April 23, 2010
By Gordon Jessup
If you are selling baked goods in Ontario, you are likely looking to
better understand the effects HST will have on your business.
If you are selling baked goods in Ontario, you are likely looking to better understand the effects HST will have on your business.
Ontario has announced that it will be harmonizing its retail sales tax (RST) with the GST effective July 1, 2010. The new harmonized sales tax (HST) will be 13 per cent and apply to taxable supplies made in Ontario after July 1, 2010.
The HST is based on the existing GST rules. In fact, the HST has been in existence in Nova Scotia, New Brunswick and Newfoundland since 1996. Supplies that are currently subject to GST will be subject to the HST after July 1, and supplies that are not subject to GST will not be subject to HST.
Basic groceries (most foods and beverages marketed for human consumption) are GST zero-rated (GST rate is reduced to zero per cent). Food and beverages that are not considered basic groceries (for example candies, confectionery and snack foods) are taxable at five per cent. When the HST comes into effect, the zero-rated items will continue to be zero-rated and the GST taxable items will be subject to HST.
Businesses will be required to pay HST on purchases of taxable goods and services just like they currently pay GST. Businesses that are not providing exempt supplies will be able to recover the HST that they pay as an input tax credit (subject to the restrictions noted below). HST collected and HST paid will be reported on the registrant’s GST/HST return.
As a transitional rule, Ontario is restricting the ability of large business (those with revenues exceeding $10 million) to claim input tax credits on certain items. The restrictions are only on the provincial component of the HST (i.e., eight per cent) on energy, telecommunications, road vehicles weighing less than 3,000 kg, and meals and entertainment expenses. Energy purchased by farms or used to produce goods for sale is not subject to the restriction and detailed records will be required to support the amount of energy used in these qualifying activities. The restrictions on input tax credits are scheduled to last for five years and then be subject to a three-year phase out.
With the introduction of the HST in Ontario and British Columbia (which will also be harmonizing its sales tax with the GST on July 1) new place-of-supply rules have been announced. These rules are used to determine whether GST or HST should apply on a taxable supply. The changes announced have no impact on the sale of tangible goods, but do impact the supply of intangible assets and services. A detailed review of the proposed place of supply rules is beyond the scope of this article. Businesses should educate themselves on these rules to ensure that they charge and collect the correct amount of tax.
With the introduction of the HST comes the repeal of Ontario’s retail sales tax (RST). After July 1, purchases will no longer be subject to RST. Businesses that are planning purchases of taxable goods may want to defer the purchase until after June 30 in order to avoid paying the RST. Any HST paid on the property would be recoverable, thus reducing its after-tax cost. If a purchase cannot be deferred, consider leasing instead of purchasing. Lease payments after July 1 will no longer be subject to RST; they will be subject to recoverable HST.
The bottom line is that businesses will be better off under the HST regime as compared to the RST regime. When a business is purchasing services that were not previously subject to RST, it will be paying additional tax at the time of purchase. However, the business will be able to claim it back as a credit. Businesses who make zero-rated supplies will pay the tax and wait for a refund after filing their GST/HST returns.
Gordon Jessup is a partner in the tax practice of Fuller Landau LLP. He can be reached at 416-645-6508 or email@example.com.
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