February 17, 2012
The British Columbia and federal governments today announced transitional measures for the province’s return to provincial sales tax (PST) and goods and services tax (GST) from harmonized sales tax (HST). The announcements say B.C. will return to GST and PST on April 1, 2013.
The federal announcement includes general transitional rules that describe how and when the HST would cease to apply to transactions that straddle April 1, 2013.
B.C.’s announcement includes transitional measures relating to new home sales, including the transitional rules that will apply when the construction and sale of a new home straddles April 1, 2013. These rules include an expanded new housing rebate for new home sales and a provincial grant effective April 1, 2012 for sales of certain recreational properties.
This TaxNewsFlash-Canada summarizes the federal and B.C. announcements.
Background — B.C. voters reject HST
British Columbians voted in a tax referendum in 2011 to return to the goods and services tax (GST) and the provincial sales tax (PST), thus rejecting the harmonized sales tax (HST).
B.C. Finance announced in August 2011 that the PST will be reinstated at 7%. During the transition period, the provincial portion of the HST will remain in place at 7% along with the federal portion at 5%. For details, see KPMG’s TaxNewsFlash-Canada 2011-25, “B.C. Voters Reject HST — Transition Back to PST Begins”.
Goods and services
The general transitional rule for goods and services states that, if tax becomes payable or is paid before April 1, 2013, the HST will apply. If tax becomes payable after March 31, 2013 without having been paid before April 1, 2013, PST and GST will apply.
Goods and services brought into B.C.
The B.C. component of the HST would not apply to tangible personal property brought into B.C. after March 31, 2013.
The B.C. component of the HST would also not apply to consideration that becomes due or is paid after March 31, 2013, for a service or intangible personal property supplied in a non-participating province to a resident of B.C. who acquires the service or intangible personal property for consumption, use or supply in B.C.
The B.C. component of the HST would not apply to non-commercial goods that are imported by a resident of B.C. after March 31, 2013, nor to non-commercial goods imported by a resident of B.C. before that date that are accounted for under the relevant provisions of the Customs Act after March 31, 2013.
The B.C. component of the HST would also not apply to a specified motor vehicle or commercial goods brought into B.C. from a place outside Canada after March 31, 2013.
Imported taxable supplies
GST/HST applies on imported taxable supplies in certain circumstances on supplies of intangible personal property and services made outside Canada. The recipient of an imported taxable supply is generally required to self-assess and remit the tax on the value of the consideration for the supply.
The B.C. component of the HST would not apply to any imported taxable supply made after March 31, 2013, nor to an imported taxable supply made before April 1, 2013 to the extent the consideration for that supply becomes due, or is paid without having become due, after March 31, 2013.
Taxable benefits, passenger vehicles and aircraft and employee/partner rebates
In certain circumstances, an amount of tax, or a credit or a rebate in respect of GST/HST, is calculated based on amounts determined for income tax purposes and in reference to a person’s taxation year. Specifically, this is the case in the determination of the GST/HST on certain taxable benefits for employees and shareholders, certain input tax credits (ITCs) in respect of passenger vehicles and aircraft not being used exclusively in commercial activities, and rebates of GST/HST to employees or partners with respect to certain expenses.
In these cases, the amount of tax, the credit or the rebate is calculated by multiplying the amount determined for income tax purposes by a specified factor. These factors and rates would be adjusted to reflect B.C.’s exit from the HST.
Refunds and rebates
Generally, eligibility for refunds and rebates of the B.C. component of the HST would remain in place until the existing time limits for claiming them have expired for the transactions to which they relate.
New limitations would, however, apply in certain circumstances to reflect B.C.’s exit from the HST system, particularly where the event giving rise to the relief occurs after March 31, 2013. For example, no rebate of the B.C. component of the HST would be available for tangible personal property (i.e., goods) removed from B.C. after March 31, 2013.
Returns and exchanges
The following rules for returns and exchanges of goods would apply where a person purchases a good before April 1, 2013, that is subject to the HST, but returns or exchanges it after March 31, 2013:
- If the good is returned or exchanged and a refund is given, a refund of HST would be available on the amount refunded provided that a credit ordebit note is issued.
- If an exchange is made and no refund is given (i.e., no credit or debit note is issued), there would be no HST refund.
