ALM500-2011-FA10.qxd
11/23/2010
5:14 PM
Page 123
500
GUIDE TO THE LEADING
L AW Y E R S I N C A NA DA
The New Canadian HST and the Place of Supply Rules By Dalton Albrecht Miller Thomson LLP
On July 1, 2010, Ontario and British Columbia joined the provinces of Nova Scotia, Newfoundland and New Brunswick in implementing a harmonized sales tax (HST) system. The HST replaced the single-stage (non-recoverable) provincial sales taxes previously in place. In Ontario, for example, the eight per cent Provincial Sales Tax was eliminated and a 13 per cent HST imposed in its place (five per cent Federal Goods and Services Tax (GST) and an eight per cent provincial component), representing a “harmonization” of federal and provincial sales taxes. All non-participating HST provinces, with the exception of Alberta, have a provincial sales tax in force (although Quebec QST is almost harmonized, although still not an HST).
VAT and Business Tax Relief The HST is a value-added tax (VAT) that operates in the same manner as the GST. Certain goods or services, including supplies to non-residents, are zero-rated, which means that an input tax credit (ITC) is available to suppliers, while the non-resident purchasers are charged tax at the rate of zero per cent. Other supplies are exempt, which means that the purchaser is not charged any tax on the supply of the products or service, but neither is an input tax credit is available to the supplier with respect to the costs related to the sale of the good or service. Importantly, most services and real property supplies are now subject to HST, which was previously not the case under the provincial sales tax regimes. However, most businesses now recover all the sales tax they pay through the ITC mechanism. Thus, the HST is really a business relief tax, albeit with cash flow burdens and tax compliance issues.
Place of Supply Rules The HST rate differs from province-to-province, and is not applicable in all provinces. This makes Canada unique amongst VAT regions as the only jurisdiction with a multiple-rate VAT. This can have potentially serious implications for large businesses and large-scale transactions. A supply deemed to be made in Ontario, for instance, will be subject to 13 per cent HST, whereas a supply deemed to be made in Alberta will only be subject to five per cent federal GST. Just when consumers or businesses such as a financial service provider thought they were safe to buy goods or services from Alberta suppliers (to avoid the HST), “Place of Supply Rules” were announced by the Department of Finance. These are federal rules, but apply to HST participating provinces as well as nonparticipating provinces. They come into effect May 1, 2010, even though the HST was implemented on July 1, 2010, as this was the date that suppliers were generally required to start collecting HST (13 per cent in Ontario, 12 per cent in British Columbia) for supplies made or deemed to be made after June 30 pursuant to the HST Transitional Rules. Schedule IX of the GST legislation has been replaced by a new, complex HST Regulation that changes the focus of the rules from being primarily “origin” based for the most part (for example, Alberta service providers would not charge HST) to the more modern OECD “Destination” approach (or where the goods or services are consumed or utilized as opposed to generated). The Place of Supply (“POS”) Rules are the most important, complex and long term aspect of the HST (the much talked
Reprinted with 123permission from The 2011 Lexpert®/American Lawyer Guide to the Leading 500 Lawyers in Canada © Thomson Reuters Canada Limited.
ALM500-2011-FA10.qxd
11/23/2010
5:14 PM
Page 124
2 0 1 1 L E X P E RT ® / A M E R I C A N L AW Y E R
about Transitional Rules are, essentially, functus this fall and even the restricted or “repaid” ITC rules applicable to large businesses for certain inputs are phased out after five years). As the economic model for the HST is based on assumed consumption, not the actual tax collected, the POS Rules are of primary importance for both suppliers and recipients. It is necessary to understand the POS Rules in order to collect the proper amount of HST (if not, the supplier is subject to assessment) or if the purchaser owes the HST (self assessment or otherwise). It is also important to determine where and what HST was paid for purposes of the restricted ITC rules (even businesses receiving 100 per cent GST ITCs will be denied or, more accurately, must repay, HST ITCs for certain purchases such as energy, road vehicles, telecommunication, etc.). For exported services or goods, there is nothing new in terms of the POS Rules (if one exports out of the country, there is no GST or HST). However, a non-universal HST (participating and non-participating provinces) means intra-country imports/exports are important.
General Services Rule The general Services Rule has changed from Origin to Destination based. The Rule used to be a three part test: 1. where performed — 90 per cent (what does “ performed” mean; for example, is it purely where the WIP is?); 2. place of negotiation in province and 10 per cent performance in that province equals that province; or 3. primarily in participating province — go to province where greatest element performed. Fortunately, this test was only an issue when the three Atlantic provinces were involved, which was rare. However, the new general Services POS Rule is based on the location (address) of the recipient. If the recipient has more than one address (business or personal, depending on the nature of the service), then the address that is “most closely connected” to the recipient’s business applies. The question is what does this phrase mean? Is it the old “place of negotiation” rule; presumably not? Is it the place where the instructions emanate from, or is it the place that benefits most from the services (and what if that is more than one location?)? If there is no address in Canada, then the place is where the greatest proportion of the services are performed. Alternatively, if none of the above apply, or if you cannot determine the status, the Rule defaults to the highest VAT rate (now Nova Scotia at 15 per cent).
