Contract of Purchase and Sale of Real Property Ontario

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Contract of Purchase and Sale of Real Property Ontario Powered By Docstoc
					Getting Construction Companies Ready
For the Ontario HST

Hamilton Halton Construction Association

Rino Bellavia
905-633-4905
rbellavia@bdo.ca

January 15, 2010
Outline


•Background to the HST
•ORST as Compared to the HST
•Planning Opportunities to Minimize tax
•GST/HST and Construction Contracts
•Other issues


•Let’s keep this informal

  Page 2
Background to the HST


Setting the Landscape

•Limited guidance issued so far
•Limited legislation has been issued
•Relying on budget comments and some pronouncements
•Presentation is based on speculation




  Page 3
Background to the HST

Overview

•Effective July 1, 2010
•Rate of 8% for the OHST and 5% for the GST
•Parallels the GST
•HST is a “value-added tax” rather than the Ontario Retail
Sales Tax (ORST) which is a consumption tax
•Elimination of the Ontario Retail Sales Tax


  Page 4
Background to the HST

Overview
Part of Ontario’s Comprehensive Tax Package
Simultaneous decrease in rate of income tax for individuals,
small businesses and corporations
Intended to attract investment and employment to Ontario




 Page 5
Background to the HST
Benefits of Replacing ORST with OHST
“Simpler” compliance
• Deal with only one government tax authority
• One potential compliance audit


PST is subject to interpretation
• Results in many judgment calls made by auditors
• Limited legislative guidance


Will eliminate embedded PST previously absorbed by persons engaged
   exclusively in commercial activities as HST is recoverable as ITC’s



   Page 6
Background to the HST
Costs of Replacing ORST with OHST

Additional tax to consumers
Expenditures not currently subject to ORST:
   • i.e. professional fees, commercial rents, real property purchases
Additional tax on entities not exclusively engaged in commercial activities
  (i.e. exempt supplies)
   • Health Care services
   • Financial institutions
Cash flow impact
   • Like the GST, OHST will be remitted when billed, not when collected
   • Purchases taxed at 13%



   Page 7
Background to the HST



Point of Sale Rebates
Tax Relief from the OHST portion for:
•     Books (including audio books)
•     Children’s clothing and footwear
•     Car seats and car booster seats
•     Diapers
•     Feminine hygiene products
•     Meals under $4.00


    Page 8
ORST as Compared to the HST
Items for Resale
Example: Sale of Light Bulbs

ORST
• Purchased ORST exempt by issuing a PEC
• Charged ORST on the sale of the item

HST
• Purchase item and pay HST and claim an ITC
• Charge the HST on the sale of the item

Issues
• Cash flow issue with the HST
• Cash flow negative if you pay the supplier prior to filing the GST/HST return




   Page 9
ORST as Compared to the HST
Items for Resale
OHST General Rule – Starting on May 1, 2010
For transactions that straddle the July 1, 2010 date
• Charge OHST starting on May 1, 2010
     - Example: sale of goods on June 28, 2010 to be delivered
       on July 2, 2010
     - Charge HST not ORST
     - Watch for these straddle transactions to ensure the
       correct tax is calculated and remitted to the correct
       government.



  Page 10
ORST as Compared to the HST
Supply and Install
Example: Supply and Install Drywall

ORST
• “Real Property Contractor”

• Pay ORST on the cost of materials to be used in construction contract
  - Contractor is the “user” of the materials

• No ORST charged to the customer

• Pay ORST on purchase of all installation tools




   Page 11
ORST as Compared to the HST
Supply and Install
Example: Supply and Install Drywall

HST
• HST paid on materials and on installation tools
• HST recoverable by claiming an ITC
• HST charged to customer including labour component

Issues
• Cost savings since no ORST on materials and other costs
• Negative cash flow impact on purchases if paid prior to filing the GST return
• Negative Cash flow impact on receivables
    • must remit GST/HST when billed not paid



   Page 12
ORST as Compared to the HST
Supply and Install
Example: Supply and Install Drywall

Planning Point
• Keep inventory of “supply and install” goods at a minimum as of June 30, 2010
• Take delivery after June 30, 2010 to minimize ORST paid
• No ORST refund for goods in inventory on June 30, 2010
   • Inventory rebate only available to suppliers to residential housing industry
   • Need to lobby for a change
   • Consider filing rebate anyway for ORST in inventory as of June 30, 2010
   • Need to review legislation when issued to see if there is a refund position




