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British Columbia and Ontario HST – transitional rules


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Canadian Indirect Tax News, October 2009 (09-10) 

Why are the transitional rules important?
General HST transitional rules
Specific HST transitional rules
Other HST transitional rules
Importations of goods and services into B.C. and Ontario
Winding down of B.C. and Ontario PST and the B.C. hotel room tax (HRT
Transitional PST inventory rebate for residential real property contracts
Things to think about

The British Columbia (B.C.) and Ontario governments have concurrently released information notices outlining the transitional rules to deal with transactions that straddle the July 1, 2010 implementation date. These information notices are available on their respective websites:

General Transitional Rules for British Columbia HST
General Transitional Rules for Ontario HST

Why are the transitional rules important?

The transitional rules deal with determining the application of which of the combined Harmonized Sales Tax (HST) (13% in Ontario, 12% in B.C.) or the Goods and Services Tax (GST) only (5%) plus any applicable provincial retail sales tax (PST) for payments made and related supplies that straddle the July 1, 2010 HST implementation date. The rules also deal with the phase out of the PST and specific matters such as the availability of transitional rebates, special filings and adjustments. A number of specific Ontario HST and PST transitional rules applicable to Ontario were announced on June 18, 2009 respecting residential property, which we addressed in an earlier publication.

For the most part, the two provinces have chosen identical dates and rules. We summarize the rules that are common to both the application of Ontario HST and B.C. HST by type of supply, as well as highlight specifically any rules that are unique to each of the provinces. There are some key common dates that are referred to in the application of the rules and they are:

Implementation Date – July 1, 2010, the date on which the HST comes into effect.

Pre-implementation Date – May 1, 2010, the date on or after which the HST would generally apply to consideration that becomes due, or is paid without having become due, for property and services provided on or after July 1, 2010.

Release Date – October 14, 2009, the date on or before which the HST would not apply to consideration that becomes due, or is paid without having become due. Certain businesses and public service bodies[1] may be required to self-assess the provincial component of the HST on consideration that becomes due, or is paid without having become due, after this date and before May 2010 for property and services provided on or after July 1, 2010, in accordance with the details in Table 1.

Table 1

Businesses and public service bodies (i.e., does not apply to consumers[2]) are required to self-assess the provincial component of the HST in the following circumstances:
  • Acquiring the property or services for consumption, use or supply otherwise than exclusively in the course of their commercial activities (e.g., a business, such as a financial institution, that is acquiring the property or services to make GST/HST exempt supplies).
  • Acquiring the property or services in the course of their commercial activities but in circumstances where the property or services would be subject to an input tax credit restriction or recapture (e.g., electricity subject to the proposed input tax credit restriction for large businesses).
  • Using simplified procedures available under the Excise Tax Act (ETA) for calculating net tax (e.g., as may be the case for certain charities, public service bodies and small businesses).
  • Selected listed financial institutions, which use a special attribution method in determining their net tax.
Note: A person who is required to self-assess in these circumstances would be required to account for the tax either: (i) in the GST/HST return of the person for the reporting period that includes July 1, 2010, if the due date for that return is before November 2010, or (ii) in any other case, in prescribed form and before November 2010.


It will be important for businesses and public service bodies to understand these rules as they may have an impact on their information systems and procedures for complying with the various taxes.  Understanding these rules is necessary for proper planning and preparation for the HST and the winding down of the PSTs.  There may also be some opportunities with regard to planning to ensure that the most efficient tax circumstances are achieved within allowable limits of the laws.[3]

This communication provides a summary of the rules as they apply to the different types of supplies and certain special payment arrangements, and highlights some opportunities and pitfalls. The rules are very technical, however, and care must be taken to determine how they apply to your operation, especially if you fall within one of the special sectors.

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General HST transitional rules

Sales of tangible personal property (i.e., goods)
The HST would generally apply to a supply of goods by way of sale to the extent that the goods are delivered, and ownership of the goods is transferred, to the recipient of the supply on or after July 1, 2010.

