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GWA Business Solutions

HST and Your Business

2009 Ontario Harmonization Update2009 Ontario Harmonization UpdateAre your clients ready for the OHST?Are your clients ready for the OHST?

Outline

• Background to the Ontario HST

• Planning for the OHST

• Transition to the OHST- Sale of TPP

- Services

- Leases

- Memberships

- Real Property

• OHST and the Residential Housing Industry

• MUSH Sector and the OHST

Background to the OHST

Setting the Landscape

Limited guidance issued so far

• No legislation has been issued

• Relying on budget comments and some pronouncements

• Presentation is based on speculation


Overview

• Effective July 1, 2010

• Rate of 8% for the OHST and 5% for the GST

• Parallels the GST

• HST is a “value-added tax” rather than the Ontario Retail Sales Tax (ORST) which is a consumption tax

• Elimination of the Ontario Retail Sales Tax


Overview

• Part of Ontario’s Comprehensive Tax Package

• Simultaneous decrease in rate of income tax for individuals, small businesses and corporations

• Intended to attract investment and employment to Ontario


Benefits of Replacing ORST with OHST

“Simpler” compliance

- Deal with only one government tax authority

- One potential compliance audit

• ORST is subject to interpretation

- Results in many judgment calls made by auditors

- Limited legislative guidance

• Will eliminate embedded ORST previously absorbed by persons engaged exclusively in commercial activities as OHST recoverable as ITC’s

Costs of Replacing ORST with OHST

• Additional tax to consumers

• Expenditures not currently subject to ORST:

- i.e. professional fees, commercial rents, real property purchases

• Additional tax on entities not exclusively engaged in commercial activities (i.e. Exempt supplies)

- Health Care services

- Financial institutions

• Cash flow impact

- Like the GST, OHST will be remitted when billed, not when collected

- Purchases taxed at 13%



Accounting Issues

• Systems implementation to provide for OHST and elimination of Ontario RST

• Tracking ITC’s is important again- Tracking potential restricted ITCs

- On which expenses can you claim an ITC? (i.e. municipalities, charities, etc.)

- How to implement?

- Required system changes


ITC Restrictions

Apply to:

• Financial institutions

• “Large Businesses”

- TAXABLE sales over $10,000,000 annually

- On an associated basis

• Recovery of ITC’s on OHST paid restricted as follows: - First 5 years

- After first 5 years, phased in over next 3 years


ITC Restrictions on OHST Paid

Restricted purchases:

• Energy (except for energy used for farming or for production of goods for sale)

• Telecommunications services other than internet access or toll free numbers

• Road vehicles less than 3000 kilograms and related fuel, parts and certain services

• Food, beverages and entertainment


Point of Sale Rebates

• Tax Relief from the OHST portion for:

- Books (including audio books)

- Children’s clothing and footwear

- Car seats and car booster seats

- Diapers

- Feminine hygiene products

- Meals under $4.00

Planning for the OHST

Planning Opportunities

• Accelerate purchases before July 1, 2010 with no ORST but Ontario HST- Most services (subject to transitional rules)

- Where full recovery of OHST is not available

• Delay purchases that have ORST charged- ORST is an additional unrecoverable cost- HST may be eligible for a rebate or ITC- Lease now; buy later? (contract structuring)


OHST Planning Opportunities

• Contracts extending beyond July 1, 2010- Consider OHST implications

• Prepayment of taxable items- example: Golf fees for 2010- Important when no full recovery of OHST- Works for consumers


OHST Planning Opportunities

May voluntarily register for GST if small supplier

• Input tax credits may become available in respect of the taxable supplies

• OHST will be a 13% cost


OHST Risk Areas

• 13% risk if GST/HST is not collected

• Entities that don’t usually collect GST- Charities- Non-profits- Doctors- Financial institutions- Self employed


• HST Impact Analysis

• HST Implementation Strategy

• Staff Training

• Post-Implementation Review

Transition to the OHST

Introduction

Dealing with transactions that straddle the July 1, 2010 implementation date

• When do we charge ORST?

• When do we charge the OHST?

• Ontario Information Notice issued on October 14, 2009 provides general guidance

Sale of TPP

RulesWhen is GST Payable?

