July 23, 2009

No. 2009-23

B.C. Announces PST-GST Harmonization

Today B.C. Premier Gordon Campbell and Finance Minister Colin Hansen announced that British Columbia intends to harmonize its provincial sales tax (PST) with the federal Goods and Services Tax (GST), effective July 1, 2010.

B.C. proposes to combine its PST with the GST to create a single, value-added harmonized sales tax (HST) that will be federally administered. The HST rate in B.C. will be 12% (comprising a 5% federal portion and a 7% provincial portion). 

B.C. joins Ontario, which previously announced that it will harmonize its PST with the GST effective July 1, 2010. (New Brunswick, Nova Scotia, and Newfoundland and Labrador harmonized with the GST in 1997.) Today’s announcement provides only limited details on the specific application of the HST in B.C. However, it appears that there will be both similarities and differences in how the HST will apply in Ontario and B.C.

Business measures
Today’s announcement by B.C. indicates that there will be a temporary delay in the provision of input tax credits for certain purchases by businesses with taxable sales exceeding $10 million.

Although no details were announced, if B.C. follows Ontario’s approach, it may restrict large businesses (with annual taxable sales exceeding $10 million) and financial institutions from claiming input tax credits related to energy, certain telecommunication services, road vehicles, and food, beverages and entertainment. In Ontario, these restrictions will apply only to the 8% provincial portion of the 13% HST. After the first five years of HST implementation, full input tax credits on these businesses’ taxable supplies will be phased in over three years. 

Public service bodies measures
Public service bodies are currently entitled to claim partial rebates of the GST. B.C. has announced that some public service bodies will also qualify for partial rebates of the provincial portion of its HST, intended to avoid an increase in the tax costs to that sector. No details as to the rebate percentages have been provided. 

Measures for individuals
Like Ontario, B.C. proposes to exempt books, diapers, children’s clothing and footwear, children’s car seats and car booster seats and feminine hygiene products from the 7% provincial portion of the HST. However, B.C. also intends to provide consumers with point-of-sale rebates for the 7% provincial portion of the HST included in purchases of gasoline and diesel fuel for motor vehicles, including any bio fuel components. Since these exemptions will take the form of point-of-sale rebates, they will also preserve retailers’ ability to claim input tax credits.  

For homebuyers, a new housing rebate will apply to certain new homes. Buyers will be able to claim a rebate of part of the provincial portion of the HST for new homes priced up to $400,000. The rebate rate has not yet been announced but the stated intent is to ensure that new homes up to $400,000 will bear no more tax than they currently do under the existing PST system. New homes over $400,000 will be eligible for a flat rebate of approximately $20,000.

To help compensate for the increased cost of the HST to consumers, B.C. proposes to pay a quarterly HST credit along with the existing GST and carbon tax credits to offset the impact of the tax on those with low incomes.

Planning your next steps
Companies that do business in B.C. will be affected by the province’s proposal to harmonize effective July 1, 2010, which is now less than a year away.  Businesses need to start preparing for the transition and determining the resources they will need to make the necessary changes as they plan their financial budgets, capital expenditures and human resource allocations for the coming year.

Transitional rules
B.C. and the federal government have yet to provide transitional rules for the B.C. HST. However, they may look to the rules that applied when Nova Scotia, New Brunswick and Newfoundland and Labrador harmonized their PSTs with the GST in 1997 (the 1997 model) for guidance in developing their position. It is possible that B.C. will adopt the rules currently being developed for Ontario’s harmonization.

KPMG observation

Until transitional rules are released, companies may find it difficult to determine the full impact of the proposed harmonization on their businesses, including the impact of the HST on existing agreements and proposed transactions. For that purpose, the 1997 model may provide some clues as to what’s in store.

For example, when the HST was introduced in 1997, special transitional rules were introduced to limit some opportunities to prepay certain expenses that would become taxable under the HST system.

What should you do now to get ready?
Though transitional rules are not yet available, businesses can take steps to start preparing for the HST.

For example, you may want to review your business’ accounting and IT systems to see whether you need to develop better internal controls for GST/HST purposes because, among other things, the cost of an error in determining the tax status of goods may increase to 12% (from 5%) of the sale price in many cases.

Your business may also want to consider the following ideas to start planning for the change to the HST:

· Budget for the financial and cash flow implications of the HST transition in the 2010 financial plans you are developing now

· Determine the IT resources you will need to change your systems to accommodate the HST

· Consider whether you want to submit comments to the government

· Consider tax planning opportunities such as deferring purchases until after July 1, 2010, if practical, so you can claim input tax credits on the provincial portion of the HST as well as the GST portion.

You may want to review how the current HST place of supply rules and PST rules in other provinces may interact on the same goods and services, particularly if you supply intangible personal property or services in several jurisdictions. 