Services
The HST would generally apply to a supply of a service to the extent that the service is performed on or after July 1, 2010. The HST would generally not apply, however, to a supply of a service if all or substantially all (90 per cent or more) of the service is performed before July 2010.

Leases and licenses
The HST would generally apply to a supply of property - including goods, intangible personal property, non-residential real property (including short-term or transient accommodations) and commercial real property - by way of lease, license or similar arrangement for the part of a lease interval that occurs on or after July 1, 2010. The HST would not, however, apply to a supply of property by way of lease, license or similar arrangement if the lease interval begins before July 2010 and ends before July 31, 2010.

This rule does not apply to supplies of intangible personal property where the payments do not vary with the amount of use or profits from the property (e.g., a lump-sum payment for a supply of a copyright). For such supplies, the general rule for intangible personal property applies as described below.

Intangible personal property
The HST would generally apply to consideration that becomes due, or is paid without having become due, on or after July 1, 2010 for a supply of intangible personal property (e.g., intellectual property or contractual rights) by way of sale.

Sales of real property (other than residential housing)
The HST would generally apply to a supply of real property (other than residential housing) by way of sale if both ownership and possession of the property are transferred to the purchaser on or after July 1, 2010.

Summary
Table 2 provides a summary of how the general rules would apply for the portion of supplies made on or after July 1, 2010 as described above.

Table 2

Type of supply Consideration due or paid on or after July 1, 2010 Consideration due or paid on or after May 1, 2010 and before July 2010 Consideration due or paid after October 14, 2009 and before May 2010[4] Consideration due or paid before October 15, 2009

Sales of tangible personal property

Services

Leases and licenses

HST applies HST applies – registered vendors will begin collecting HST applies – businesses and public service bodies may be required to self-assess the provincial component of HST in accordance with Table 1 No HST applies
Sales of intangible personal property HST applies No HST applies No HST applies No HST applies
Sales of real property (other than residential property) HST applies in any case if both ownership and possession are transferred on or after July 1, 2010


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Specific HST transitional rules

Notwithstanding the general rules noted above, special rules would apply for the supplies described below.

Subscriptions to newspapers, magazines or other periodical publications
The HST would generally not apply to consideration that is paid before July 2010 for a subscription to a newspaper, magazine or other periodical publication.

Prepaid funeral and cemetery services
The HST would not apply to consideration for the part of a funeral or cemetery service (including the supply of property relating to the funeral, burial or cremation of an individual) that is performed on or after July 1, 2010 if the service (and related property) is supplied pursuant to an arrangement in writing that was entered into before July 2010. This rule would only apply if it was reasonable, at the time the arrangement was entered into, to expect that all or a part of the consideration for the service would be paid (or put into trust) before the service is performed.

Transportation services
Passenger transportation services: The HST would not apply to consideration for the part of a passenger transportation service that is performed on or after July 1, 2010 if the passenger transportation service is part of a continuous journey that begins before July 2010.

Passenger transportation passes: Passenger transportation passes the consideration for which is due or is paid without being due after October 14, 2009 are subject to HST to the extent that the consideration is applicable to the pass period on or after July 1, 2010. However, they are not subject to HST, if the pass period begins before July 1, 2010 and ends before August 1, 2010.

Freight Transportation Services: The HST would not apply to consideration for the part of a freight transportation service that is performed on or after July 1, 2010 if the service is part of a continuous freight movement that begins before July 2010.

Commercial parking passes
A supply of a commercial parking pass would be treated as a supply of non-residential real property by way of lease, license or similar arrangement. Please see the section above on leases and licenses.

Memberships
A supply of a membership in a club, organization or association would be considered to be a supply of a service for purposes of the transitional rules and HST would apply to the extent that the membership period occurs on or after July 1, 2010. Please see the section above on services.

