Release date: April 26, 2011
Guest: Audrey Diamant
Running time: 9:53 minutes
In this episode of Tax Tracks, Audrey Diamant discusses why it's important for companies to continue to review their HST situation. She talks about the complexity in the tax rules, RITCs, place of supply rules, and the day-to-day issues that can potentially lead to interest and possibly penalties on audit.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.
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Gerry Lewandowski: With us today is Audrey Diamant, a senior partner with PwC’s sales tax practice.
Audrey has been with PwC for a number of years and is well known in the sales tax community, providing advice and assistance to Canadian and foreign companies coping with the effects of harmonization.
The harmonized sales tax, or HST, came into effect in Ontario and British Columbia on July 1, 2010. On the same date, Nova Scotia increased their HST rate, which has been in place for several years, as it has in New Brunswick and Newfoundland and Labrador.
Audrey is here to discuss why it is important for corporations to review their HST situations frequently, even though these sales tax changes came into effect some time ago.
Thank you for joining us Audrey.
Audrey: Thank you, Gerry.
Gerry: So, Audrey, why is HST still an issue?
Audrey: It really comes down to two things – change and complexity. Essentially, because of complexity and change, you can’t just assume that the way HST was handled in, say, August 2010, is still appropriate.
Over time, even if the legislative rules don’t actually change, their interpretation can – and unfortunately sometimes that change can be quite dramatic.
And of course, businesses evolve – buying or selling different products or services in different jurisdictions, for example, or moving operations, or even changing the terms of delivery.
Finally, many of the HST rules are complex and quite detailed, and it unfortunately it is easy to get things wrong.
Gerry: Can you give us an example of this complexity?
Audrey: As an example of the complex nature of the rules, we find that a lot of our clients, a lot of companies, are still struggling with the concept of recaptured input tax credits or as we often refer to them RITCs. These rules impact large businesses, which are essentially those with taxable revenues in excess of $10 million and certain financial institutions. Large businesses are restricted from claiming input tax credits for the provincial portion of the HST on specified expenses that include such things as energy – unless used directly in manufacturing - and certain telecom services. However, large business status can be impacted by a number of different things including reorganizations such as amalgamations, the sale or purchase of significant portions of a business, and the restricted expenses, in and of themselves, can be subject to interpretation. For example, restricted energy costs can include both supply and delivery charges in certain circumstances, or just the supply of the energy but not delivery in other specific situations. Restricted telecom services will typically include long distance and usage charges, but not where the usage relates to toll-free services – which, in and of themselves, are not restricted expenses. So, unfortunately with taxes, nothing is simple.
Gerry: And what about the place of supply rules?
Audrey: Broadly speaking, it’s much the same story as with the RITCs. First you have to figure out the nature of the specific supply, whether it’s tangible goods, a service, or an intangible. You then have general rules that deal with each type of supply as well as more specific rules specific rules. Again, as an example, there’s a general rule for services as well as specific rules that deal with services in relation to tangible or real property. And there’s even a specific rule that relates to the location of an event – such as a conference. So figuring out what kind of supply you have, and which place of supply rule to invoke is not always easy, and there is unfortunately at this point very little interpretation from CRA to provide much guidance. As a further example, the services of a sales agent can be viewed as either a general service, with the place of supply typically being the business address of the customer receiving the service, or it can be viewed as a service in relation to tangible goods, with the place of supply being the location of those goods. Which rule then under the circumstances do you use? In verbal comments from CRA, they have indicated that a sales agent selling say a tractor – in other words, an item that is specifically identifiable and identified – would typically look to the place of supply rule for services in relation to tangible goods, whereas a sales agent trying to sell 100 or 1000 widgets – which are non-specific units – would likely look to the general services rule.
These kinds of interpretations are clearly not for the feint of heart.
Gerry: You’ve shown me that the place of supply rules can be complex. What about some of the practical day-to-day issues?
Audrey: Well interestingly, one of the biggest issues people have been and are still grappling with relate to employee expense reports and what factors to use to claim input tax credits and also to restrict ITCs where required. Also, on the administrative side, you have to be sure not only that you have figured all this out correctly – which is a tall order to begin with – but that it gets coded properly in your accounting and tax systems.
Gerry: Is that really difficult?
Audrey: For some it can be tricky. Other times it’s relatively straightforward. But the point is, you can’t take it for granted – you have to make sure that you have it nailed down – and that it stays that way over the long term.
Gerry: Which brings us to change?
Audrey: Exactly. Things change. Sometimes these things are under your own control, and sometimes as things evolve and CRA releases further interpretation, they are not under your control directly. So you need to make sure you keep abreast of all these changes and implement them on a timely basis.
Gerry: So even when there is no new legislation, the rules can be a moving target?
Audrey: Right. But even if the rules never changed, as we all know real life does. So, say you close a plant in one province and shift production to another. Or you start selling goods or services to a customer that has many different locations across Canada and therefore a number of relevant business addresses which can impact place of supply.
With all of these changes you have to be sure that your HST application is still supportable and also properly documented.
Gerry: Or else…?
Audrey: Or else you can be assessed interest and possibly penalties on audit.
Gerry: Speaking of audit, has the government starting auditing for BC or Ontario HST?
Audrey: Not that we’ve seen as of yet. It’s still early days, but we can expect the audits to start in the near term and, unfortunately, there is no guarantee of leniency on the part of CRA simply because the rules are complex and the interpretation still evolving.
Gerry: So, who should be doing an HST health check at this point?
Audrey: I would suggest that most businesses who were impacted by the advent of the HST in Ontario in BC in one form or another. And they should, now that the flurry of HST implementation becomes a not-so-fond memory, tie up any loose ends. Take a fresh look at some of the more complex issues. Ensure that the logic of what was programmed into the system stands up to the cold light of day.
Gerry: Would it be fair to say that companies - in HST provinces or otherwise - are not doing enough to ensure that they avoid interest and penalties.
Audrey: I think the best way to look at all of this and maybe to sum it up is that the HST is not a sprint, it’s a marathon. And those that take it slow and steady, and stop to reassess where necessary and as further interpretation is released, will likely enjoy the run and reap better results at the end of the day.
Gerry: Thank you for your time today Audrey. For value added or sales tax information, please visit our PwC website at www.pwc.com/ca/taxtracks.
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