“If your ship doesn’t come in, swim out to it.” Jonathan Winters
CELEBRATIONS & CONGRATULATIONS!!
Congratulations to the following SEB participants who have successfully completed the business-planning phase of the program!
Andrew Turk, Easyware Computer Repair
Micheal Santorelli, Paintball Palace
All the best to you as you begin the next stage!
Attention All SEB Clients!
Need help with your bookkeeping woes? Are you using Simply Accounting, QuickBooks or are you doing your Bookkeeping manually and require help setting up your company’s books. If you answered yes to these questions, then please call us to set up a one-on-one 1-2 hour appointment with Karen Ristanen. Karen will be more than happy to help you with the set-up of your books. Please bring all of your questions with you. Bring your personal documentation.
Getting Ready for Ontario Tax Harmonization
On March 26, 2009, the Ontario government announced in its annual budget that it will eliminate its existing provincial sales tax (PST) and introduce a harmonized sales tax regime with the Federal GST. This will take effect on July 1, 2010. The province is proceeding with this change as a GST-style tax is far more efficient for businesses. The GST is a value-added tax applied to goods and services, which is designed to be paid by the ultimate consumer. Tax paid by businesses during the production or marketing of these goods and services are recovered through the claiming of input tax credits (ITCs), meaning that sales tax is not included in business costs. PST, on the other hand, while still charged to the consumer, is also payable on many business inputs, increasing business costs. The purpose of this bulletin is to outline how harmonization will impact your business, and what you need to think about to prepare your business for its implementation.
Advantages of Harmonization
The biggest winners with the introduction of harmonization will be the Ontario business community. Businesses will realize the following advantages from the introduction of a harmonized sales tax (HST):
Recovery of PST
Unlike the GST, Ontario businesses pay PST on many business inputs with no ability to recover the tax. This embedded PST becomes part of the costs of the business. Examples of unrecoverable PST include the PST incurred on fixed asset purchases or goods that are used in the business (i.e. not resold to customers). Under a harmonized sales tax system, ITCs will be available to recover the provincial component of the tax, which will result in lower costs – savings which can be passed on to consumers through lower prices.
Reduction of Paperwork Instead of dealing with two sales tax systems, businesses will find their compliance burden substantially reduced by a harmonized sales tax system. There will only be one tax collector – and as a result, only one sales tax return to file. Businesses will no longer be subject to sales tax audits by two levels of government. Purchase exemption certificates, which allow for the purchase of certain business inputs to be exempt from PST, will become a thing of the past as the provincial component of an HST will be recovered by claiming an ITC. For entities who are eligible to claim full ITCs, there will also be no need to self assess any sales tax on goods purchased from nonregistered vendors that are used in a business in Ontario, which is something that PST auditors currently look for on tax audits.
Implications of Harmonization
The Ontario HST will be administered by the CRA, allowing the province to save millions of dollars in administration costs. Ontario’s HST will be 13%, which is comprised of the 5% GST plus an 8% Ontario tax. The Ontario HST will generally use the same rules and tax base as the GST. Details of how the HST will be implemented will be released in the coming months. It is expected that a comprehensive HST agreement with the federal government will be concluded by September 2009, with complete policy and administrative details to be released by the end of March 2010. As part of the transition to the harmonized system, two specific measures were announced in the budget.
Small Businesses
To help reduce the compliance cost of the move to the new system for small businesses, a credit of between $300 and $1,000 will be allowed for the first reporting period after harmonization (a small business will generally be one that has annual taxable revenue of less than $2 million). The following table illustrates the small business transition credit: Total taxable revenues in first full fiscal quarter commencing after June 30, 2010 Amount of transition credit Up to and including $15,000 $300 Over $15,000 and up to and including $50,000 2% of taxable revenue for that quarter Over $50,000 and up to and including $500,000 $1,000
Getting Ready for Harmonization
It is not too early to start thinking about how harmonization will impact your business. The following are things that all businesses need to think about as harmonization approaches:
Conversion of systems Many businesses will likely find the conversion to the HST a costly and challenging endeavour as systems will need to be changed to accommodate the HST. Invoices, sales receipts, purchase orders and expense reports will likely require modification. Those businesses with complex billing cycles that straddle the transition time may find the transition to a harmonized sales tax particularly onerous.
Budgeting for HST The impact of the introduction of the HST on budgets and cash flow projections will have to be evaluated. The ability to recover previously unrecoverable PST as ITCs will reduce business costs once the HST is implemented. Cash flows will also be impacted due both to the collection and remittance of the HST on a broader range of goods and services sold, and the payment of the HST on business inputs. Larger organizations will have to take into account the restrictions on claiming ITCs on certain expenditures during the first eight years of harmonization. Implementation costs, including any required system changes, will also have to be factored into budgets.
Contractual obligations Businesses will need to review their contractual obligations to determine the impact of harmonization on these agreements. Harmonization also needs be considered in negotiating new contracts that extend beyond July 1, 2010. Transitional rules should be carefully reviewed when issued to ensure compliance with the legislation and refund opportunities, if any, are considered.
Planning Considerations Businesses should review planned expenditures as the conversion date approaches and determine whether these expenditures are subject to PST that can’t be recovered. If possible, these expenditures should be incurred after June 2010 so that the provincial component of the tax paid qualifies for an ITC. Consumers on the other hand will no doubt be reviewing expenditures that will become subject to the provincial component of the harmonized tax, so that these goods or services are bought before the harmonized tax comes into effect. In addition, small businesses who file GST returns on a quarterly or annual basis should consider whether they want to file HST returns monthly, if a significant amount of the supplies they sell are zero-rated under the GST. GST does not have to be charged on zero-rated supplies – that said, businesses making zero-rated supplies are still entitled to recover all of the GST paid on business inputs as ITCs. Filing monthly will allow these businesses to recover the HST they pay on a more frequent basis than filing returns on a quarterly or annual basis. Businesses who will have a significant amount of zero-rated supplies will include exporters, grocery stores and farmers. Note that while businesses can change their reporting periods by filing an election, the change will only take effect on the first day of a fiscal year.
Summary Even though harmonization only takes effect July 1, 2010, it is important that you start to think about the transition to a harmonized sales tax now. Contact your BDO advisor to discuss how harmonization will impact your organization. This is a publication of BDO Dunwoody on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this document is current as of June 25, 2009 Comments and suggestions should be addressed to National Tax, by FAX (416) 367-3912 or E-mail at info@bdo.ca. We invite you to visit our web site at www.bdo.ca to find out more about our firm and the offices near year. Or call us at 1-800-805-9544. BDO International is a worldwide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V., incorporated in The Netherlands, with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located. © 2009 BDO Dunwoody LLP
