Ontario and B.C. HST Only Months Away — Feb 8, 2010 www.kpmg.ca

Ontario releases new HST details on recaptured input tax credits

Since Ontario and British Columbia announced they would harmonize their provincial sales taxes with the federal Goods and Services Tax (GST), they have been releasing details on how this new harmonized sales tax (HST) will work in each province. In the latest of these releases, Ontario provides details on the recaptured input tax credit requirements for large businesses.

This TaxNewsFlash-Canada summarizes Ontario’s latest announcement and some of the other HST-related details Ontario and B.C. have recently released, including point-of-sale rebates, real property transactions and sales to the Ontario government. With the HST’s July 1, 2010 implementation date now only a few months away and some businesses facing significant accounting and system changes, businesses need to prepare now for Ontario and B.C. HST.

Ontario’s new details
Ontario’s latest release includes new proxy methods for determining amounts not subject to the recaptured input tax credit requirements (also know as input tax credit restrictions). The release also includes transitional measures and an option to use recaptured input tax credit instalments.

Large businesses will have to carefully review these proposed measures to determine whether they qualify to use one or more of the proposed proxy methods and whether it would be beneficial to do so. Large businesses will also have to review the release’s details on filing deadlines and possible interest and penalties for incorrect reporting.

Ontario notes that the recaptured input tax credit requirements for selected listed financial institutions (i.e., listed financial institutions that allocate revenues to harmonized and non-harmonized provinces) will be described in a separate information notice.

Background

Ontario and B.C. will harmonize their provincial sales taxes with the federal GST to create a 13% HST in Ontario and 12% HST in B.C. on July 1, 2010.

 

Over the last few months, both provinces and the federal government have released numerous HST-related details in various formats, including news releases, information notices and draft legislation.

 

For details on previous government releases, see:

Recaptured input tax credits
Ontario and B.C. propose temporary recaptured input tax credit requirements for large businesses (i.e., businesses with annual taxable sales exceeding $10 million and some financial institutions). These entities will be required to repay or “recapture” their input tax credits for the provincial component of the Ontario and B.C. HST on the following specified goods and services:  

  • ·         Energy (except when used to provide goods for sale or purchased by farms)
  • ·         Telecommunication services other than Internet access or toll-free numbers
  • ·         Road vehicles weighing less than 3,000 kilograms, parts and certain services (and fuel, other than diesel fuel, to power those vehicles – Ontario only)
  • ·        

After the first five years of the HST implementation, input tax credits relating to the restricted items will be phased in over three years.

Ontario proposes proxies
Ontario released details on February 1, 2010 describing how the recaptured input tax credit requirements will work. These details include optional proxy methods for determining the portion of certain expenses that will not be subject to the recaptured input tax credits.

For specified energy, Ontario proposes production proxies for large businesses whose most significant business qualifies under one of 24 specific categories. Under the production proxies, an eligible large business may elect to use a prescribed percentage (i.e., 96%, 87% or 70% depending on the category) to determine what portion of the energy it acquired would be considered used directly in the production of goods for sale and hence not subject to the recaptured input tax credit.

The election to use the production proxy will have to be filed with the CRA before the beginning of a particular recapture period (i.e., one-year period from July 1 of a particular year to June 30 of the following year) and would generally apply for the entire recapture period (i.e., 12 months).

Ontario also proposes proxies for:

  • ·         Specified energy used directly in activities that are eligible scientific research and experimental development (SR&ED) activities in Ontario
  • ·        

Ontario has reiterated that the recaptured input tax credit requirements will not apply to specified goods and services acquired solely for resupply. However, Ontario notes that large businesses will have to use a specific method to recapture a portion of the input tax credits claimed where road vehicles are used before being resupplied, such as vehicles used by car dealerships.

KPMG observation

It is important to note that businesses must “recapture” input tax credits and not simply restrict their claims for input tax credits. Ontario states that large businesses will not be allowed to simply forego claiming input tax credits on a specific good or service.

 

In addition, the recapture (i.e., the repayment) of input tax credits must be done in the reporting period when the input tax credits first became available, even if the input tax credits were not claimed. Failure to recapture input tax credits in the appropriate reporting period may expose large businesses to interest and penalties.

 

Surprisingly, this requirement and reporting method are quite different from the existing input tax refund restrictions under the Quebec Sales Tax that large businesses in, or operating in, Quebec are used to.

