HST – Sales Tax Harmonization in Ontario for Professional Firms by abstraks


									HST – Sales Tax Harmonization in Ontario for
Professional Firms
Beginning July 1, 2010, Ontario will no longer have                 TRANSITIONAL ISSUES
the Ontario retail sales tax (“RST”), and will instead
                                                             Similar to the 1997 HST transition, the Ontario HST
be adopting a harmonized sales tax (“HST”), which
                                                             transition involves three important dates:
will parallel the GST at the provincial level. The
HST rate will be 13% -- 5% of the HST is the                 1       Transition date – October 14, 2009;

existing GST component, and 8% will be the                   2       Implementation date – July 1, 2010; and
Ontario provincial portion.    British Columbia will
                                                             3       Pre-collection date – May 1, 2010.
also be moving to an HST on July 1, 2010. We
have some information already about how the HST              These dates are important especially when dealing

will operate in Ontario, and about the transition, but       with transactions which straddle the July 1, 2010

are still awaiting more complete information.                implementation date.     Some of the most likely
                                                             transition problems for professional firms are
This Insight deals with the proposed Ontario HST
                                                             considered below:
by addressing aspects of the following areas that
are of special relevance to professional services            Prepaid services
firms:                                                       Generally, professional services performed after

                 Transitional Issues                         the implementation date of July 1, 2010 will bear
                                                             HST, representing an increase equivalent to the
   Recommendations and Considerations for the
                                                             present 8% RST, which does not currently apply to
               Implementation Period
                                                             professional services.     However, there will be
Please also refer to our general principles Insight          transitional rules to determine the tax rate (5% GST
“HST – Sales Tax Harmonization in Ontario”, and              or 13% HST) for services which straddle the
our Insights addressing the implications of the new          implementation date, depending on when any
HST system for specific industries, including the            prepayment for the services is made, the nature of
real estate sector, the charitable and not-for-profit        the client, and the proportion of work performed
sector, and medical practitioners.                           before July 1, 2010.

INSIGHTS                                                                                                                     2009

The general principle is that invoices prepared after          service       bodies,      financial         institutions,     and
June 2010 for professional services which straddle             businesses buying goods for non-commercial
the July 1, 2010 implementation date should                    purposes       will   be    impacted          by      these    self-
separate the portion of the work performed before              assessment rules, and they will generally face a
July 1, 2010, from the portion performed on or after           significant    increase        in    their    total    costs    for
that date, with the former taxed at 5% and the latter          professional services for this reason. The service
at 13%.     However, if a particular professional              provider can mitigate this self-assessment impact
service is 90% performed before July 1, 2010,                  by ensuring that at least 90% of the work is
and is invoiced after June 2010, the invoice will              performed by July 2010, in which case only 5%
only bear 5% GST, regardless of when the                       GST will apply to the invoice.
actual invoice is prepared. If the work was less
                                                               As a result of these transitional rules, service
than 90% completed prior to July 2010, the
                                                               providers     may       wish    to    encourage         individual
professional will be required to pro-rate the work,
                                                               consumer clients to make prepayments before
and charge two different rates of sales tax on
                                                               May 1, 2010, even if the work is not to be
the invoice.
                                                               performed until after July 1, 2010.                     Individual
HST will also generally be collectible on payments             consumers will be most affected by the introduction
for supplies of services, which become due, or are             of HST, since they are unable to recover any of the
paid without having become due, on or after May 1,             HST as an ITC, so the application of HST will mean
2010 and before July 2010, to the extent the                   an 8% increase in their costs.               Clients should be
consideration   relates   to   part   of   the   service       made aware that if the prepayment becomes due,
performed on or after July 1, 2010.               When         or is paid without having become due, after April
payments for services become due, or are paid                  2010, then any portion of that prepayment that
without having become due, after October 14,                   relates to work done after June 2010 will bear HST.
2009 and before May 1, 2010, then to the extent                Payments due after July 1, 2010 will generally be
such prepayments are for services to be performed              subject to HST, (unless at least 90% of the work
after June 2010, they will attract only GST, not               was done before July 1, 2010). It will be important
HST, if the client is an individual "consumer"                 to be able to document when the payment was
purchasing for personal (i.e. non-business) use. In            actually due, but clients should be encouraged to
contrast, certain "non-consumer" clients acquiring             make these payments well before the cut-off dates.
services otherwise than exclusively for use in
                                                               For most business clients, the introduction of HST
commercial activities (i.e. where full input tax
                                                               will only present a cash flow issue, rather than a net
credits or ITC's can be claimed) will be required to
                                                               increase in cost.          As indicated, however, some
self-assess the provincial HST component for such
                                                               clients will only be eligible for a partial recovery of
prepayments made during this period, although the
                                                               HST paid rather than full ITC’s (e.g. charities and
providers of the professional services will not be
                                                               other not-for-profit entities), so the cash flow for
required to charge HST.        Most charities, public

INSIGHTS                                                                                                                2009

these clients will be negatively impacted by the                work was performed, in case of a later review by
HST.                                                            CRA.

Professionals will also have an incentive to do as
much work as possible on projects before July
                                                                   RECOMMENDATIONS AND
2010, since if at least 90% of the work is completed
                                                                CONSIDERATIONS FOR THE
by that date, the client is only required to pay GST,
                                                                IMPLEMENTATION PERIOD
even if the client pays after July 1, 2010. This may            Professional     services     firms    dealing     with    the
involve keeping detailed documentation to establish             transition to an HST system will need to consider
when work-in-progress was performed.                            many issues including the following:

                                                                       Professionals should do as much work as
Contingency-based legal billing
                                                                       possible on projects before July 2010, since if
Lawyers often are engaged on the basis that they                       at least 90% of the total work is completed
will only be paid once (or if) their client is successful              by that date, the client will only pay GST,
in an action. This process can take several years,                     even if payment is after June 30, 2010.
and may straddle the HST implementation date.
                                                                Notice to Readers: The above is a general discussion based
However, if at least 90% of the work was                        on published proposals for Ontario HST harmonization. These
                                                                proposals depend on the enactment of enabling legislation,
performed on the file before July 2010, then the
                                                                which has not yet been published. To the extent changes or
invoice will not bear HST even if it is rendered                modifications arise, our comments would be subject to
                                                                modification as well. This Insight is not a substitute for
long after July 1, 2010.       We are awaiting final
                                                                professional advice. You should review these points of
clarification regarding whether this will also apply to         discussion with your professional advisor, who should be fully
                                                                informed of your circumstances, before you take any significant
disbursements related to the file.         The lawyer
should retain evidence of when exactly the relevant


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