Seven ways to prepare for HST

1. What types of training will the tax or accounting departments need to be prepared for HST?

It’s imperative tax and accounting departments be aware of transitional rules, particularly noting dates on which HST collection must start and exactly when to charge what tax. The accounts payable staff will want to be particularly careful to ensure unrecoverable PST is not paid on goods delivered or services performed on or after July 1, 2010.

Businesses presently accounting for GST should find that, once the transitional period has ended, accounting for HST is very like GST, except larger amounts. Because of those larger amounts, it will be even more important to ensure proper documentation is maintained to substantiate input tax credit claims. Clients will also want to be sure their input tax credits are properly documented, so tax and accounting staff should also check their own invoices to ensure clients have the necessary information.

Businesses that operate in more than one province will need to be aware of the place-of-supply rules to ensure HST is charged when applicable and not charged when it isn’t. The tax and accounting staff in such businesses will likely need to put systems in place to ensure appropriate information is collected and maintained for audit purposes. Businesses that currently charge PST in a variety of jurisdictions will likely have systems in place that can be modified, but providers of services that were not subject to PST may find this transition particularly challenging.

2. When should pricing be adjusted in order to pass on PST savings to clients?

Like most pricing decisions, businesses should take into consideration both the reduced costs and market factors when determining when or if to adjust their pricing in order to pass on PST savings to their customers. PST savings will be just one part of the overall pricing decision.

3. How will HST affect your cash flow and budget for next year?

For businesses that now collect GST on the amounts charged for goods and services, the effect on cash flow will depend on the timing of their purchases, payments, invoicing and accounts receivable collection. The HST will increase both the amounts paid to suppliers and amounts collected from clients. For example, if a business that files GST returns monthly generally invoices its customers on the first day of the month, the amount of the GST/HST in that invoice will be reported and remitted on the GST/HST return filed by the end of the following month. As long as customers pay within that two-month period, the cash flow affect will be positive. Businesses will want to ensure invoices are rendered early in their GST/HST reporting period.

The affect on a business’s overall budget will depend on whether or not it is able to recover the HST it pays by way of input tax credit. Where a business can recover the HST, the affect will be reduced costs, as the business no longer is required to pay RST on things such as office supplies and furniture.

However, businesses making exempt supplies, such as many in the financial services sector, will see their costs rise as HST will now apply to services that were not subject to RST such as contracted advisory services.

Large businesses will also not be able to recover HST fully as for the first eight years of HST their ability to claim input tax credits to recover the HST on certain expenditures. Some of the restricted items currently are subject to RST, such as expenses associated with business passenger vehicles, so there will not be a cost increase. Energy costs, such as electricity and gas, however, will now be subject to HST and are affected by the restrictions on input tax credits, so large businesses will see costs increases with respect to those items.

4. Are wording changes required for brochures, flyers, advertisements, catalogues, signs, coupons and rebate forms?

If a supplier is a GST registrant that uses tax-included pricing will have to change signs, advertisements, catalogues and invoices to show the new rate of tax included in the price.

Where the supplier does not use GST/HST included pricing, advertising materials and receipts or invoices issued by the supplier must be changed to show the new total amount of tax payable on the supply (that amount will now include both a federal and provincial tax component) or the new total of the rates of tax payable (will now include a federal and provincial component).

Point-of-sale rebates for the provincial portion of the HST on certain goods will be deducted by retailers and only the federal portion of the tax will be shown on the invoice, so no change to invoicing will, in fact, be required.

5. What types of provincial sales tax (PST) capabilities need to be retained in the system after HST implementation?

In Ontairo, PST will continue to apply to insurance premiums. Otherwise, with the exception of keeping records until the expiry of the applicable limitation periods, businesses will generally see the end of PST by the end of 2010.

Most business will file their final PST returns on or before July 23, 2010 reporting PST collected in June. When an amount is collected or becomes payable on account of PST after June 30, 2010 that amount will be accounted for in a supplemental return. Generally, supplementary filings will be required with respect to taxable services, such as motor vehicle repairs, that are rendered prior to July 1, 2010 but not invoiced or paid until after June 30, 2010.

Where goods purchased prior to July 1, 2010 are returned for refund prior to November 2010, the retailer may refund the RST paid on the original purchase. If goods are exchanged in that period for goods of equal value, HST will not apply to the transaction. If the exchange is for goods of higher value, HST must be collected on the difference. Retailers will need to keep detailed records during this transitional period.

6. What will happen with existing contracts that straddle the pre- and post-HST effective date?

Generally, goods delivered on or after July 1, 2010 will be subject to HST, regardless of when they were ordered (subject to the prepayment rules set out below). If, for example, goods are delivered each month (with an exception for subscriptions to periodicals), those delivered in June will be subject to PST, while July’s invoice will show HST.

The tax applicable to fees charged for services depends on the date the services are performed, not the date on which the invoice is delivered. Where services are performed over a period straddling July 1, 2010 an allocation will be required. Prepaid services have similar rules to those for goods.

There are specific transition rules for prepaid funeral services, passenger transportation services, royalties and other payments dependant on profits, memberships, intellectual property rights, admissions, continuous supplies (such as gas and electricity), direct sellers, subscriptions and budget payment arrangements.

7. How will transitional rules apply to goods/services purchased before July 1, 2010 and delivered after that date?

Generally, goods delivered or services performed on or after July 1, 2010 will be subject to HST. Businesses are required to start collecting HST for prepaid goods and services to be delivered or performed on or after July 1 on May 1, 2010. Individual consumers who prepay prior to May 1 will not be required to pay the HST regardless of when delivery occurs or services are performed. Public services bodies and businesses, however, will be required to self-assess the applicable tax if the prepayment occurred after October 14, 2009. In general, the self-assessment obligation will not apply to businesses entitled to recover the HST by way of full input tax credit.

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Janet Kasun is an Associate at BLG’s Ottawa Office and a Certified Management Accountant. She is part of BLG’s Tax and Wealth Management Professional Groups.

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