For lifetime memberships in clubs, organizations or associations, if the consideration becomes due, or is paid without having become due, after October 14, 2009 and before July 2010, and that consideration exceeds 25 per cent of the total consideration for the lifetime membership, the amount in excess of that 25 per cent portion would be treated as having become due on, and not to have been paid before, July 1, 2010 and would be subject to the HST. The supplier would be required to account for the provincial component of the HST in the GST/HST reporting period of the supplier that includes July 1, 2010. The recipient of the supply would be able to claim any available input tax credits in respect of the provincial component of the HST in the GST/HST reporting period of the recipient that includes July 1, 2010.

HST would apply in this circumstance where the supply of the lifetime membership is made in B.C. or Ontario and where the supply is made outside an HST province to a person who is resident in B.C. or Ontario.

Admissions
A supply of an admission to a place of amusement, a seminar, an event or an activity would be considered to be a supply of a service for the purposes of the transitional rules and HST would apply to the extent that the event or activity to which the admission relates occurs on or after July 1, 2010. Please see the section above on services.

Residential real estate
Ontario released special transitional rules for residential real estate on June 18, 2009. Please refer to our special release on these rules.

B.C. will be providing HST transitional rules for this sector in the coming months.

Summary
Table 3 provides a summary of how many of these specific rules would apply for the portion of supplies made on or after July 1, 2010 as described above.

Table 3

Type of supply Consideration due or paid on or after July 1, 2010 Consideration due or paid on or after May 1, 2010 and before July 2010 Consideration due or paid after October 14, 2009 and before May 2010[5] Consideration due or paid before October 15, 2009
Commercial parking passes applicable to period on or after July 1, 2010 HST applies HST applies – registered vendors will begin collecting HST applies – businesses and public service bodies may be required to self-assess the provincial component of HST in accordance with Table 1 No HST applies
Admissions to the extent that the event or activity to which the admission relates occurs on or after July 1, 2010 HST applies HST applies – registered vendors will begin collecting HST applies – businesses and public service bodies may be required to self-assess the provincial component of HST in accordance with Table 1 No HST applies
Membership in a club, organization or association to the extent that the membership period occurs on or after July 1, 2010 HST applies HST applies – registered vendors will begin collecting HST applies – businesses and public service bodies may be required to self-assess the provincial component of HST in accordance with Table 1 No HST applies
Lifetime memberships HST applies HST applies to the consideration that exceeds 25 per cent of the total consideration   No HST applies
Subscriptions to newspapers, magazines or other periodical publications to be supplied on or after July 1, 2010 HST applies if consideration paid in the period No HST applies if consideration paid in the period
Prepaid funeral and cemetery services HST applies if the agreement is entered into on or after July 1, 2010 No HST applies if the agreement is entered into before July 1, 2010


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Other HST transitional rules

Direct sellers
Direct sellers using the alternative collection method on July 1, 2010 will be required to collect HST from their independent sales contractors that hold an inventory on July 1, 2010 of exclusive products sold to them by the direct seller, if that inventory is intended for sale in either of B.C. or Ontario. Additionally, where products have not been delivered to an independent sales contractor by July 1, 2010, the direct seller is required to collect the HST on the suggested retail value of those products for which consideration becomes due or is paid after October 14, 2009 and before July 2010.

Continuous supplies
Where a supplier provides property or services on a continuous basis by means of a wire, pipeline, or similar conduit (e.g., cable or satellite television), HST will generally apply to the extent that the consideration is for property or services that are delivered, performed or made available on or after July 1, 2010. Where this cannot reasonably be determined, the consideration received may be prorated in equal parts according to the number of days in the period to which the consideration is attributable.

