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Ontario sales tax harmonization – things to think about


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Canadian Indirect Tax News, April 2009 (09-4)

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In its March 26, 2009 provincial budget, Ontario announced its intention to proceed with a value added tax. Effective July 1, 2010, provincial sales tax will be harmonized with the federal GST, resulting in a federally administered 13% tax, of which the Ontario portion will be 8%. Details are expected to be released later in 2009.

For a summary of the proposed harmonized tax regime, please read Deloitte’s March 27, 2009 edition of Canadian Indirect Tax News.

Currently, the   Ontario Retail Sales Tax  (ORST) applies to a narrow base of tangible property and some services. Ontario’s intention is to adopt the much broader GST base. Consumers and businesses making exempt supplies will see a rise in their costs (because they cannot claim input tax credits (ITCs) in respect of their exempt activities). While many public service bodies will be entitled to significant rebates, those engaged in exempt businesses will have limited input tax recovery.

Limited details were released with the budget, but both the federal and provincial governments are working on developing important transitional and place of supply rules over the next several months. 

With just over a year to implementation, now is the time to begin considering the impact of the proposed Ontario harmonized sales tax (OHST). This document provides a general summary of several potential issues to take into account, when considering the impact of the OHST on your business. It is provided as a guide and we recommend that you review and examine these issues as soon as possible, since implementation of the OHST is less than 15 months away.

Financial and budgeting

  • What is the economic impact of paying more tax on your operations (e.g., additional tax cost, cash flow cost)? Remember that all large businesses (i.e., with annual taxable sales greater than $10 million) and financial institutions will be restricted from claiming any of the 8% provincial component of the OHST on: energy costs, except where purchased by farms or used to produce goods for sale; telecommunication services other than internet access or toll-free numbers; road vehicles weighing less than 3,000 kilograms (and parts and certain services) and fuel to power those vehicles; as well as food, beverages and entertainment.
  • What is the impact on your cash-flow position, of collecting and remitting more tax?
  • What are the implementation costs associated with complying with the OHST, including the cost of any necessary information systems changes?
  • Factor in the impact of harmonization as you prepare financial budgets, plans and forecasts.

Purchasing

  • For large purchases that are currently subject to ORST and for which the provincial component of the OHST will be recoverable, consider the timing of the purchase to minimize sales tax costs.
  • Conversely, examine the potential benefits of accelerating certain ORST exempt purchases for which the applicable provincial component of the OHST may not be fully recoverable under an OHST regime.
  • Determine the pros and cons of purchasing versus leasing property, depending on when the property is needed, the significance of the acquisition and the ability to recover the OHST.
  • Review the benefits and costs of certain elections available to not have OHST apply to certain inter-company transactions. Some of the elections alleviate the cash flow impact of the tax and others result in a reduction of tax costs.
  • For certain large businesses, determine how to deal with the restricted ITCs on the provincial component of the OHST, and giving thought to:
    • the percentage of energy used in manufacturing giving rise to ITCs
    • the extent of your operations that may qualify as manufacturing
    • ensuring suppliers of telecom services categorize all charges separately so you can identify restricted expenses and minimize the potential misclassification of charges that are subject to the restriction
    • monitoring the timeline/incurrence of expenses subject to the ITC restrictions (five years of full restrictions and a phase-in in the following three years).
  • Review past and current operations for potential overpayments of ORST and make any resultant refund and rebate applications.
  • Consider the impact of harmonization on suppliers and their ability to pass on any resultant savings or the requirement to increase their prices as a result of their inability to recover any additional tax cost due to the OHST.
  • For large dollar transactions, consider the timing of purchases and related payment of the OHST to suppliers to minimize the funding requirements where ITCs are available. For suppliers who will be monthly filers, the OHST they are required to collect from you likely will not be required to be remitted until the last day of the month following the month in which the purchase took place. This could be as much as 60 days, allowing your business to claim the ITCs before the remittance is due by the suppliers.

Sales

  • Consider how the provincial component of the OHST will apply for goods, services and intangibles supplied to customers outside of Ontario.
  • Consider that businesses that are not currently registered for ORST (but who sell into Ontario and currently collect GST), will likely be required to collect the additional 8% of the OHST.
  • Consider the impact of harmonization to any required wording changes in promotional flyers, advertisements, catalogues, signs, coupons, rebates, etc.
  • Consider the impact of harmonization on your customers and generally how it impacts on the pricing of your goods, services and/or intangibles and your ability to pass on any resultant savings or the requirement to increase your prices as a result of your inability to recover any additional tax cost due to the OHST.

Contracts

  • Review existing contracts for supplies that are expected to straddle the proposed implementation date to determine the impact of harmonization and clarify wording where necessary.
  • Carefully consider tax clauses for new contracts to be entered into that will survive the proposed implementation date to ensure the desired results are achieved, including minimizing the tax cost where applicable.
  • Expect special transitional rules relating to real property transactions; contracts involving real property will require special consideration.

Systems and compliance processes/procedures

  • Plan for the expected numerous system changes that go along with implementing all of the above changes, including:
    • with respect to sales (accounts receivable and billing/POS systems), tax codes and invoices will have to be adjusted, and if you sell the specific goods (books, children’s clothing and footwear, children’s car seats and booster seats, diapers, and feminine hygiene products) subject to the point-of-sale rebate for the provincial portion of the OHST, your system will have to accommodate the rebate
    • for purchases (accounts payable systems), programming will be required to track the OHST where necessary to claim ITCs or rebates and to deal with the unrecoverable provincial component of the OHST on certain expenses, as well as adjusting the rates in the system if ITCs are automatically calculated for certain expenses
    • current ORST capabilities may need to remain in the system for a certain period of time following implementation of the OHST to deal with adjustments (e.g., price adjustments) post June 2010.
  • Identify the priorities for IT departments relating to system requirements for the OHST and ensure the requisite testing, updating of procedures, etc. is completed in time for implementation on July 1, 2010.
  • Ensure the process for self-assessing ORST is amended accordingly effective post-implementation of the OHST and any requirement to self-assess the provincial component of the OHST after June 2010 is included in a new process.
  • Review existing policies and procedures to determine the impact of harmonization on them and the need for new policies and procedures.  Consider the impact on:
    • policies concerning credit notes, debt notes, discounts, volume and other rebates, coupons, gift certificates, deposits, partial payments and bad debt adjustments
    • procurement transactions and related procedures and policies for existing procurement card and corporate credit card programs
    • employee allowances and reimbursements
    • taxable benefit calculations
    • petty cash requirements
    • GL accounts
    • reasonability testing and other exceptions analyses.

Other

  • Consider the impact on human resources, such as the need for additional resources, necessary training of staff, changes required to internal policies, etc.
  • If applicable, determine the impact of harmonization to SR&ED claims.
  • Consider the impact of the proposed Ontario corporate income tax rate reductions announced in the March 26 budget.
  • ORST audits will continue after June 2010 for a number of years, so retain records accordingly to deal with a possible ORST audit post-implementation of the OHST.

Now is the time to prepare and plan

The issues noted above are not intended to be exhaustive. However, we hope that it guides you in thinking about the impact of the impending implementation of OHST on your business. Deloitte can assist in preparing and planning for the OHST. We can guide you in understanding and prioritizing the issues that will require attention. We can perform a diagnostic impact analysis to assist with budgeting and forecasting the impact of harmonization, establishing priorities for necessary systems and process changes and planning for minimizing the cost and cash flow impacts. Although many details are still to be released, such as the transitional rules that will apply and the rules relating to place of supply, the time to begin preparing for these changes is now.

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