   Page 13
ORST as Compared to the HST
Supply and Install – Manufacturing Contractor
Example: manufacture and install kitchen cabinets

ORST
• “manufacturing contractor”
• Install into real property - “user”
• Must pay ORST on the manufactured cost
  • Includes raw materials, manufacturing labour, manufacturing overhead
• Equipment used directly in manufacturing purchased ORST exempt
  • Pay ORST on depreciation of equipment
• No ORST charged to the customer




   Page 14
ORST as Compared to the HST
Supply and Install – Manufacturing Contractor
Example: manufacture and install kitchen cabinets

HST
• HST paid on raw materials and manufacturing equipment
• HST recoverable by claiming an ITC
• HST charged to customer on full contract value

Issues
• Cost savings since no ORST on manufacturing costs
• Negative Cash flow on purchases if paid prior to filing GST/HST return
• Negative cash flow impact on receivable
    • GST/HST remitted when invoiced not when invoice paid



   Page 15
ORST as Compared to the HST
Supply and Install – Manufacturing Contractor
Example: manufacture and install kitchen cabinets

Planning Point
• Keep inventory of manufactured goods at a minimum as of June 30, 2010
• Take delivery after June 30, 2010 to minimize ORST paid
• No ORST refund for goods in inventory on June 30, 2010
   • Inventory rebate only available to suppliers to residential housing industry
   • Need to lobby for a change?
   • Consider reducing self assessment on goods in inventory as of June 30, 2010
      • Ministry may not agree
      • Need to review legislation carefully when issued to see if there is a
         postion



   Page 16
Revenue Issues


Impact on Current Bidding

• Need to estimate ORST to be paid until June 30, 2010
• Will depend on the timing and progress of the work
• Will need to make assumptions




  Page 17
Revenue Issues


B.C., Ontario and Federal Governments agree to pay
  the GST and HST effective July 1, 2010

• B.C. and Ontario previously did not pay the GST
• Feds did not previously pay the PST
• Impact on existing contracts?




  Page 18
Revenue Issues


Review existing contracts extending beyond July 1, 2010

•   Consider OHST implications
•   Are prices “plus value added taxes”?
•   Are prices “tax included”?
•   Any provision to pass on ORST savings to customer?




    Page 19
Revenue Issues


Municipalities, Universities, Schools, Hospitals
•Public Service Bodies presently recover GST as a
percentage of GST paid
•Public service bodies will also be able to claim rebates on
provincial OHST portion
•Entities in the MUSH sector will need to track federal
portion and provincial portion separately to calculate
rebates


 Page 20
Revenue Issues

Public Sector Rebate Table
                            GST    OHST
    Municipalities          100%   78%

    Universities/Colleges   67%    78%

    School Boards           68%    93%

    Hospitals               83%    87%

    Charities, Qualifying   50%    82%
    Non-Profit
    Organizations
 Page 21
Planning for the HST


Planning Opportunity
Accelerate purchases before July 1, 2010 with no ORST but
Ontario HST
• Most services (subject to transitional rules)
• Where full recovery of OHST is not available
• Some of your customers may be looking for this




  Page 22
Planning for the HST


Planning Opportunity
Prepayment of taxable items before May 1, 2010
• Works only for consumers
• example: Golf fees for 2010
• Important when no full recovery of OHST




  Page 23
Planning for the HST


Planning Opportunity
Delay purchases that have ORST charged
• ORST is an additional unrecoverable cost
• HST eligible for a rebate or ITC
• Lease now; buy later? (contract structuring)
  - Example: large equipment purchase




  Page 24
Planning for the HST


HST Risk Areas
•13% risk if GST/HST is not collected
•Evaluate every revenue source including “cost recoveries”


Watch for unusual transactions
• example: sale of equipment, rent of extra space etc




  Page 25
Planning for the HST


Consider Whether To Change GST Filing Frequency

• Smaller companies have the choice to file annually,
  quarterly or monthly GST returns
• Evaluate cash flow issues relating to the HST on expenses
  and revenues
• Does it make sense to change the filing frequency?