Financial Services POS There are new financial services POS Rules (particularly the recently announced Financial Institution Regulations in terms of making changes to the SAM (or Special Attribution Method) for investment funds (and other SLFIS or Selected Listed Financial Institutions). For services provided by trustees for certain types of funds such as RRSPs, RRFI, RESPs or TFSAs, the place of supply is deemed to be where the service is utilized, that is, the address of the recipient.
Goods POS The tangible goods POS Rules are already destination based for the most part; that is, the place of delivery of the goods is the place of their supply. In effect, the existing QST rule applies: if it delivered to or put on common carrier for delivery to the recipient, then the place of supply is the address of the recipient. For leases of goods, the POS Rule is the ordinary location (cars are where they are registered for more than three months) of the recipient. For services related to tangible personal property (TPP), the POS Rule is the address of the recipient. If there are two or more addresses, then it is the place where the greatest proportion of services are performed, or the “Default” rule (the place with the highest combined HST rate, which will be Nova Scotia or with the new proposed rate of 9.5 per cent, Québec, if it opts to adopt the federal POS Rules, which it undoubtedly will).
IPP and Real Property POS Rules For intangible personal property (IPP) generally, the POS rule is where it can be used (a primary use test). For IPP related to Real Property Services or TPP, the rule is where the property is primarily situated. For real property, the POS Rule is where the property is situated. For services related to real property, the POS Rule is where the property is situated. If it is equally situated in two provinces, then it defaults to the highest tax rate at the time.
Special POS Rules Telecommunication services POS Rules still use the two-outof-three rule but for telecommunication facilities, if you are in a province or if part in a province and invoice is sent there, then that is the place of supply. There is a new rule for services related to an event. If it is a location specific event, then that is where the services are performed? There is also a new customs brokerage POS Rule, which is where the recipient is located. Presumably, this means where the recipient’s office or home address to which the goods are delivered, if there is more than one address.
Reprinted with permission from The 2011 Lexpert®/American Lawyer 124 Guide to the Leading 500 Lawyers in Canada © Thomson Reuters Canada Limited.
ALM500-2011-FA10.qxd
11/23/2010
5:14 PM
Page 125
500
GUIDE TO THE LEADING
Place of Supply: General Services Example Consider a client of a professional based in Toronto. The “place of negotiation” is in Ontario under the old rules. The services are performed 80 per cent in BC (out of the BC office of a law firm, for example). The old POS rule would look to who is on the WIP (an allocation of WIP may be necessary), although query if WIP is even relevant, or is the issue where the lawyer is located who performed the services, that is, not where the lawyer is normally located, but rather where was the lawyer when doing the services? The New POS Rule is where the recipient uses the services, that is, where the recipient is located and where the firm is engaged. As the client is in Ontario and the address was Ontario, 13 per cent HST applies. This would be the same if it was an Alberta firm providing the services. It can become complicated though if the law firm has multiple offices and a national client; for example, the Toronto office is retained by an Ontario based client, but the work is done mainly in BC and partly in Alberta and the contact is made with the client in all three locations. Determining which client office is “most closely connected” is an interesting question.
Place of Supply: Imported Taxable Supplies If a purchaser is not entitled to take full ITCs, then imported supplies of services and IPP are subject to tax under the self-
L AW Y E R S I N C A NA DA
assessment Rules. However, it is now 12 per cent or 13 per cent (not just the five per cent GST). If the taxpayer misses this, it’s a big surprise, for example, for Charities and other non-profits as well as some financial service providers.
Inter-Provincial Imports There is both a self-assessment requirement and a rebate for entities engaged in non-commercial activities for inter-provincial supplies. Basically for supplies made in non-HST provinces and imported into Ontario, self-assessment is applied at eight per cent or for supplies made in Ontario imported into non-HST provinces, the rebate is applied at eight per cent.
International Imports of Goods The CBSA will not collect the provincial portion of the HST (eight per cent Ontario, seven per cent BC) on commercial importations of goods into Canada (except for travelers, i.e. non business importations). However, for imported commercial goods acquired from an unregistered non-resident that are not acquired for use exclusively in commercial activities, a self-assessment of eight per cent is required (again Charities and other Non-Profits beware). Therefore, imported taxable supplies not acquired for use exclusively in commercial activities must be self-assessed (at 13 per cent) by the recipient. ■
Dalton Albrecht, Miller Thomson LLP
Tel: (416) 597-4360 • Fax: (416) 595-8695 • E-mail:
[email protected]
D
alton Albrecht is a partner in the Toronto office of Miller Thomson LLP. Dalton advises and represents clients on sales, use, and commodity tax matters, including the Goods and Services Tax and Harmonized Sales Tax (GST/HST), federal excise taxes and duties and provincial retail sales tax. He also specializes in all aspects of international trade law, including anti-dumping/countervailing/safeguard matters before the CBSA/CITT and other NAFTA and WTO/GATT related matters, including investment restrictions and trade in services. Other areas of practice include customs law value for duty, tariff classification, Export Controls/Sanctions and Import Controls, and duty relief. Dalton appears regularly before the Canadian International Trade Tribunal (CITT) and represents clients before the Tax Court of Canada (GST/HST), Ontario Provincial Offences Court and Superior Court (Retail Sales Tax) and the Federal Court of Canada.
Reprinted with 125permission from The 2011 Lexpert®/American Lawyer Guide to the Leading 500 Lawyers in Canada © Thomson Reuters Canada Limited.
