Ontario – New value added tax
Canadian Indirect Tax News, March 27, 2009
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- Canada and Ontario have entered into a Memorandum of Agreement for Ontario to join a framework agreement for federal collection of a single value added sales tax.
- Starting July 1, 2010, the Ontario Retail Sales Tax (RST) will be converted to a value added tax structure and combined with the federal Goods and Services Tax (GST) to create a single sales tax at a rate of 13%. The provincial portion will be at a rate of 8% and the federal portion at a rate of 5%.
- The single sales tax will generally use the same rules and tax base as the federal GST.
- The tax will be administered by the Canada Revenue Agency and the Canada Border Services Agency.
- The government will establish an implementation panel to assist with the transition to the single sales tax.
- More details on the technical and transitional rules of the new tax will be published in the coming months. Although not noted in the Budget announcements, the specific areas where the retail sales tax provisions will continue to apply are expected to be covered by separate provincially administered legislation.
Measures affecting businesses
- Businesses selling taxable or zero-rated goods and services will be able to claim input tax credits (ITCs) on their purchases, as under the GST, with limited exceptions.
- Businesses selling tax-exempt goods or services will be unable to claim ITCs as under the federal GST rules. For example, most financial services are GST exempt and therefore ITCs may not be claimed in respect of these services.
- Ontario will provide up to a total of $400 million in one-time transition support to small business in the form of a small business transition credit.
- Most businesses, other than financial institutions, with less than $2 million in annual revenue from taxable sales will be eligible for a transition credit of up to $1,000.
- Ontario will parallel the GST small supplier threshold where businesses with sales under the threshold are not required to register and collect the single sales tax.
- Small suppliers (with total taxable revenues of $30,000 or less in the prior year or $50,000 or less in the case of a public service body) that choose not to register will not be required to file a single sales tax return and will not be eligible to claim ITCs.
- With the elimination of the RST, vendor compensation will end as part of the transition to the single sales tax. Vendor compensation will continue to apply for RST returns filed up to and including those filed for the period ending March 31, 2010 under the existing RST system.
- Ontario’s public service bodies (e.g., municipalities, hospitals, universities, colleges, school boards, charities and qualifying non-profit organizations) will be able to claim rebates for the provincial portion of the single sales tax.
* Rebate of provincial portion of tax paid based on federal GST public service body definitions.
Rebates for public service bodies Sector Rebate* Municipalities 78% Universities and Colleges 78% School Boards 93% Hospitals 87% Charities and Qualifying Non-Profit Organizations 82%
- Similar to the restricted ITC system in Quebec, large businesses (those with annual taxable sales in excess of $10 million) and financial institutions will be unable to claim ITCs in certain areas on the Ontario portion of the single sales tax. However, in Ontario, these restrictions have been announced as being temporary. After the first five years of single sales tax implementation, full ITCs to the extent relating to taxable supplies will be phased in over the subsequent three-year period.
- The temporary ITC restrictions for large businesses are:
- energy, 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, and
- food, beverages and entertainment.
- Ontario will retain a tax on insurance at 8% after the transition to the single sales tax on the same types of insurance currently taxed under the RST. Automobile insurance premiums will continue to be exempt from sales tax.
- Alcoholic beverages sold through licensed establishments and through retail stores will be taxed at the single sales tax. The provincial rate on these products will fall to 8%.
- The government proposes to introduce tax legislation to replace various alcohol and other fees, levies and charges in order to maintain the current net pricing based on the current 10% and 12% rates on alcoholic beverages.
Measures affecting individuals
- $4 billion in relief will be provided to Ontarians in an effort to ensure a smooth transition to the new sales tax system.
- Ontario sales tax transition benefit:
- benefits will be delivered to eligible Ontario tax filers aged 18 and over,
- eligible families with an income of $160,000 or less will receive three payments totalling $1,000,
- eligible single individuals with an income of $80,000 or less will receive three payments totalling $300, and
- the first benefit will arrive in June 2010, the second in December 2010, and the third in June 2011.
- A new Ontario sales tax credit will be introduced to help low to middle income individuals and families with a permanent refundable credit of up to $260 for each adult and child. The new sales tax credit will be paid quarterly starting in July 2010.
- An enhanced refundable property tax credit will be introduced for low and middle income homeowners and tenants.
- Point of sale rebates will be introduced for the provincial portion of the single sales tax for the following items: books, children’s clothing and footwear, children’s car seats and booster seats, diapers, and feminine hygiene products.
- The new single sales tax will apply to new home sales. The Budget announcements refer to a study of embedded RST costs of approximately 2% to 3%. Hence, the government’s stated intent of the change in tax application is that new homes under $400,000 will not be subject to an additional tax burden, for which a new housing rebate will be implemented. Homebuyers will be able to claim a rebate of part of the provincial portion of the tax for new homes priced up to $500,000. The rebate for new primary residences under $400,000 will be 75% of the provincial portion of the tax (or 6% of the purchase price), with the rebate amount reduced for homes priced between $400,000 and $500,000. New homes priced in excess of $500,000 will not be eligible for any rebate.
- Resale homes will not be subject to the single sales tax.
- The RST rate on transient accommodation will increase to 8% under the provincial portion of the single sales tax, from the current 5%.
- Ontario will retain a sales tax on private transfers of used motor vehicles.
At this point, we are awaiting further details in several areas, including:
- Detailed information is required regarding transitional rules phasing out the current RST (e.g., audits, refunds) and phasing in the new single sales tax (e.g., registration obligations).
- It appears that financial services will be exempt as per the federal GST treatment. If Ontario adopts the current harmonized sales tax (HST) approach followed in the HST provinces of Newfoundland, New Brunswick, and Nova Scotia, the HST rules address inter-provincial activity. For example, under the HST there is a special attribution formula to calculate net tax for financial institutions operating both inside and outside the harmonized provinces. For those financial institutions operating exclusively within the HST provinces, there are inter-provincial import rules. No such rules have yet been announced for Ontario.
- Transitional rules for implementing Ontario’s single sales tax for real property, tangible personal property, and services (e.g., contracts straddling the implementation) have not yet been announced.
- Provincial place of supply rules, inter-provincial zero-rating and any unique Ontario considerations have also not been announced.
- With the announcement respecting the new home rebates, there was no reference to the inclusion of parallel rebate relief for the multiple unit residential or senior care industry as exists under the federal GST.
- The proposed ITC restrictions will impact certain sectors more than others. However, there has been limited reference to relief mechanisms such as those introduced in Quebec.
- Municipalities which currently receive 100% rebates or ITCs federally will have to revert to allocating inputs in order to recover the 78% rebate for the provincial portion of the single sales tax on input costs relating to exempt supplies.
- All public service bodies will have different federal GST and provincial component rebates, resulting in effective blended rebate rates for their operations.
- The direction Ontario has taken is expected to impact the approach taken by other non-harmonized provinces.
Business to take action:
- Computer software systems changes will be required to account for charging, collecting, remitting and recovering the new single sales tax and for aspects of the tax unique to Ontario (as compared to the federal GST treatment).
- Businesses will be required to consider the impact of these changes on their costing and pricing models.
- The time to consider tax planning opportunities and their impact relating to these new changes is now. Clearly, there are significant elements of the new single sales tax still under development. However, the actions that your business takes today can enable you to prepare for, mitigate and possibly improve the impact of sales tax on your business, in areas such as capital acquisitions, lease versus buy considerations, importations, central purchasing and inter-provincial movement of goods.
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