply to commercial goods brought into Ontario by a goods and services tax (GST) / Harmonized Sales Tax (HST) registrant for consumption, use or supply exclusively in the course of the registrant's commercial activities.
The provincial component of the harmonized sales tax will further apply to the consideration for an imported taxable service made to an Ontario resident who acquires it for supply, use or consumption primarily in the participating provinces to the extent that the consideration is for the part of the service performed on or after July 1, 2010. A similar rule applies to payments made for a supply of intangible personal property by way of lease, licence or similar arrangement.
VI — Restriction on Input Tax Credits
One of the more controversial components of Ontario's move to the harmonized sales tax is the temporary restriction on input tax credits instituted by the provincial government. As initially proposed and as elaborated in a recent bulletin, a temporary restriction on input tax credits (in the form of a recapture of such credits) will be imposed on specified supplies acquired by large businesses in circumstances where such credits would otherwise be available.
1. Large Business
A large business is described as a business whose annual taxable supplies (including zero-rated supplies) in a fiscal year exceed $10 million. For the purposes of the $10 million annual limit, the annual taxable sales of goods and services tax (GST) / harmonized sales tax (HST) registered persons associated with a particular business will also be taken into account. The determination will be based on the total consideration for taxable supplies made in Canada or made outside Canada through a Canadian permanent establishment. The types of consideration that will be included in the large business threshold calculation include amounts by which the consideration for a supply is reduced because of a trade-in of tangible personal property, the fair market value of a supply made between non-arm's length persons to the extent the consideration for the supply does not reflect the fair market value, and the actual value of consideration for a supply made for no consideration by a member of a qualifying group to another member of the same group. Consideration not included in the computation are the goods and services tax (GST) / harmonized sales tax (HST) paid on a supply, the amount attributable to a supply by way of sale of real property that is capital property of the supplier, the amount attributable to a supply of a financial service, and the amount attributable to goodwill supplied as part of the supply of a business.
A person whose chief source of income is farming or public service bodies are exempt from the large business description such that these businesses will not have to bear the brunt of an input tax credit restriction even if their annual taxable supplies exceed $10 million.
2. Timing
The timing of the calculation will be important in this regard. The restrictions will apply on an annual basis for periods commencing July 1 of a particular year. The $10 million threshold will be calculated at the end of the taxation year of a business immediately preceding the period for which the restriction may be in effect. For example, a business with annual taxable sales in excess of $10 million at the end of its taxation year ended December 31, 2010, will have input tax credit restrictions from July 1, 2011 to June 30, 2012, irrespective of the annual taxable sales of the business in that period. In other words, even if the annual taxable sales go down below $10 million between July 1, 2011 and July 1, 2012, the business will be considered a large business by virtue of its annual taxable sales exceeding $10 million at the end of its taxation year (December 31, 2010) immediately prior to the period of the input tax credit restriction. Similarly, a business with annual taxable sales of less than $10 million at the end of its taxation year ended December 31, 2010, will not have any input tax credit restrictions for the July 1, 2011 to June 30, 2012 period even if its annual taxable sales exceed $10 million within that period.
The input tax credit restriction is temporary. The initial restriction is for a period of five years commencing July 1, 2010 with the credits being phased in over a period of three years commencing July 1, 2015. In the first year of the phase-in, only 25% of a restricted input tax credit will be available with 50% being available in the second year and 75% in the third year. Any input tax credit otherwise restricted under this proposal will be fully available from July 1, 2018.
3. Specified Property and Services Subject to Restriction
There are four broad categories of supplies that will be subject to the temporary restriction for input tax credits. These are specified energy, specified telecommunications services, specified vehicles and food, beverages and entertainment. However, the restriction does not apply to specified property or services acquired by a large business for the sole purpose of resupply, or specified property acquired by a large business for the sole purpose of becoming a component part of tangible personal property supplied by that business.
(a) Energy
Specified energy will include electricity, gas, fuel (other than fuel used in a propulsion engine) and steam that is acquired or brought into Ontario for use in the province by a large business. The consideration for a single supply of specified energy will include consideration attributable to transportation services and fees (e.g., delivery charges or regulatory fees) that are incidental to the supply of energy.
The restriction on input tax credits in respect of specified energy does not apply to energy used by a large business directly in the production of tangible personal property for sale or production equipment used by the business in the production of such property. However, this exception is not available for energy used by a large business to facilitate such production (e.g., for the cost of energy used to light, heat or ventilate a production facility).
(b) Road Vehicles
A specified road vehicle is a motor vehicle that is licensed for use on a public highway and weighs less than 3,000 kg. Specified road vehicles include vehicles purchased or leased by a large business, i.e., the mode of acquisition is irrelevant for purposes of the input tax credit restriction. The restriction also applies to vehicle parts and services that are acquired or brought into Ontario by a large business in respect of a specified road vehicle if acquired or brought into Ontario within 12 months of the acquisition of the vehicle itself. However, the restriction does not apply to vehicle parts and services that are acquired or brought into Ontario for the routine repair or maintenance of a specified road vehicle.
