Release date: August 23, 2011
Guest: James Capobianco
Running time: 6:17 minutes
Note: An August 26, 2011 B.C. referendum revoked the HST and will reinstate B.C. PST with a target date of March 31, 2013. See our Tax memo: B.C. votes to extinguish HST for further information.
In this podcast, James Capobianco discusses the issues related to winding up PST in Ontario and British Columbia, and what companies can do to prepare for impending audits – including reviewing existing documentation – and then what to do if assessed upon audit.
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You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Gerry: In this podcast, James Capobianco of our Toronto office delves into the issues related to the winding up of PST in Ontario and British Columbia.
Thank you for speaking with us today, James.
James: You’re welcome.
Gerry: James, I thought that the provincial sales taxes in BC and Ontario were replaced by harmonized sales tax or HST on July 1, 2010. Why are we talking about it now? It sounds like an awfully long goodbye.
James: Well, it is a hot topic now Gerry, or should be, because businesses that had an obligation to collect or self assess PST in BC or Ontario before the HST came into effect, still have to account for it. In fact, it’s our understanding that Ontario and British Columbia intend to audit most businesses.
Gerry: Is that normal?
James: Not really, but we’re dealing with an extraordinary situation — two entire tax regimes are closing down. The two provinces are winding down their sales taxes at slightly different rates and with different vigour. Ontario, for example, has hired many new auditors to address the increased number of audits, whereas BC seems to be awaiting the outcome of the provincial referendum to determine if and how it will wind up the PST.
Gerry: Audits can be intimidating. What can our listeners do to prepare for a provincial sales tax audit?
James: Well, the key thing is to review any PST obligations they have before being contacted for an audit and make sure that everything is documented. For example, they should ensure that agreements are in place to support their tax position. If agreements aren’t clear, they should be clarified now.
Gerry: What other preparations should be made?
James: Well, it depends on the particulars, but some other things include having properly completed purchase exemption certificates in place and making sure all out-of-province shipping documents are in order to support non-collection of tax, where appropriate.
Special rules apply to specific types of transactions. For example, license and maintenance fees for software situated on servers outside of Ontario are not subject to PST. Illustrating the location of such software is not always straightforward and without explicit proof, such as the IP address of the server being outside of Ontario, an auditor may take the position that the software is in Ontario and that the license and maintenance fees are subject to PST.
We’re currently assisting clients with a number of software-related PST audits.
Gerry: Okay James, let’s say you are well prepared and an auditor starts looking at your provincial sales tax records. How far back can they go?
James: They can generally go back four years from the present time and cover off any of the PST obligations that fall within the four-year window. This means that audits could technically occur anytime between now and June 2014. However, we understand that Ontario is looking to have any remaining PST audits wrapped up before October or November of 2011.
Gerry: You mentioned that some Ontario auditors involved in this transition are new and might not have the same experience as the seasoned government auditors. Does that affect things from how a business should deal with the process?
James: No, it doesn’t. The process is the same. Regardless of who the auditor is, we recommend that our clients be as accommodating as is reasonable. And if you don't agree with a proposed assessment, it may be advisable to get the auditor's manager involved as well as your tax advisers. From experience, I can say that an outside adviser who speaks the same language as the auditors and has a good working relationship with the Ministry of Revenue can make it a lot easier to reach a satisfactory result.
Gerry: And if not?
James: Well, let’s say an assessment is actually issued, not just proposed. You have 180 days to file a notice of objection in Ontario and 90 days in BC. It’s really important not to leave this to the last minute. You need to ensure your notice of objection includes a complete statement of facts and arguments, as well as documentation that supports your position.
Now I have to emphasize the timing. You really want to address your audit concerns as early as possible because it gets more costly and more time consuming the further along you get in the process. The burden of proof generally increases and the discretion that the auditors can exercise also decreases as the process escalates.
Gerry: Can you outline the process?
James: Certainly. Audit, objection and appeal to tax court.
Gerry: Now, what happens if your auditor asks you to sign a waiver?
James: A waiver extends the four-year time limit that we talked about earlier, but it isn’t always a bad idea. Of course, I wouldn't suggest you sign a waiver if you suspect the auditor is on a ‘fishing expedition.’ On the other hand, a waiver can be helpful because it gives you more time to gather supporting documentation before time runs out and the auditor is forced to issue an assessment. So, it all depends — and some professional advice is probably essential.
Gerry: So, this is an unusual situation — to have a tax regime disappear and spawn numerous audits in the process. But it looks like with some thought and planning you can be prepared and ready for a provincial sales tax audit.
Thank you for joining us today.
James: You’re welcome. Glad to be here.
Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.
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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.