Earlier of when the consideration for the supply:• Becomes due; or• Is paid without becoming due.• Subject to special over-ride rules

Difference between a “deposit” and the payment of the consideration

Sale of TPP

OHST General Rule – Starting on May 1, 2010

• For transactions that straddle the July 1, 2010 date– Charge OHST starting on May 1, 2010– Some exceptions depending on nature of supply require earlier OHST billing– See lifetime memberships and construction progress billings

Sale of TPPSale of TPP

Example 1

• Sale of TV occurs in April 2010

• Purchased for $25,000 for his personal use

• Pays for the TV in full at the time of purchase

• TV gets delivered and ownership transfers on July 15, 2010

Sale of TPP

Result

• TV was paid in full April 2010 (before May 1, 2010)

• GST is triggered in April 2010

- Earlier of when consideration becomes due, or- when paid without becoming due

• Therefore, no requirement to collect OHST

Sale of TPP

General Rule for ORST

• ORST will generally cease to apply- to a sale of goods where the goods are delivered and ownership of goods are

transferred after July 1, 2010

Sale of TPP

ORST Overriding Rules

• ORST continues to apply on pre October 15, 2009 transactions- where consideration becomes due or is paid on or before October 14, 2009

• Example: sale of tickets in September 2009 for an event that takes place in July 2010

Sale of TPP


• After October 14, 2009 and before May 2010- Where consideration becomes due or is paid within these dates- ORST should be collected on July 1, 2010 straddle transactions

• No ORST required to be collected if:- Self assessment of OHST by purchaser, or- Exclusively in commercial activities

Sale of TPP

Self Assessment of the OHST

Transactions after October 14, 2009 and before May 2010

• Who is required to self assess Ontario component of OHST?- Excludes consumers- Businesses not exclusively in commercial activities- Businesses subject to ITC restrictions- Using simplified procedures (i.e. charities, quick method)- Selected listed financial institutions

• Remit self assessed OHST earlier of the GST return for July 1,2010 transactions or on prescribed form before November 1, 2010.

Sale of TPP


Practical problem

• How does the vendor know if purchaser is required to self assess or is exclusively in a commercial activity?

Opportunity

• ORST paid in error by the purchaser- On July 1, 2010 straddle transactions where ORST collected

Sale of TPP

Example 2

• Registered charity buys the TV in April 2010

• Delivered in July 2010

• Ownership transfers in July 2010

Sale of TPP

Result

• Self assess the Ontario component of OHST on the purchase of the TV, earlier of- GST return that includes July 1, 2010, or- before November 2010 on prescribed form

• Claim 50% rebate of GST; Claim 82% rebate of provincial component of OHST

• If ORST is paid, refund opportunity

Sale of Services

General Rules

• Starting May 1, 2010 need to collect OHST on transactions that straddle July 1, 2010

• OHST applies to services provided after July 1, 2010

Sale of Services

Example

• Lawn maintenance package purchased on April 15, 2010

• Service covers period from June 1, 2010, to December 31, 2010

• Does OHST need to be collected?

Sale of Services

Result

• No OHST is collected since the service is paid for before May 1, 2010

• However, self assessment required on cost of maintenance package that relates to post July 1, 2010 period

Sale of Services

Rules

• No OHST to be charged on:- A supply of a service that is 90% performed before July 1, 2010- Billings will require adjustments to correctly apply tax to pre and post OHST

services

Sale of Services

Example

• Issues an invoice on August 15, 2010, for $1,000

• Maintenance period from June 1, 2010 to December 31, 2010

• Does OHST need to be collected?

Sale of Services

• Result

• Consideration becomes due on August 15, 2010- Date of invoice

• OHST and GST charged for period July 1, 2010 to December 31, 2010 ($857.14 x 13% = $25.71)

• GST charged for the month of June, 2010 ($142.86 x 5% = $7.14)

• $32.85 remitted in return covering August 15, 2010

Sale of Leases

Rules

• OHST would generally apply to a supply of property by way of lease, licence or similar arrangement for the part of a lease interval that occurs on or after July 1, 2010.

• The OHST would not, however, apply to a supply of property by way of lease, licence or similar arrangement if the lease interval begins before July 2010 and ends before July 31, 2010.

Sale of Leases

Example

• 2008 lease- 5 years- “Lease interval” May 1, 2010 to October 31, 2010

• Payment due March 31, 2010

• Recipient uses the Quick Method

• Does OHST apply? Does ORST apply?

Sale of Leases

Result

• Each lease payment is a separate supply

• No “grandfathered” leases

• No OHST to be collected since payment due before May 1, 2010. GST would be due on March invoice

• Purchaser needs to self assess 8% portion of OHST on post July 1, 2010 period since on the Quick Method

• ORST applies for the pre July 1, 2010 period

• If ORST is paid on entire lease interval, eligible for rebate for postJuly 1, 2010 period

Sale of Memberships

Rules

• A supply of a membership in a club, organization or association deemed to be a supply of a service for purposes of the transitional rules.

• OHST is payable with respect to the period after July 1, 2010

Sale of Memberships

Example

• Golf Membership for 2010

• Membership to be billed in 3 equal installments

• $1,000 each on January 1, May 1 and September 1

• Does the OHST apply?