  Page 26
Planning for the HST


•Update billing systems to provide for OHST and
elimination of Ontario RST


Conduct
•HST Impact Analysis
•HST Implementation Strategy
•Staff Training
•Post-Implementation Review



  Page 27
Recovery Opportunities


ORST Overriding Rules
ORST continues to apply on pre October 15, 2009
transactions
• where consideration becomes due or is paid on or before
   October 14, 2009
• Example: sale of tickets in September 2009 for an event
that takes place in July 2010




  Page 28
Recovery Opportunities


ORST Overriding Rules
After October 14, 2009 and before May 2010
• Where consideration becomes due or is paid within these dates
• ORST should be collected on July 1, 2010 straddle transactions

No ORST required to be collected if:
• Self assessment of OHST by purchaser, or
• Exclusively in commercial activities

File for refund if ORST was paid in error



  Page 29
Recovery Opportunities


Examples:

ORST Charged After October 14, 2009
• Leased equipment for the period after July 1, 2010
• Goods delivered after July 1, 2010
• Services provided after July 1, 2010




  Page 30
GST/HST On Construction Contracts


When is GST is payable?
• GST is generally payable when consideration is paid or
  becomes due
• Override rule for real property construction services*
   • GST is deemed to become due on any consideration that
     has not been paid or invoiced on the last day of the month
     following the month in which substantial completion is
     reached.
• *Applies to construction, renovation, alteration or repair
  of real property


  Page 31
GST/HST On Construction Contracts



Requirement to collect HST started on October 15, 2009


• OHST applies if the payment is attributable to property delivered or
services performed after July 1, 2010

• Example:
  - OHST applies to April 2010 progress billing if attributable to
    property delivered or services performed after July 1, 2010




   Page 32
GST/HST On Construction Contracts

Remittance of OHST Collected Prior to July 1, 2010


• If OHST applies to pre July 1, 2010 billing it is reported on
GST/HST return that includes July 1, 2010 and before
November 2010
• Does not apply to sale of residential property




  Page 33
GST/HST On Construction Contracts


 Example
 Building is substantially completed on May 2, 2010
 Contract is for $1,500,000 with the following billings:
 • $500,000 due on March 31, 2010
 • $500,000 due on May 15, 2010
 • $500,000 less $150,000 holdback is due on August 15, 2010
 • $150,000 holdback is due on September 1, 2010
 First two payments attributable to property and services delivered
 prior to July 1, 2010
 70% of last two payments attributable to post
 July 1, 2010



  Page 34
GST/HST On Construction Contracts


 Result
 Substantial completion occurs on May 2, 2010
 GST owing on the $350,000 payment ($17,500) due August
 15, 2010 needs to be remitted by June 30, 2010
 GST does not apply to the $150,000 holdback
 • GST on holdback is due September 15, 2010




  Page 35
GST/HST On Construction Contracts



 Result
 March 31, 2010 and May 15, 2010 billings
 100% attributable to property delivered and services
 performed before July 1, 2010
 No OHST would be collected on these payments, only GST




  Page 36
GST/HST On Construction Contracts

Result
August 15, 2010 Payment of $350,000
$150,000 related to holdback not due until Sept 15, 2010
70% of $350,000 attributable to property delivered and services
performed after July 1, 2010
OHST of 8% of 70% times $350,000 or $19,600
For OHST, substantial completion is deemed to be
June 1, 2010 (not May 2, 2010)
OHST due July 31, 2010 because of the substantial completion
rule


  Page 37
GST/HST On Construction Contracts


 Result
 $150,000 Holdback on September 15, 2010
 70% attributable to property delivered or services
 rendered after July 1, 2010
 OHST of 8% of 70% times $150,000 or $8,400
 Reported on September 2010 GST Return
 GST of $7,500 is also reported on September return



  Page 38
ITC Restrictions on OHST Paid


ITC’s Restricted for “Large Businesses”

• TAXABLE sales over $10,000,000 annually
• On an associated basis


Recovery of ITC’s on OHST paid restricted as follows:
• First 5 years
• After first 5 years, phased in over next 3 years




  Page 39
ITC Restrictions on OHST Paid

Restricted purchases:
•Energy (except for energy used for farming or for
production of goods for sale)
•Telecommunications services other than internet access
or toll free numbers
•Road vehicles less than 3000 kilograms and related fuel,
parts and certain services
•Food, beverages and entertainment




  Page 40
ITC Restrictions on OHST Paid


Self Assessment of the HST

Transactions after October 14, 2009 and May 1, 2010
• Applies where the HST was not collected
• Applies to large businesses that are subject to the restrictions
• Applies to straddle transactions that relate to the post June 30,
  2010 period
• Can’t prepay or purchase before May 1, 2010 and avoid the HST




  Page 41
          QUESTIONS?




Page 42

				
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