Effective July 1, 2010, Ontario’s Retail Sales Tax (RST) be replaced with the Ontario Harmonized Sales Tax (HST). The HST will have a combined tax rate of 13 per cent — combining the existing five per cent federal Goods and Services Tax (GST) and an eight per cent Ontario component. The HST will be administered by the Canada Revenue Agency.
CGA Ontario has published a very concise overview of the new Ontario HST, and this information can be accessed free of charge at the following web-site link…
The publication is co-authored by Rod Butcher, CGA and Diane Gaudon, CGA, both of whom have significant tax expertise and experience.
This HST overview provides guidance for the implementation of HST within an organization, and I thought it would be helpful to highlight a few extracts.
To begin the preparation process, consider all facets of an organization that are affected by sales taxes (for example, accounts receivable, accounts payable, payroll, purchasing, forecasting and budgeting); this can be a very time consuming task. The benefit of spending time preparing for implementation is a reduction in costly errors, surprises for overlooked issues, and future audit exposures. Below are a number of issues businesses need to consider for the sales tax implementation.
COLLECTION OF SALES TAXES
• Amend software and/or tax tables used to generate invoices, debit and credit notes to accommodate additional tax rates/codes.
• Amend automated system-generated entries (e.g., monthly inter-company charges, monthly rent charges or management fees to reflect the new sales tax codes/rates).
• Consider the impact of harmonization on real property contracts during the transitional period and after implementation.
• Determine if prepayments have been made before the implementation date. The transitional rules may be used to determine the tax rate applicable in these situations.
• Develop special codes for point-of-sale rebates for the provincial component of OVAT and BC HST if applicable.
• Perform a product and service sales tax analysis. Many goods, services, intangible personal property and real property non-taxable under the old Ontario sales tax legislation will now become taxable as a result of harmonization. However, unless a supply is specifically excluded from OVAT or BC HST (e.g., books, children’s clothing), or under a specific Ontario or BC levy post-harmonization (e.g., in Ontario certain insurance premiums), the sales tax status will be consistent with current GST rules, which will simplify tax administration for businesses.
• Do not delete or deactivate old tax rate codes since it may be necessary to use them after implementation during the transitional period.
• Follow transitional rules for volume rebates, promotional allowances, price adjustments, goods returned or exchanges after the July 1, 2010 implementation date and guidance for goods in transit on July 1, 2010.
• Modify tax tables for Internet web sites. All GST registrants will automatically become registered to collect OVAT and BC HST.
• Review ongoing or long-term contracts that straddle the harmonization date to ensure the correct sales rate is applied (e.g., service agreements, licences, memberships and leases).
• Update point-of-sale terminal or cash-register software.
RECOVERY OF VALUE-ADDED TAXES PAID (INPUT TAX CREDITS AND REBATES)
• A business defined as a “large business” (over $10M taxable sales) or a financial institution cannot claim input tax credits for the provincial component on specified restricted expenses. Restrictions will last up to five years with a three-year phase out.
• Develop updated or new tax tables/codes for accounts payable systems that automatically record input tax credits or rebates based on embedded taxes. Prepare to code payables for restricted versus non-restricted expenses.
• Do not delete/deactivate old tax rates as they may be required in some situations. If your system can only accommodate one or a limited number of tax rates, develop a manual system to record sales taxes correctly during the transitional period.
• During the transitional period, implement procedures to ensure only the value-added tax paid is recovered. Develop an override procedure to use in instances where old tax rates are charged in error.
• Develop a system to track the federal and provincial components of HST if you are part of the MUSH sector (municipalities, universities, schools and hospitals) or a qualifying non-profit organization.
• Evaluate and update periodic system-generated payments to apply the new taxes.
• Make adjustments to the remittance percentages if you are a small businesses or public service body using the simplified remittance methods.
• Modify employee expense reimbursement and allowance software or pre-printed forms for not only the new rates but also the restricted expenses and possibly the use of factors. In addition, watch for special transitional rules for expense reports that straddle the implementation date.
• Selected listed financial institutions must adjust formulae included in the Special Attribution Method calculation if applicable.
• Revise cash flow projections.
• Update budgets and forecasts.
• Modify purchase orders with pre-printed sales tax information or system generated purchase orders to accommodate the new taxes, e.g. the goods for resale exemption will no longer apply in Ontario or British Columbia.
• Modify pre-printed price lists or Internet web-sites containing sales tax information.
• Develop a system to track coupons and rebates by province of redemption or purchase.
• Develop a system to track bad debt adjustments, tracking the tax from the original transaction.
• Develop a process to change taxable benefit remittance rates for the 2010 and 2011 taxation years, if applicable.
• Modify documented procedures for how internal tasks are performed whether automatically or manually.
• Additional calculations may be required for the embedded tax content subject to the change-in-use provisions.
Plan to do a test run of sample data for all modified systems as a result of the numerous changes and revisions. This will reduce the potential for errors and surprises when the systems are activated on July 1, 2010.
For publicly traded companies, ensure that Bill 198 (NI 52-109) key controls testing during 2010 takes into consideration HST implementation, by reviewing the approval process for system changes, and testing a sample of sales and purchase transactions to ensure the controls are designed and operating effectively.
The Ministry of Ontario has HST information available on its website, and CRA is conducting informational seminars during 2010. For further information and guidance on HST, please contact your accounting and tax professionals.