Budget payment arrangements
Equal payment plans for natural gas or electricity are examples of budget payment arrangements. If the reconciliation date for the payment plan occurs prior to July 1, 2011, suppliers will be required to adjust the HST owing on the supplies made on or after July 1, 2010 by determining when the supplies were made and collecting or crediting the amount of HST owing by the recipient accordingly. If the time of delivery cannot be reasonably determined, the supply will be prorated in equal parts based on the number of days in the reconciliation period.

Combined supplies
There are situations in which a combination of property and/or services is supplied as a single supply (e.g., the supply and installation of a dishwasher). If ownership or possession of the property component (the dishwasher) is transferred to the recipient prior to July 1, 2010 and it would not attract HST under the general transitional rules if supplied separately, then HST would not apply to the consideration for the property. This rule does not apply to sales of newly constructed or substantially renovated homes.

Progress payments and holdbacks
Progress payments: HST will apply to progress payments on contracts to “construct, renovate, alter or repair” (construct) real property to the extent that the progress payments can reasonably be attributed to property delivered or services performed on or after July 1, 2010. These rules also apply to ships or other vessels but do not apply to sales of newly constructed or substantially renovated homes which are subject to the special transitional rules for new residential housing.

For progress payments that become due or are paid without becoming due after October 14, 2009 and before July 1, 2010, that relate to property delivered or services performed on or after July 1, 2010, the supplier would be required to account for the provincial component of the HST in the GST/HST reporting period of the supplier that includes July 1, 2010. The recipient of the supply would also be entitled to claim any input tax credits or public service body rebates for the provincial component of the tax. There is no requirement to account for HST on progress payments that relate to property delivered to service performed on or after July 1, 2010 where the payments became due or were paid without becoming due before or on October 14, 2009.

Real property contracts greater than three months: There are special rules for real property contracts that expand more than three months. Specifically, where it is reasonably expected that a written contract to construct real property will require more than three months to complete, and the construction is substantially completed (90 per cent or more) before June 2010, the construction will be considered to have been substantially completed on June 1, 2010. Any consideration or part of the consideration payable on such a contact that had not been paid or becomes due on or before July 31, 2010, would be considered to have become payable on July 31, 2010 and any portion of such payment attributable to construction on or after July 1, 2010 would be subject to HST.

Holdbacks: A holdback from a progress payment is considered part of the progress payment from which it is held. The holdback would be subject to the same allocation as under the progress payment even if the holdback becomes due or is paid on or after July 1, 2010.

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Importations of goods and services into B.C. and Ontario

Importing property and services into B.C. and Ontario from a non-harmonized province
Table 4 provides a summary of how the general rules would apply where property and services are acquired in a non-harmonized province by a resident of B.C. or Ontario for import into B.C. or Ontario, respectively. There will generally be a requirement to self-assess the applicable provincial component of the HST unless the person who imports the property or service would be entitled to a full input tax credit to recover the tax paid.

Table 4

Type of supply Consideration due or paid on or after July 1, 2010 Consideration due or paid on or after May 1, 2010 and before July 2010 Consideration due or paid after October 14, 2009 and before May 2010[6] Consideration due or paid before October 15, 2009
Tangible personal property (goods), mobile homes, floating homes: brought into B.C. or Ontario after July 1, 2010

HST applies

Services: B.C. or Ontario  resident acquires services for consumption, use or supply primarily[7] in the participating provinces[8] HST applies HST applies HST only applies to non-consumers No HST applies
Leases and licenses: B.C. or Ontario resident acquires intangible personal property by way of lease, license or similar arrangement for consumption, use or supply primarily in the participating provinces HST applies HST applies HST only applies to non-consumers No HST applies
Sales of intangible personal property: B.C. or Ontario resident acquires the property by way of sale for consumption, use or supply primarily in the participating provinces  HST applies No HST applies No HST applies No HST applies


Importing goods into B.C. and Ontario from outside Canada
The provincial component of the HST would generally apply to non-commercial importations (e.g., consumer imports by a resident of B.C. or Ontario) of goods imported into Canada or accounted for under the Customs Act on or after July 1, 2010 and will be collected by the Canada Border Services Agency.