Sale of Memberships

Result

• Considered to be a service

• OHST to be collected on fees that become due or paid after April 2010 but relate to post July 1, 2010 period (May and September)

• First payment not subject to OHST

• No self assessment on fees required since OHST paid on post July 1, 2010 period

• OHST to be collected on ½ of the May invoice (July and August portion)

Sale of Memberships

Rules: Lifetime Memberships

• After October 14, 2009 and before July 2010- The first 25% of the membership is not subject to OHST- OHST collected on the remainder

Sale of Memberships

Example: Lifetime Memberships

• $40,000 total cost of membership

• $20,000 due on March 1, 2010

• $20,000 due on September 1, 2010

• How much GST/HST is due? When is the tax due?

Sale of Memberships

Result: Lifetime Memberships

• Payment due after October 14, 2009, and before July 1, 2010

• March 1, 2010 billing is 50% of lifetime membership fee- Must collect OHST on portion of fee exceeding 25% of total lifetime membership or

$10,000 of March 1, 2010 billing

Sale of Memberships

Result: Lifetime Memberships

• Must collect GST on first 25% of membership fee ($10,000) of March 1, 2010 billing

• GST = 5% of $20,000 ($1,000) must be reported in March return

• Ontario component of OHST must be collected on amount in excess of 25% of membership fee ($10,000 x .08 = $800), and must be reported in July return

• OHST must be collected on September 1, 2010 billing($20,000 x .13% = $2,600) and reported in September return.

Real Property

Rules

• Determining when GST is payable

• GST is generally payable when consideration is paid or becomes due

• Override rule for real property construction services*

- GST is deemed to become due on any consideration that has not been paid or invoiced on the last day of the month following the month in which substantial completion is reached.

* Applies to construction, renovation, alteration or repair of real property

Real Property

Rules: OHST and Real Property contracts

• OHST applies if the payment is attributable to property delivered or services performed after July 1, 2010

• OHST applies to amounts due or paid without becoming due afterOctober 14, 2009 and before July 1, 2010

- Exception to the May 1, 2010 rule

- i.e. OHST applies to April 2010 progress billing if attributable to property delivered or services performed after July 1, 2010

• If OHST applies to pre July 1, 2010 billing it is reported on GST/HST return that includes July 1, 2010 and before November 2010

• Does not apply to sale of residential property

Real Property

Example

• Building is substantially completed on May 2, 2010

• Contract is for $1,500,000 with the following billings:- $500,000 due on March 31, 2010

- $500,000 due on May 15, 2010

- $500,000 less $150,000 holdback is due on August 15, 2010

- $150,000 holdback is due on September 1, 2010

• First two payments attributable to property and services delivered prior to July 1, 2010

• 70% of last two payments attributable to post July 1, 2010

Real Property

Result

• Substantial completion occurs on May 2, 2010

• GST owing on the $350,000 payment ($17,500) due August 15, 2010 needs to be remitted by June 30, 2010

• GST does not apply to the $150,000 holdback- GST on holdback is due September 15, 2010

Real Property

Result

March 31, 2010 and May 15, 2010 billings

• 100% attributable to property delivered and services performed beforeJuly 1, 2010

• No OHST would be collected on these payments, only GST

Real Property

Result

• August 15, 2010 Payment of $350,000

• $150,000 related to holdback not due until Sept 15, 2010

• 70% of $350,000 attributable to property delivered and services performed after July 1, 2010

• OHST of 8% of 70% times $350,000 or $19,600

• For OHST, substantial completion is deemed to be June 1, 2010 (not May 2, 2010)

• OHST due July 31, 2010 because of the substantial completion rule

Real Property

Result

• $150,000 Holdback on September 15, 2010

• 70% attributable to property delivered or services rendered after July 1, 2010

• OHST of 8% of 70% times $150,000 or $8,400

• Reported on September 2010 GST Return

• GST of $7,500 is also reported on September return

Residential Housing

General Rules

• Agreements prior to June 18, 2009: “Grandparented Transactions”- No OHST is collected- Builder has taxpayer transitional adjustment based on % completion as of June 30,

2010

• Post June 18, 2009 Agreements- OHST applies- Is entitled to a transitional ORST rebate

Residential Housing

Rules: Grandparented Purchases

• Impact on Builder

• No OHST to be collected on the sale

• Need to pay a transitional tax on homes not 90% complete by July 1, 2010

• Approximates the ORST savings to the builder on post July 1, 2010 expenditures

• Transitional tax applies to sales of a condominium complex or residential condominium units regardless of % of completion of units

Residential HousingResidential Housing

Rules: Grandparented Purchases

Impact on Builder

• Transitional tax adjustment (TRA) is based on the total purchase price of the home

• TRA is based on the percentage completed as of July 1, 2010

• For example, if the home is less than 10% complete, the TRA is equal to 2% multiplied by the total purchase price

• TRA % on declining degree of completion - 1.5% if more than 10% but less than 25%

- 1.0% if equal to or more than 25% but less than 50%

- .5% if equal to or more than 50% but less than 75%

- .2% if equal to or more than 75% but less than 90%

- 0% if equal to or more than 90% complete

Residential Housing

Example: Grandparented purchase

• Agreement date is June 1, 2009

• Ownership and possession to be transferred in August 2010

• $300,000 home

• Does OHST apply?