Ontario also proposes an instalment and reconciliation approach to account for the recaptured input tax credits during the year. Under this approach, a large business would elect to use a specified method to calculate and make equal instalment payments of recaptured input tax credits in each reporting period. At year-end, the large business would then determine the actual amount of recaptured input tax credits and report any differences.

Who qualifies as a “large business”?
Ontario also released details on the $10 million of annual taxable sales threshold calculation for businesses and the meaning of a “financial institution” for purposes of the definition of a “large business” and the recaptured input tax credit requirements.

The $10 million threshold calculation for a particular person will include, among other amounts, taxable (including zero-rated) supplies made in Canada and supplies made outside Canada through a permanent establishment in Canada, by the person and its associates.

The definition of financial institution under the GST legislation is very broad. However, for the purposes of the new recaptured input tax credit requirements, Ontario proposes that only the following financial institutions and related entities would automatically be subject to the recaptured input tax credits: banks, trust companies, credit unions, insurers, segregated funds of insurers and investment plans.

The recaptured input tax credit requirements for selected listed financial institutions (i.e., listed financial institutions that allocate revenues to harmonized and non-harmonized provinces) will be described in a subsequent information notice.

KPMG observation

Other types of financial institutions could potentially be subject to the recaptured input tax credit requirements if they meet the $10 million of annual taxable sales threshold. 

 

Businesses that believe they are below the $10 million threshold should review the rules to determine which supplies made by associated persons must be included in the $10 million threshold calculation.

 

B.C. has not yet released such details on its input tax credit restrictions. However, the rules will likely be similar.

Ontario proposes that qualifying public service bodies and farming activities will not be subject to the recaptured input tax credit requirements.

Point-of-sale rebates
Ontario and B.C. propose point-of-sale rebates of the provincial component of the HST on a few similar designated items, including books and children’s clothing and car seats.

B.C. will also offer a point-of-sale rebate of the provincial component of the HST for qualifying motor fuels and a provincially administered rebate for the provincial component of the HST on energy for residential use.

In November 2009, Ontario announced two new point-of-sale rebates for qualifying prepared food and beverages sold for a total price of $4.00 or less and print newspapers.

Also, Ontario and B.C. released more details on the designated items subject to the point-of-sale rebates, which should help some businesses prepare. For example, children’s clothing subject to the point-of-sale rebate will include clothing designed for babies, girls and boys up to and including Canada Standard Size 16 for girls and Size 20 for boys.

Ontario and B.C. also announced that the point-of-sale rebates will apply to supplies of designated items made at any point in the distribution chain, such as supplies made by wholesalers and distributors.

KPMG observation

Many businesses will have to determine the software and other system changes required to account for the new point-of-sale rebates and the recaptured input tax credit requirements, where applicable. 

Real property transactions
Ontario and B.C. released HST transitional rules relating to new homes and other types of real property transactions on June 18, 2009 and November 18, 2009, respectively.

For new home builders, Ontario and B.C. propose that builders will be required to pay transitional tax adjustments for grandfathered transactions. It’s important to note that such an adjustment would be calculated based on the fair market value of the property where such value is higher than the sale price of the home.

KPMG observation

New home builders in Ontario and B.C. face complicated calculations to determine the total tax costs and profits on new housing transactions that straddle July 1, 2010. Builders will be required to determine the degree of completion of construction and the fair market value of new housing projects in progress on July 1, 2010 to apply the HST transitional rules. 

Sales to Ontario government
Ontario recently announced that it will pay HST on its purchases (and claim a rebate from the CRA for eligible HST amounts). Businesses should benefit from no longer having to treat government purchases differently from other types of sales.

KPMG observation

Businesses and public sector organizations that supply goods and services to Ontario should review their invoicing procedures and systems to determine necessary changes for sales to the Ontario government and the B.C. government, should it opt to pay HST. 

We can help
Your KPMG adviser can help you effectively manage a smooth transition to Ontario and B.C. HST, along with helping you address any other federal or provincial indirect tax matters that may affect your business. We can help you manage your indirect tax compliance obligations in all relevant jurisdictions and also help you ensure that you are not missing refund opportunities. For details, contact your KPMG adviser.
 

 

 

Information is current to February 5, 2010. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

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Paige Gregson

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CENTURY 21 Executives Realty Ltd.
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