(c) Telecommunications
The input tax credit restriction on specified telecommunications services will apply to local and long-distance telephone, cable and pay television, satellite television, facsimile and electronic mail, video, audio and computer link-ups and data transmission acquired by a large business for use in Ontario by that large business. The restriction will generally not apply to Internet access services, web-hosting services, toll-free telephone services (e.g., 1-800, 1-888 or 1-877 telephone services) and supplies provided by means of telecommunications that are not themselves telecommunications services (e.g., building surveillance services, news services offered by press agencies or 1-900 services).
(d) Food, Beverage and Entertainment
The input tax credit restriction on food, beverage and entertainment will apply to business dinners, theatre, sports or concert tickets, private boxes at sports facilities and costs of admissions to nightclubs, and athletic, social and sporting clubs. Such restriction will not apply to meals or entertainment acquired solely for the purpose of resupply (e.g., by an airline), meals or entertainment acquired for events where all employees from a particular location are invited (e.g., an office Christmas party) and meals or entertainment for an employee in situations where the expenses are required to be included in the employee's income as a taxable benefit under the Income Tax Act (Canada).
VII — Planning Considerations
The new HST regime creates planning considerations and headaches for a number of different sectors. The noted advantage of the new regime is the availability of input tax credits on the entire amount of harmonized sales tax paid in the commercial context. Even after temporary restrictions are factored in, businesses that were paying RST on inputs used in their commercial activities will now be able to replace such non-creditable taxes with an credit-eligible harmonized sales tax (HST). This of course means that in those instances where an input was subject to the retail sales tax (RST), the entire cost of the retail sales tax (now levied through the harmonized sales tax) will be eligible for an input tax credit. This should lead to significant savings for businesses and, ultimately, for consumers as businesses pass down cost savings in the form of reduced prices.
The main disadvantage of the harmonized sales tax (HST) regime is that supplies that were previously only subject to the goods and services tax (GST) at 5% and not to the retail sales tax (RST) will now be subject to a 13% harmonized sales tax (HST). Even though it is arguable that the increased tax will be offset by the availability of input tax credits, suppliers of exempt supplies are expected to be impacted by the harmonized sales tax (HST). The increased tax without any possibility of an input tax credit could lead to an increase in the cost of various supplies from bank fees to condominium fees as ordinary consumers of the supply bear the brunt of the increased tax.
1. Real Estate Industry
At the forefront of harmonized sales tax planning is the real estate industry, including both the builders and the construction sector. A builder must now consider whether it wants to include or exclude the provincial component of the harmonized sales tax (HST) from the price of a home. It is expected that most builders will follow whatever ends up becoming the industry norm. In any event, adequate disclosure in purchase and sale agreements is now paramount and has caused concerns among builders that may not have completely decided on whether to price a home as harmonized sales tax (HST) inclusive or exclusive. Builders also have to be mindful of the transitional tax adjustment on unfinished grandparented homes and on the possibility of a transitional retail sales tax rebate. Pricing and cost models may be significantly jeopardized as a result of the new rules and may even have to be reconstructed in some circumstances. Adding to the complication is the fact that most builders have projects in different stages of construction and, accordingly, with different circumstances. Planning for each takes up a lot of manpower and resources.
The construction industry will benefit significantly from the new HST regime through the increased availability of input tax credits and rebates for real property contractors. However, the industry is also expected to face increased pressure from real estate builders and developers to pass their cost savings on to the ultimate consumer. In particular, with the replacement of the non-creditable retail sales tax (RST) with the credit-eligible HST, the entire amount of tax paid by the construction industry on most inputs should be eligible for input tax credits from July 1, 2010. This not only means that the inputs should cost less to the relevant construction businesses, the previously incorporated retail sales tax (RST) costs in input prices may also have to be backed out of the price of such inputs. The identity of the ultimate beneficiary of such cost savings may eventually be a function of financial might, i.e., while larger builders may be able to extract such savings from smaller or financially dependent construction businesses, the larger members of the construction industry may be able to negotiate out of passing such cost savings to the builders.
2. Financial and Medical Sectors
Exempt and partially exempt sectors like the financial services sector and the medical sector may also be required to plan for the new harmonized sales tax regime. As mentioned previously, the cost of inputs are expected to rise due to the imposition of the provincial component of the harmonized sales tax (HST) on inputs that are currently not subject to the retail sales tax (RST). However, the financial industry and the medical industry may not be able to offset the added costs due to the inability to access input tax credits where the inputs are used to provide exempt services. A likely solution is the transfer of such additional costs to the ultimate consumer. However, changes in business structures (e.g., avoidance of management fees being paid to professional corporations for physicians) should also be considered.
3. General Planning Considerations
Consumers and businesses alike need to plan for the harmonized sales tax (HST). Accelerating purchases that will likely be costlier from July 1, 2010, or delaying purchases on which input tax credits may be available from July 1, 2010, should be part of the planning process. Accounting systems will need to be modified to be compliant with harmonized sales tax (HST) reporting requirements. Input tax credit restrictions should be considered for large businesses. As Ontario enters the new HST regime, the planning should not be delayed until the date of harmonization but should commence immediately.
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