The HST has been in place in Ontario and British Columbia for the past 18 months and businesses have likely discovered that the harmonized sales tax (HST) has both advantages and challenges. Figuring out which rate of tax to collect on sales can get complicated, if your business is in an HST province and you have customers across Canada. The rules can get even more complex if your customers reside outside of Canada.
Recently, a few of my clients have asked me how they can ensure they are collecting the right amount of tax on the goods and services they sell. Unfortunately, there is no quick and easy answer to this question. To ensure you are applying the right sales tax, business owners need to spend time working through complex HST rules that have multiple layers, because getting it wrong could be costly. With HST currently at 13 per cent in Ontario, errors can be more than twice as much as they were under GST. These rules are about to get even more complicated when British Columbia transitions back to provincial sales tax effective April 1, 2013 and Quebec harmonizes its QST with the GST effective January 1, 2013.
Tax systems vary across all provinces: Nova Scotia, New Brunswick and Newfoundland have HST at 15 per cent, 13 per cent and 13 per cent, respectively; Saskatchewan, Manitoba and P.E.I. have their own provincial sales taxes; Quebec has its own system which is soon to be harmonized; Alberta has no provincial sales tax. Of course, the 5 per cent GST applies in all non-HST provinces.
One advantage of being located in a province with HST is that you may be able to claim back the HST paid on products you purchase directly for your business such as, computers, software, furniture, paper and toner. Under the previous sales tax systems, you could generally only claim the GST, but not the PST. However, when British Columbia transitions back to a PST, this advantage will no longer apply and planning measures should be considered in order to minimize the amount of potentially unrecoverable PST to be incurred on purchases.
It’s important to keep in mind that the HST rules apply differently depending on the types of goods or services you sell. To determine which rate of tax to collect, you need to correctly classify what you’re selling.
When it comes to tangible goods — merchandise, for example — the HST rate you charge is based on where the goods are delivered. For instance, if you ship merchandise to a customer in Ontario, you charge 13 per cent HST, regardless of where your business is located. For suppliers in some provinces, there is an added complication: certain items qualify for a point-of-sale rebate of the provincial portion of HST (your cup of Tim Hortons coffee – for example).
If your business provides services or intangible personal property, the rules are more complicated. You might have heard of the GST’s “place of supply” rules that applied to these items under the previous tax regimes in Ontario and British Columbia. These rules have changed and this is where there seems to be some confusion.
For a translation services company, for example, it is generally the case that the service is deemed to be provided in the province of the customer’s address. So, if your translation company is in Ontario, but you service customers with an address in Nova Scotia, you would charge HST at a rate of 15 per cent. To complicate matters even more, the general rule doesn’t always apply for all services. When it comes to freight transportation, telecommunications, and services related to goods such as repairs, maintenance, cleaning and alterations, there are approximately 11 other rules that you need to take into consideration.
The lines between categories sometimes can be difficult to decipher. It’s usually clear which goods are tangible, but you might find it’s not so clear-cut when it comes to services and intangible personal property. If your business supplies something electronically, such as access to information on a database, it could be treated as either a service or an intangible personal property and the tax requirement would be different.
This article peels back only a few layers of HST regulations. As I speak to more and more of my clients it has become clear to me that there are multiple scenarios and rules that you need to consider to ensure you’re getting the HST right. The rules vary when it comes to closely-related corporations, automobile benefits, leased vehicles, meals and entertainment; and repairs and maintenance, to name a few. Taking the time to understand the HST rules can save you time and money, and failure to do so could result in costly penalties and interest