The HST is upon us. HST will now apply in Ontario and British Columbia as well as Nova Scotia, New Brunswick and Newfoundland (in addition to the very similar QST in Quebec). While the HST clearly means more sales tax for your organization, have you thought about how the HST will impact operations from a strategic perspective? Are you ready to self-assess tax where necessary so you can avoid interest and penalties? Are you sufficiently knowledgeable to ensure that you will be charged the right amount of tax?
In terms of whether you need to charge HST, there is really only one significant new issue. If your supplies are already GST exempt (that is, you do not charge GST on your supplies of goods and services or sales or leases of real property), they will continue to be exempt under the HST. The same rules in terms of taxable status of the products apply, with the exception of certain point-of-sale rebates in Ontario and British Columbia. However, you must be aware of the HST Place of Supply Rules (POS Rules). The POS Rules are extremely important, because you need to determine what rate of tax to apply to your taxable supplies or what rate you should be charged. The HST is 13% in Ontario, 12% in British Columbia, 15% in Nova Scotia and 13% in Newfoundland and New Brunswick. Quebec’s current rate for QST is 7.5% on top of the GST, which is 12.88% combined, and next year it will go up to 8.5% and the following year 9.5%.
The new general services POS Rule is based on the location (address) of the recipient. If the recipient has more than one address (business or personal, depending on the nature of the service), then the address that is “most closely connected” to the recipient’s business is the one to use. The question is what does the phrase “most closely connected” mean? Is it the old “place of negotiation” rule? Presumably not. Is it the place where the instructions emanate from, or is it the place that benefits most from the services (and what if that is more than one location)? If there is no address in Canada, then the place is where the greatest proportion of the services is performed. Alternatively, if none of the above apply, the Rule defaults to the highest tax rate (Nova Scotia at 15%).
The tangible goods POS Rules are already destination based for the most part; that is, the place of delivery. In other words, the existing QST rule applies: if goods are delivered to, or put on a common carrier for delivery to, the recipient, then the place of supply is the address of the recipient where they are received.
In terms of the self-assessment obligation, you must self-assess the provincial component of HST for any goods or services imported from another province if the supplier does not charge you HST. This is a very complicated rule and is similar to the current self-assessment on imported taxable supplies rule that applies for GST. Whether or not you realize it, any time a Charity or NPO imports services or intangibles (in other words, acquires services for use in Canada or intangible property rights that can be used in Canada), the Charity/NPO should be self-assessing the GST or it is subject to penalties. This rule will now be expanded such that Charities will need to self-assess for the provincial component of HST if it is not charged. For example, the 8% (Ontario) or 7% (British Columbia) HST provincial portion and will apply to importations of goods or services from other provinces where you are not charged HST.
The greatest impact by far of the HST, however, is the fact that your sales tax burden will be going up. As most Charities/NPOs are not engaged in commercial activities, they are not entitled to input tax credits to allow them to recover GST/HST. The HST rates are more than double the existing GST rate. Federally, Charities that are not entitled to claim ITCs (Input Tax Credits) receive a rebate of 50% GST paid, so the GST burden is really 2.5%. In the case of the HST, the rates are actually higher; for example, Charities and Qualifying NPOs receive an 82% Ontario rebate (in BC it is 57%). The end result is that the tax burden for an Ontario based Charity would be approximately 3.94%. In the case of a BC based Charity it will be higher (at 5.51%). This is the net tax that sticks after the rebate. In addition, there are some complicating factors as you will need to determine which HST is applicable for purpose of the rebate. If you pay BC tax, you will be rebated 50% of the 5% and 57% of the 7%. In the case of Ontario, you will be rebated 50% of the 5% and 82% of the 8% provincial component. The difficulty is that you will have to keep track of which HST you paid as you simply cannot throw all of the tax in the pot and claim a X% rebate. Therefore, if you operate in more than one jurisdiction, or pay more than one tax, you will have to keep track of each amount of HST you paid so you can apply for the appropriate rebates.
In addition, one of the major concerns with the HST for Charities is that virtually everything you acquire (goods, services and property) will be taxable. This is a major change from the PST legislation that applied previously as many services were not taxable. There were many exemptions on goods or other taxable services that exempted Charities from paying the PST. The end result is that the HST is going to increase the sales tax burden either because of the higher rate or the enlargement of the tax base.
What does this mean for you? It means that you should be planning to minimize HST payable or you should be planning to maximize your commercial business activities so that you can claim ITCs. You may also want to consider another method for accounting for HST remittable. It is also necessary to look at your supplies to determine their taxable status and see whether it is possible to change the status to being taxable to be able to claim ITCs. Of course, you may not want to. You may want to see if you can plan to reduce the amount of taxable supplies you make on the basis that it is more beneficial to recipients of your goods or services to not pay tax. It may make you more competitive. For example, if you are dealing with a catering service that involves the general public (such as a wedding), you may well want to continue to have your supplies be exempt or avoid doing something that would trigger taxation because that might make you a more competitive supplier, which, in turn, enables you to obtain more revenue to carry on your charitable activities.
This article first appeared in the Miller Thomson LLP Charity and Not-For-Profit Newsletter, which readers can subscribe to free of charge by emailing firstname.lastname@example.org.