Transcript: Tax Tracks – A PwC Tax Management Services Podcast Series -- Episode 7

Harmonization – Interview with Audrey Diamant

You're listening to another episode of PwC's Tax Tracks at www.pwc/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today's busiest tax directors.

Gerry: Hello, I am Gerry Lewandowski and today we’re speaking with Audrey Diamant, a partner in PwC’s Tax Indirect Tax practice on the topic of sales tax harmonization in Ontario and British Columbia, and the recently released transitional rules.

Hello Audrey. Audrey, where do we currently stand on harmonization?

Audrey: Well Gerry, we’ve had a harmonized sales tax system in three of the Atlantic Provinces–Newfoundland, Nova Scotia and New Brunswick – since 1997.

In the province of Quebec, we have a semi-harmonized system. Quebec’s rules parallel the GST in many respects but are not identical to the GST. And now we we’re looking at full harmonization in the provinces of Ontario and BC effective July 1, 2010. The remaining provinces are also in the process of looking at the benefits of harmonization, but there’s no word yet as to whether they will actually jump on board effective July 1.

Gerry: Now what does this mean for us?

Audrey: Well, I think that it’s important that we understand why the government decided to proceed with a harmonized structure. We can all debate the merits of harmonization, and I think economists generally feel that there are significant benefits to harmonizing. But from a businesses’ perspective, I think there are some obvious benefits:

• Number one: simplicity in administration. Businesses will essentially dealing with just one return as opposed to the two separate returns they file currently for GST and PST. They’ll also be dealing with one government body, the Canada Revenue Agency as opposed to having to deal separately with CRA and the provincial authorities on things such as audits and other administrative matters. So that’s going to be a bit of bonus.
• Harmonization also puts businesses generally on a more competitive footing. Currently, with the provincial sales tax, there is PST embedded in the pricing structure. And that embedded PST means that our prices on a global basis could potentially be some what higher and less competitive.
• By removing that PST, we are looking at a more competitive system and for most business that certainly would be an advantage. There are some businesses clearly under harmonization that will not benefit and that would include financial institutions, certain not-for-profit entities, medical practices, but largely speaking businesses should benefit under harmonization.

Gerry: Now, in regard to harmonization, what is the difference between BC and Ontario?

Audrey: Well, the systems are essentially the same. Where they differ somewhat given the information we currently have available to us is obviously to begin with the rate of tax. In Ontario, it will be thirteen per cent and BC it will be twelve per cent. As well there are certain point-of-sale rebates that were announced in each of the provinces.

In Ontario, point-of-sale exemptions will be provided for books, for children’s car seats, booster seats, for diapers, child-size clothing, footwear, and feminine hygiene products. BC will exempt those same items or will provide point-of-sale rebates, for those same items but in addition they will also provide exemptions or point-of-sale rebates for motor fuels and residential energy.

Gerry: How do harmonized taxes work?

Audrey: The majority of the rules that would apply to a harmonized sales tax are already available as they are found in the Excise Tax Act, which is the GST legislation. So if something is currently taxable for GST purposes, excluding the point-of-sales rebates, those same items will be taxable under the harmonized sales tax. If something is currently tax exempt under the GST, it will also be exempt under the harmonized sales tax.

One key difference between the existing GST and the provincial components of the HST is that for the first five years after implementation with a phase-in, in the three subsequent years, input tax credits will not be available for a specified list of expenditures. So, for example, input tax credits or ITCs will not be available for energy that is not used in manufacturing or farming activities, certain telecommunication services, road vehicles weighing less than three thousand kilograms, parts, services and gas for those road vehicles, and meal and entertainment expenses. These ITC restrictions will apply to financial institutions and will also apply to businesses with taxable supplies in excess of ten million dollars.

Gerry: What should corporate Canada be doing in preparation?

Audrey: The transitional rules with respect to goods, services and intangible property were recently released and what those rules tell us is that for certain supplies that take place on or after July 1, 2010, where pre-payments are made prior to that date, the HST may have to be charged or certain businesses may be required to self-assess.

So, I think it is incumbent upon all businesses to take a look at those transitional rules, to try to understand how they will apply to their business and also to take the steps necessary to charge HST in advance of July 1, where that is indicated by the transitional rules or to self-assess the HST again, depending upon the nature of the business and the pre-payment.

In addition to that, the HST is going to impact really all businesses in one form or another. So, I think given the timing, most businesses at this stage should have, for example, put together a task force of individuals in their organizations who should be looking at how the HST will impact their business in all respects – payables, receivables, the demand for their product and whether the HST will impact their purchasing decisions in the run-up to harmonization.

Businesses should also be looking at their contracts both on the purchases side and the sales side. Are they obligated to pass along any savings realized under the HST to their customers? Are their suppliers required to pass savings on to them? Those are important issues that need to be dealt with now. In our view, its time to begin preparing, to make sure there is sufficient time to be fully ready and engaged for implementation on July 1, 2010.

Gerry: Thank you Audrey for providing us with your insights on sales tax harmonization. If you are looking for additional information on sales tax harmonization, please visit our website, pwc.com/ca/harmonization, or contact your PwC advisor.

Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.

The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation.

Copyright 2009 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. For full copyright details, please visit our website at pwc.com/ca.