In addition, the provincial component of the HST will generally apply, on a self-assessment basis, to importations of specified motor vehicles or commercial goods brought into B.C. or Ontario from outside of Canada on or after July 1, 2010. However, commercial importations would not generally be subject to the provincial component of the HST where the person who brings the goods into the respective province is entitled to a full input tax credit.

Imported Taxable Supplies
Recipients of imported taxable supplies[9] would be liable to pay the provincial component of the HST by way of self-assessment.  However, generally no self-assessment would be required where the property or services are imported by a person who would be eligible to claim a full input tax credit. Table 5 summarizes the application of the provincial component of HST to consideration paid for supplies of tangible personal property, services and leases, licenses and similar arrangements of intangible personal property made on or after July 1, 2010.

Table 5

Type of imported taxable supply Consideration due or paid on or after July 1, 2010 Consideration due or paid on or after May 1, 2010 and before July 2010 Consideration due or paid after October 14, 2009 and before May 2010[10] Consideration due or paid before October 15, 2009
Tangible personal property delivered or made available, or the physical possession of which is transferred, on or after July 1, 2010 HST applies HST applies HST only applies to non–consumers No HST applies
Services for consumption, use or supply primarily in the participating provinces, to the extent of the service that is performed on or after July 1, 2010 HST applies HST applies HST only applies to non–consumers No HST applies
Leases, licenses and similar arrangements for intangible personal property for consumption, use or supply primarily in the participating provinces, to the extent of the part of the lease interval that occurs on or after July 1, 2010 HST applies HST applies HST only applies to non–consumers No HST applies


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Winding down of B.C. and Ontario PST and the B.C. hotel room tax (HRT)

Generally, the PST will no longer apply when the goods, services, admissions or accommodations are provided on or after July 1, 2010.

Table 6

  Before July 1, 2010 On or after July 1, 2010 Special situations
Tangible personal property (goods) 
  • Sales
PST No PST N/A
  • Leases, licenses or similar arrangements
PST No PST PST applies if the lease interval starts before July 1, 2010 and ends before July 31, 2010
  • Continuous supplies[11]
PST No PST N/A
  • Imported goods
PST No PST N/A
Taxable services PST No PST PST rules apply if more than 90% of the service is performed before July 1, 2010
Admissions PST No PST N/A
Accommodation[12] HRT No HRT HRT applies if the lease interval starts before July 1, 2010 and ends before July 31, 2010


There are exceptions, however, to the general rules when the goods, services or admissions are provided on or after July 1, 2010. The PST will apply where consideration for a sale of goods or services, and admissions, becomes due or is paid after October 14, 2009 and before May 2010 unless: the goods, services or admissions are purchased for use exclusively in the course of commercial activities or self-assessment of the provincial component of HST is required, in which case no PST will apply. Essentially, this exception applies to consumers in circumstances where the provincial component of HST would not be payable by them for consideration due or paid after October 14, 2009 and before May 2010. In these circumstances, the PST will apply and presumably be cIollected by the vendor accordingly.

Tax-included pricing in transitional period
If goods or taxable services (and admissions for Ontario purposes) are sold on a tax-included basis without disclosing the amount of PST included and payment is due or is paid between October 14, 2009 and May 1, 2010, the price would be considered to include PST.

Final PST return
Final PST returns are due on or before July 23, 2010. For PST collected or that becomes payable after June 30, 2010, a supplemental PST return would be required to be filed on or before the 23rd day of the following month. Ontario announced that the due date for the final supplemental return will be November 23, 2010.

Returns and exchanges
The following rules apply to returns and exchanges of property purchased before July 1, 2010 when the property is exchanged or returned on or after July 1, 2010 and before November 2010.

