Point-of-sale exemptions – Ontario Status Indians; Recaptured input tax credits – B.C. and Ontario
Canadian Indirect Tax News, July 9, 2010 (10-5)
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As announced on June 17, 2010, Status Indians purchasing certain off-reserve goods and services will be exempt from the 8% provincial component of the Harmonized Sales Tax (HST). This is in addition to the existing exemption provided for on-reserve purchases. The specific new exemptions have not yet been outlined.
The exemptions will come into effect on September 1, 2010, two months after the implementation of the HST in Ontario and British Columbia. This delay is presumably to give businesses time to adjust their systems for the change.
For qualifying purchases made between July 1, 2010 and August 31, 2010, Status Indians can submit Ontario receipts to the Ontario Ministry of Revenue for refunds until November 1, 2010.
Similar point-of-sale exemptions in British Columbia and the Atlantic HST provinces are not mentioned. Stay tuned for further updates.
Regulations detailing the recaptured input tax credit (RITC) rules were promulgated in June 2010. In addition, the Canada Revenue Agency (CRA) released Technical Information Bulletin B-104 (TIB B-104), which provides guidance on the application of these rules in Ontario and British Columbia. These follow the February 2010 Ontario and British Columbia government releases on the proposed rules regarding the RITC.
There are some notable changes and additions to the previous guidance, as outlined below.
The government has clarified that a large business does not include a government entity that is:
- An entity of the government of Canada that is not listed in Schedule I of the Federal Provincial Fiscal Arrangements Act;
- A department (as defined in section 2 of the Financial Administration Act); or
- An entity of the government of a province that is eligible for a rebate of the GST/HST, pursuant to a provision of a sales tax harmonization agreement with that province.
Qualifying motor vehicle
The definition of what constitutes a qualifying motor vehicle (QMV) is clarified. Vehicles, such as ATVs, electrically propelled wheelchairs, street cars, vehicles that run on rails, snow vehicles, power-assisted bicycles and farm machinery, will not be part of the RITC rules.
The Bulletin also identifies that short-term rentals of a QMV are subject to the RITC.
In addition to electricity, gas and steam, specified energy includes anything (other than fuel for use in a propulsion engine) that can be used to generate energy, such as:
- By way of combustion or oxidation, or
- By undergoing a nuclear reaction in a reactor for the generation of energy.
Production for sale and proxies
The Bulletin provides expanded examples of activities that are considered to be performed in conjunction with production activities. The meaning of production equipment is expanded to include spare parts and materials used for repairing the machinery, tools and equipment used to manufacture and produce the goods.
To qualify for the proxy in British Columbia, at least 10% of Canadian production activities in the last fiscal year must have occurred in British Columbia; for the Ontario proxy, production activities must be primarily in Ontario.
A change that will likely create significant confusion is the wording change on how the proxies are applied. In February, the approach outlined was to apply the proxy as being the amount of specified energy used in production and, therefore, not restricted. Both TIB B-104 and the regulations reverse the approach to a proxy that reflects what is restricted.
For example, previous guidance provides that a paper manufacturer would be eligible to use the production proxy of 96% (96% being considered used directly in the production of the tangible personal property (TPP)). Therefore, it restricts 4% as an RITC. However, the regulations refer to the proxy as 4% of the energy not considered to be used directly in the production of TPP. Therefore, readers are counselled not to restrict 96% of the energy in calculating the RITC.
Specified meals and entertainment
Meal expenses for long-haul truckers will not be subject to recapture.
Operator of a joint venture
Where an election has been filed to have the operator account for the net GST/HST in a joint venture, the operator must consider the RITC rules for a particular participant if that participant is considered to be a large business. Furthermore, if the operator is a large business, then all purchases of specified property by that joint venture will be subject to the RITC rules. Effectively, the joint venture election cannot be used to eliminate the RITC requirements.
Allowances and reimbursements
A large business must follow the RITC rules on allowances and reimbursements paid to employees on the provincial component of the HST in relation to specified property and services. If the factor method was being used, the RITC factor is 7/12 for British Columbia and 8/13 for Ontario.
The CRA has provided information for reporting the recapture of RITCs under this method for the 2010 instalment period, which will be a 12-month period. The recapture period does not begin until July 1, 2010, and the first reporting period will be that which includes July 1, 2010.
The reconciliation is to be completed within three months following the entity’s fiscal year-end. However, no reconciliation can take place before April 2011. If a large business has a fiscal year that ends after June 2010 and before January 2011, it will be required to perform its reconciliation in the reporting period that includes April 1, 2011. If a large business has a year-end after December 2010, it must have its reconciliation completed in a reporting period that includes a date that is on or after April 1, 2011 and is within three months of its fiscal year-end.
The CRA has also clarified that, if a business is a large business at the time it registers for the GST/HST, it cannot use the Estimation/Reconciliation method for reporting RITCs if it is the large business’s first fiscal year. However, it can elect to use this method for reporting RITCs in its first instalment period in its next year. It would estimate the RITCs based on its current fiscal year.
When a large business ceases to be registered for the GST/HST, its instalment period will also end on that date. It must reconcile its RITCs for the last reporting period in which it is registered for the GST/HST.
The RITC rules are very important to consider in the ongoing compliance with the GST/HST. As businesses grow and expand, the $10 million threshold must be monitored on a regular basis. Watch for further updates and changes, as these rules will evolve and mature.
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.