April 15, 2010
Harmonized Sales Tax and landscape contractors
By Richard Rizzo
Senior tax manager, SB Partners
On July 1, 2010 the Ontario Retail Sales Tax (RST) will be combined with the federal Goods and Services Tax (GST) to create a federally administered Harmonized Sales Tax (HST). The HST will have a combined rate of 13 per cent, eight per cent of which will be the provincial portion and five per cent of which will be the federal portion. The HST, with some exceptions, will generally use the same rules and tax base as the GST.
What does this mean to landscape contractors?
Contractor services are currently not subject to RST in Ontario. Under the HST system contractor fees will be subject to HST resulting in an eight per cent increase in the total charge for such services. This increase should not be an issue for business customers entitled to claim input tax credits for the HST. However, it will result in an increase in costs for consumers and businesses not entitled to claim input tax credits.
Although RST does not apply directly to landscaping projects, the RST on the landscaping materials is a cost to the contractor and is incorporated into the contractor’s price. With the removal of RST and the introduction of HST, the contractor will be able to recover the full HST by claiming an input tax credit in the GST/HST return, thus reducing overall costs to the contractor.
The HST will mirror the GST system with some differences. During the first eight years of the tax, businesses with taxable sales in excess of $10 million will need to modify their systems to deal with the temporary restrictions in claiming input tax credits for certain categories of expenditures. Included among these are energy (other than for producing goods for sale), telecommunications, food, beverage and entertainment, and road vehicles weighing under 3,000 kg.
Consideration due or paid on or after July 1, 2010: The HST will apply to consideration that becomes due, or is paid prior to becoming due, on or after July 1, 2010 for any part of a service that is to be performed on or after
July 1, 2010.
Consideration due or paid on or after May 1, 2010 and before July 2010: The HST will apply to consideration that becomes due, or is paid prior to becoming due, on or after May 1, 2010 and before July 1, 2010 for any part of a service that is to be performed on or after July 1, 2010.
Under these circumstances, the service provider will be required to account for the Ontario component of the HST in the GST/HST reporting period that includes July 1, 2010. The recipient of the supplies will be able to claim any available input tax credits applicable to the Ontario component of the HST in the GST/HST reporting period that includes July 1, 2010.
Consideration due or paid after Oct. 14, 2009 and before May 2010.
Individuals who are not consumers — such as businesses and public service organizations — may be required to self-assess the Ontario component of the HST on consideration that becomes due, or is paid prior to becoming due, after Oct. 14, 2009 and before May 2010, for any part of a service to be performed on or after July 1, 2010. The requirement to self-assess in these circumstances would generally apply only to:
Richard Rizzo is a member of the Canadian Institute of Chartered Accountants, the Institute of Chartered Accountants of Ontario, and the Malta Institute of Accountants. He may be contacted at rrizzo@sbpartners.ca. The website is www.sbpartners.ca.
Senior tax manager, SB Partners
On July 1, 2010 the Ontario Retail Sales Tax (RST) will be combined with the federal Goods and Services Tax (GST) to create a federally administered Harmonized Sales Tax (HST). The HST will have a combined rate of 13 per cent, eight per cent of which will be the provincial portion and five per cent of which will be the federal portion. The HST, with some exceptions, will generally use the same rules and tax base as the GST.
What does this mean to landscape contractors?
Contractor services are currently not subject to RST in Ontario. Under the HST system contractor fees will be subject to HST resulting in an eight per cent increase in the total charge for such services. This increase should not be an issue for business customers entitled to claim input tax credits for the HST. However, it will result in an increase in costs for consumers and businesses not entitled to claim input tax credits.
Although RST does not apply directly to landscaping projects, the RST on the landscaping materials is a cost to the contractor and is incorporated into the contractor’s price. With the removal of RST and the introduction of HST, the contractor will be able to recover the full HST by claiming an input tax credit in the GST/HST return, thus reducing overall costs to the contractor.
The HST will mirror the GST system with some differences. During the first eight years of the tax, businesses with taxable sales in excess of $10 million will need to modify their systems to deal with the temporary restrictions in claiming input tax credits for certain categories of expenditures. Included among these are energy (other than for producing goods for sale), telecommunications, food, beverage and entertainment, and road vehicles weighing under 3,000 kg.
Transitional rules
General rules: HST will not apply to consideration that became due on or before Oct. 14, 2009.Consideration due or paid on or after July 1, 2010: The HST will apply to consideration that becomes due, or is paid prior to becoming due, on or after July 1, 2010 for any part of a service that is to be performed on or after
July 1, 2010.
Consideration due or paid on or after May 1, 2010 and before July 2010: The HST will apply to consideration that becomes due, or is paid prior to becoming due, on or after May 1, 2010 and before July 1, 2010 for any part of a service that is to be performed on or after July 1, 2010.
Under these circumstances, the service provider will be required to account for the Ontario component of the HST in the GST/HST reporting period that includes July 1, 2010. The recipient of the supplies will be able to claim any available input tax credits applicable to the Ontario component of the HST in the GST/HST reporting period that includes July 1, 2010.
Consideration due or paid after Oct. 14, 2009 and before May 2010.
Individuals who are not consumers — such as businesses and public service organizations — may be required to self-assess the Ontario component of the HST on consideration that becomes due, or is paid prior to becoming due, after Oct. 14, 2009 and before May 2010, for any part of a service to be performed on or after July 1, 2010. The requirement to self-assess in these circumstances would generally apply only to:
- Non-consumers acquiring the service exclusively in the course of their commercial activities (e.g., a business that is acquiring the goods to make GST/HST-exempt supplies)
- Non-consumers acquiring the service exclusively in the course of their commercial activities, but in circumstances where the goods would be subject to an input tax credit restriction or recapture
- Non-consumers who use simplified procedures available under the ETA for calculating their net tax
- Selected listed financial institutions, which use a special attribution method in determining their net tax.
Other considerations
Landscape contractors should also consider the following:- Review the impact of HST on costs and review pricing to ensure that the savings from the removal of the RST on costs is passed on to customers. This will provide a competitive advantage.
- Consider postponing certain major purchases until after the implementation of HST. This may result in cost savings.
- Systems currently used to comply with the GST will need to be modified to handle the HST. Modifications will include billing systems, accounts receivable as well as accounts payable.
- Plan and modify systems to deal with the removal of RST from costs.
- Review contracts with customers to ensure they can contractually add on the provincial component of the HST to their prices.
- Consider the impact on the budgeting process and cash flows.
HST filing requirements
Landscape contractor businesses with taxable revenues exceeding $1.5 million will be required to file GST/HST return electronically for periods ending on or after July 1, 2010. Penalties will apply for paper filings made after this date.Richard Rizzo is a member of the Canadian Institute of Chartered Accountants, the Institute of Chartered Accountants of Ontario, and the Malta Institute of Accountants. He may be contacted at rrizzo@sbpartners.ca. The website is www.sbpartners.ca.