Factor for indirect taxes

The Canadian marketplace is a small universe despite its geographical expanse. It’s as common for businesses in Chilliwack, BC to have ties with customers in Regina, Sask., or St. John’s, Nfld., as it is to work with clients next door in Vancouver. Cross-provincial commerce has made it vital for businesses to factor in diverse market regulations and the resulting indirect taxes.

Indirect taxes affect vendors selling services or goods such as property, as well as buyers. The onus is on both parties to ensure they are either charging or paying the correct tax rate.

The last major changes to indirect tax rates took place in July 2010—when BC and Ontario brought in HST—but many businesses are still struggling to get the numbers right.

Tracking taxes

When reconciling, if you discover some tax hasn’t been properly charged, your vendor client has several options:

• Ask customers for the additional tax. However, this may not be possible.
• Reconcile the differences by covering the missing amount out of pocket, in addition to paying interest or penalties.
• Register for PST in provinces where they do business. This would help ensure they are charging buyers in those areas the right amount of tax at the time of transaction.

Clients who are buyers may need to either self-assess (in cases where too little tax was charged) or seek a refund for taxes paid in error. Going the refund route requires sending in copies of invoices that prove they’ve overpaid, and detailing what was purchased.

These taxes impact you, too

Though CRA announced changes to which financial services are taxable in December 2009, it has spent the last two years clarifying those changes. As a result, many advisors may not know the new rules. Some services may now considered taxable for HST/GST purposes, while many ancillary services may no longer be tax-exempt. Review your tax policies to determine that you are charging, or paying, the right amounts.

Rectifying such errors costs more than just time. In addition to CRA charges and penalties, there are the costs of dealing with appeals and audits, as well as your additional fees for working with them through the process.

Voluntary Disclosures will provide relief from penalties on unpaid amounts; however, a business must be prepared to disclose everything and, of course, pay any additional taxes and interest that are owing.

Reviewing tax policies is especially important for start-ups and businesses in the process of expanding. Owners of start-ups should work with you, as well as an indirect tax advisor, right from inception rather than waiting until an audit.

Even though it’s more money up-front, it will save a lot in the future— not to mention the pain avoided during a possible audit.

For businesses moving into new territories, applicable indirect taxes are an obvious consideration. But what if a business is expanding its product line or service offerings? New services or offerings may have different tax treatments from the rest of the line up. If the billing location has changed, or a new shipper is used, all of that will affect indirect taxes.

If two different departments deal with products and invoicing, companies may not realize when they’re paying or billing too much, or too little, tax. Many firms only discover such errors when facing a CRA fine.

If an established business begins working with suppliers outside of its usual region, it may be subject to different tax rates. So a change in suppliers could mean incorrect rates are being charged and your client will have to self-assess.

When it comes to indirect taxes, it’s in your client’s best interest to ensure they collect or pay the right amount at the time of transaction. Having the right processes in place before any transactions take place will help ensure that, come tax time, they have everything in order to file.

Establishing rates

While the indirect tax rules are not simple (there are more than 18 different place-of-supply rules dealing with services), determining how to establish tax rates for your clients boils down to two key questions:

• What do you sell, offer, and provide?
• Where is the place of supply?

What do you sell?

Rules vary depending on what’s being supplied. Often, businesses that receive commission income don’t issue a proper invoice, so it’s not always obvious when a transaction has happened. This makes it imperative for buyers of goods or services to maintain proper records that establish what service was offered for each transaction.

Given the variety of variables at play, the best way to ensure correct guidelines are being followed is to consult a tax, or indirect tax, specialist.

Where is the place of supply?

For many vendors of services or goods, the tax rate depends on where the customer is located, rather than where the vendor is situated. Sometimes, this is easy to establish.

If your client owns a real estate firm that just sold a house in Edmonton, the place of supply is Alberta. If your client sells tangible goods not fixed to a location they need to be more aware of where the supply is taking place. If the vendor is located in Edmonton but sells shirts to a buyer in Winnipeg, the place of supply is Manitoba. If, however, the buyer picks up the shirts from the vendor in Edmonton, the place of supply is Alberta—despite the fact the buyer will sell the shirts to customers in Manitoba.

Services are often more complicated. For example, if a consulting firm in Vancouver is providing services to a client in Halifax, the place of supply is most likely Nova Scotia. The place of supply may not be as straightforward when the address of the company is in a different location from where the services are being used.

Once your client knows what they sell and where, you can work with them to ensure they are either charging or paying the correct rate of tax on any business transaction.

Heather Weber, CGA is the leader of MNP’s Indirect Tax Group.