Residential Housing

Result

• Agreement on or before June 18, 2009

• Would be eligible for the 36% rebate of the GST paid provided all conditions are met

• No housing rebate for the OHST since no OHST was paid on the purchase

Residential Housing

Rules: Post June 18, 2009 Agreements

• Eligible for new housing rebates (GST and Ontario component of OHST)

• Maximum rebate for Ontario component is $24,000 on a $400,000 home

• Unlike the GST rebate, not phased out for homes costing more than $450,000

• Calculated as 75% of the Ontario component of the OHST paid

Residential Housing

Rules: Agreements subject to OHSTTransitional ORST Rebate Calculation

• Based on the percentage completed on July 1, 2010

• Paid to purchaser

• Two methods to determine ORST content:– ORST content based prescribed rate per square metre of floor space– ORST content based on 2% of selling price

Residential Housing


• Based on the estimated ORST contentBased on the estimated ORST content

• Increasing scale based on percent complete as of July 1, 2010Increasing scale based on percent complete as of July 1, 2010- 0% if less than 10% complete0% if less than 10% complete- 25% if equal to or more than 10% but less than 25%25% if equal to or more than 10% but less than 25%- 50% if equal to or more than 25% but less than 50%50% if equal to or more than 25% but less than 50%- 75% if equal to or more than 50% but less than 75%75% if equal to or more than 50% but less than 75%- 90% if equal to or more than 75% but less than 90%90% if equal to or more than 75% but less than 90%- 100% if equal to or more than 90% complete100% if equal to or more than 90% complete

Residential Housing

Rules: Post June 18, 2009 Agreement

Transitional ORST Rebate Timeframes• If using the floor space method rebate must be filed after June, 2010

and before July 1, 2014.

• If using the selling price method rebate cannot be filed earlier than when OHST payable or when TRA would be considered collected and beforeJuly 1, 2014.

Residential Housing


For new condo’s, apartments and residential housing units

• Rebate available to the builder rather than the purchaser

• Rebate would be available where transitional tax adjustment or single sales tax would apply

• Rebate would also be available for qualifying new additions to traditional apartment buildings

Residential HousingResidential Housing

Example 2: Post June 18, 2009 Agreements

• Agreement entered into on October 15, 2009

• Ownership and possession to transfer after July 1, 2010

• $300,000 purchase price

• Does OHST apply?

Residential Housing

Result

• Written agreement of purchase and sale entered into after June 18, 2009, and both ownership and possession of the house transfer to the purchaser after June, 2010

• OHST and GST at 13% would apply to the sale

• If construction of house at least 10% complete on July 1, 2010, purchaser entitled to claim new housing rebate

• Purchaser may also be entitled to claim Ontario new housing rebate in respect of the Ontario part of the OHST

Residential Housing

Result

• Cost of home is $300,000

• OHST/GST of $39,000 payable on home ($24,000 Ontario component; $15,000 GST)

• New housing rebate is 75% of the Ontario OHST or $18,000- Net provincial tax is $6,000

- Equal to estimated 2% of the ORST embedded in a new home before phase out

• Amounts greater than $400,000 will have 6% more tax (i.e. 8% OHST – 2% ORST previously embedded)

Residential Housing

Result

• Since sale is subject to OHST, no ORST should be embedded in the builder’s cost

• Purchaser may be eligible for an ORST refund based on the estimated ORST content

• Percentage of completion of home will determine the amount, if any, of the rebate

• Rebate can be claimed through the builder or from CRA with builder certification of the percent complete

MUSH Sector OHST

• Municipalities, Universities, Colleges, School Boards, Hospitals, Charities, Qualifying Non-Profit Organizations

• Benefits / potential costs?

• Each entity should review carefully implications of OHST in upcoming budgets

MUSH Sector OHST

• Public service bodies presently recover GST as a percentage of GST paid

• Public service bodies will also be able to claim rebates on provincial OHST portion

• Entities in the MUSH sector will need to track federal portion and provincial portion separately to calculate rebates

MUSH Sector OHST

Sector Rebate Table

GST OHST

Municipalities

Universities/Colleges

School Boards

Hospitals

Charities, Qualifying Non-Profit Organizations

100%

67%

68%

83%

50%

78%

78%

93%

87%

82%

QUESTIONS?

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Documents

ontario retail sales

ohst portion

recovery of ohst

ohst recoverable

ohst paidrestricted

valueadded tax

ohstadditional tax

orst chargedorst