GST and HST registration
Based on the existing GST/HST rules, we anticipate that GST-registered businesses will automatically be considered registered for the B.C. HST and will be required to collect the tax, where applicable. This was the approach followed under the 1997 model.

KPMG observation

B.C. HST will likely add another layer of complexity for GST-registered businesses located in non-harmonized provinces and other jurisdictions. Based on the 1997 model, these GST-registered Canadian and non-resident businesses will likely be required to collect the B.C. HST if the place of supply of the goods or services is determined to be in B.C.

Claiming input tax credits
Businesses selling taxable or zero-rated goods should generally be able to claim input tax credits for the HST paid on their purchases, subject to the input tax credit restrictions for large businesses noted above. B.C. has not yet indicated which types of expenditures will be restricted; however, it is possible they will restrict the same expenditures as Ontario.

KPMG observations

Canada and B.C. have yet to elaborate on the calculation of the $10 million threshold for large businesses. Under the Quebec Sales Tax (QST) system, which has similar restrictions, the threshold calculation includes items such as the value of taxable supplies made in Canada by the person and its associates, the value of exports and the value of supplies made between closely related corporations deemed made for nil consideration under joint elections.

Measures for retailers
Retailers will likely have to make several adjustments to their systems to follow the transitional rules. These rules will presumably address, among many other items, price adjustments, volume rebates, coupons, returned goods and bad debts.

As noted above, B.C. proposes point-of-sale rebates for the 7% provincial portion of the HST for specific items such as books, diapers and children’s clothing.

Under the existing HST systems, a retailer would have three options to disclose to its customers the tax payable for an item to which a point-of-sale rebate applies, as illustrated in the following example of a bookstore selling an art book priced at $100:

Option A	Option B	Option C
Book price:        $100.00 12% HST              12.00   Subtotal           $112.00 7% Rebate              7.00 Amount due       $105.00	Book price:        $100.00 HST*                      5.00 Amount due       $105.00 *This amount equals 12% HST – 7% Rebate, i.e., $12.00 – $7.00 = $5.00	Book price:        $105.00 Amount due       $105.00 5% HST included

Tax-inclusive pricing
B.C.’s announcement did not include any specific measure with regards to tax-inclusive pricing rules.

KPMG observation

When the HST was introduced in 1997, the prices were to be shown to consumers as HST-inclusive. Businesses expressed concerns about the proposed measure, which was amended prior to implementation. The federal government may re-introduce tax-included pricing but has previously committed not to do so until at least 51% of taxing provinces (i.e., in total population) have enacted tax-inclusive pricing themselves.

Measures affecting financial institutions
Since the B.C. HST will have the same tax base as the GST, with a few exceptions, financial services will generally be exempt from HST. As such, providing exempt financial services under the B.C. HST system is likely to result in higher costs for financial institutions as they will pay the 12% HST on more expenses but generally will not be able to claim input tax credits to recover the tax.

Some financial institutions must use a complex formula known as the special attribution method (SAM) to calculate their Atlantic provinces HST liability. A key component of the method involves multiplying the unrecoverable GST incurred by an 8/5 factor and the provincial allocation to harmonized provinces, less actual HST incurred. While it seems likely that the SAM formula will also apply under the B.C. HST, it also seems likely that some modifications to the formula will be required.

Financial institutions not required to use the SAM formula may also face the additional cost of anticipated self-assessment requirements under the B.C. HST for imports of goods and services into B.C. from other provinces or outside of Canada.

Measures affecting landlords and builders
Landlords of GST-exempt residential rentals will likely see their operating costs increase under the B.C. HST as many services and some goods not currently subject to B.C. PST will be taxed at 12%. Landlords cannot claim input tax credits for GST paid on expenses relating to GST-exempt activities. This rule will likely apply under the B.C. HST. Expenses such as management, maintenance and lawn care services and electricity are only a sample of services that will become taxable at 12% (increased from 5%).

Currently, a vendor of a “supply and install contract” with regards to real property is required to pay B.C. PST on its inputs. Under an HST system, a vendor should be entitled to claim input tax credits for the HST paid on its inputs. Businesses may wish to consider the effect of the proposed B.C. HST if they intend to negotiate and enter into a long-term contract for such services.

Builders of new homes will be entitled to claim input tax credits for most HST paid on their inputs. However, new homes in B.C. that are currently subject to the GST will become subject to the provincial component of the HST. These rules may be subject to anticipated transitional rules.

It’s not clear whether the HST housing rebate will be available to landlords who buy or build new multiple-unit residential complexes, as the GST rebate is.

In some cases, builders may have to review standard agreements and change tax calculations to provide for the proposed B.C. HST.

We can help
Your KPMG adviser can help you assess the effect of the B.C. HST on your business affairs, and point out ways to take advantage of its benefits or ease its impact. We can also keep you abreast of the progress of these proposals as they make their way into law and help you bring any concerns you may have to the attention of the B.C. Ministry of Finance.

Information is current to July 23, 2009. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

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