Table 7

 

Scenarios

                Outcome
PST HST
Taxable property returned for a full refund PST refund No HST
Taxable property exchanged with 1:1 value No PST refund No HST
Taxable property exchanged with partial refund Partial PST refund No HST
Taxable property exchanged with additional payment No PST refund HST on additional amount
Exempt/non-taxable property exchanged with additional payment No PST refund HST on the full price of replacement property

There would be no PST adjustments available at point of sale if the property was purchased before July 1, 2010 and it is returned on or after November 1, 2010. However, the purchaser will be able to file for a refund with the respective provincial authority (i.e., Ontario Ministry of Revenue and the B.C. Ministry of Finance).

Additional Compliance Announced by Ontario
Ontario PST that does not become payable under the current rules before October 31, 2010 will become payable on October 31, 2010 under the transitional rules.

Generally, refunds and rebates will expire the earlier of the existing time limit for claiming and June 30, 2014. 

There will be no change to the assessment, objection, appeal and enforcements provisions currently in place.

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Transitional PST inventory rebate for residential real property contracts

A PST rebate will be available for a real property contractor for the tax paid on construction materials that are purchased or produced for the contractor’s own use, held in inventory on June 30, 2010 and for use in a residential real property contract that is subject to HST. It would include contracts to repair or improve land and items permanently attached to land, such as buildings and patios. Residential real property contracts for repair and improvements to rental housing, condominiums, apartment buildings and long-term care facilities may qualify for this rebate.

The rebate is not available in cases where the PST is recoverable by the contractor or any other party. It is also not available for commercial and non-residential real property contractors.

The rebate will be administered by the respective provincial authority (i.e., Ontario Ministry of Revenue and the B.C. Ministry of Finance). The rebate application must be filed on or before December 31, 2010.

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Things to think about

The transitional rules as noted herein are numerous, in some cases complex and many require some form of compliance on the part of the taxpayer and/or supplier. Consequently, affected persons should consider carefully the impact these rules have on them, such as for example:

  • Businesses that sell services (e.g., lawn care, pool maintenance) to consumers that are not currently PST taxable may have an opportunity to sell such services prior to May 1, 2010 for delivery on or after July 1, 2010 without triggering any PST or HST where the consumer pays for the services before May 1, 2010.
  • Sellers and buyers must keep historic PST systems in place to continue to remit PST that becomes payable or that is collected after the July 1, 2010. For Ontario, the amounts must be remitted by November 23, 2010. Also for Ontario, sellers and buyers must be mindful of the fact that all Ontario PST becomes payable on October 31, 2010. The tax must be remitted by November 23, 2010 with the return.

Deloitte can assist in preparing and planning for the HST in B.C. and Ontario. We can perform a diagnostic analysis to assist with forecasting the impact of harmonization, establishing priorities for necessary systems and process changes, and planning to minimize the cost and cash flow impacts. The time to begin preparing for these changes is now.

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[1] A public service body is a non-profit organization, a charity, a municipality, a school authority, a hospital authority, a public college or a university.
[2] A consumer is an individual who acquires or imports property or a service for the particular individual’s personal consumption, use or enjoyment or the personal consumption, use or enjoyment of any other individual at the particular individual’s expense.
[3] Both government notices make specific reference to the existing anti-avoidance rules in the ETA that would apply to transactions to which the general transitional rules for the HST apply.  The notices also point out that additional anti-avoidance rules may be implemented in order to maintain the integrity of the HST and PSTs during the period of transition to the HST.
[4] Does not apply to consumers.
[5] Does not apply to consumers.
[6] Does not apply to consumers.
[7]  “Primarily” generally means 50 per cent or more.
[8]  Participating province means an HST province.
[9]  An imported taxable supply is defined in section 217 of the ETA.
[10] Does not apply to consumers.
[11]  Depending on the continuous supply, the rule for taxable services may apply.
[12]  This rule is relevant for B.C. only. Accommodation is a taxable service for Ontario PST purposes.

 

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