If a taxation year or reporting period of a financial institution begins before April 1, 2013 and ends on or after that date, the financial institution would generally be required to determine its liability for the B.C. component of the HST for the taxation year or reporting period on an apportionment basis. The apportionment would be based upon the ratio of the number of days in the taxation year or reporting period that are before April 1, 2013 to the total number of days in the taxation year or reporting period.
Special rules will also apply to participating employers and pension entities of pension plans for periods that begin before April 1, 2013 and end after March 31, 2013.
Streamlined accounting methods
Small businesses, as well as eligible public service bodies (PSBs), may use the Quick or Special Quick Method of Accounting to simplify compliance. Under these methods, taxpayers multiply eligible GST/HST-included sales by a reduced percentage and remit that amount to the government in lieu of tracking and claiming ITCs for most of the tax they pay. The remittance rates are set out in the Streamlined Accounting (GST/HST) Regulations.
As a result of the elimination of the HST in B.C., the remittance rates for supplies made through permanent establishments in B.C. and for supplies made in B.C. would generally no longer apply after B.C.’s exit from the HST. Instead, the remittance rates applicable to such supplies would be those that currently apply to supplies made through permanent establishments in non-participating provinces and to supplies made in non-participating provinces.
These revised remittance rates would apply for reporting periods of taxpayers using the methods that begin after March 31, 2013. For reporting periods that begin before April 1, 2013 and end after March 31, 2013, the current remittance rates for B.C. would apply to consideration that becomes due, or is paid without having become due, before April 1, 2013, and the revised remittance rates would apply to the remaining consideration.
The current rebate percentages attributable to charities, qualifying non-profit organizations and selected public service bodies (PSBs) resident in B.C. used to calculate rebates of their otherwise unrecoverable provincial component of the HST would generally not apply for the purpose of determining a rebate for a claim period ending after March 31, 2013.
However, for the claim period of a person that includes March 31, 2013, a PSB rebate using a PSB rebate rate attributable to a PSB resident in B.C. could be claimed with respect to the provincial component of the HST if that tax became payable by the PSB, was deemed to have been paid or collected by the PSB, or was required to be added to net tax of the PSB, before April 1, 2013.
Deemed self-supplies of real property
In certain situations, a builder may be deemed to have made and received a taxable supply by way of sale of real property. For example, where a builder constructs or substantially renovates a residential complex and subsequently rents it out to others or occupies it as a place of residence, the builder is generally deemed to have sold and re-purchased the complex and, as a result, would be required to account for GST/HST on the fair market value of the self-supply.
The transitional rules for deemed self-supplies of real property are as follows:
- The HST would apply to a self-supply of real property deemed to have been made by way of sale before April 1, 2013.
- The HST would not apply (and only GST would apply) to a self-supply of real property deemed to have been made by way of sale after March 31, 2013.
Transitional tax adjustment
Sales of certain newly constructed or substantially renovated homes for which both ownership and possession transfer after June 30, 2010 are not subject to the HST if the written agreement of purchase and sale was entered into on or before November 18, 2009. For such homes, the builder is generally required to pay a transitional tax adjustment if the home was completed in whole or part after June 2010.
This transitional tax adjustment would continue to apply only where tax becomes payable on the home before April 1, 2013.
Transitional housing rebate
For newly constructed or substantially renovated homes that are residential condominiums, traditional apartment buildings, seniors’ residences or long-term care facilities, a transitional housing rebate may be available to the builder if 10% or more of the construction was completed before July 1, 2010.
The transitional housing rebate provides relief in respect of PST embedded in the home for construction carried out prior to July 1, 2010 in situations where the HST or the transitional tax adjustment would apply. This rebate could currently be calculated using the “floor space method” or the “selling price method”.
As intended, the transitional housing rebate would continue to be available in respect of homes only where the HST or the transitional tax adjustment applies, as the case may be. Therefore, as of February 17, 2012, builders would not be eligible to claim the rebate before the earlier of the day the HST or the day the transitional tax becomes payable in respect of the home.
The general transitional rules for the PST will generally mirror the federal HST transitional rules.
Generally, PST will apply where tax becomes payable on or after April 1, 2013. Tax in respect of sales of taxable goods and services will generally become payable at the earlier of the time the consideration becomes due or the time the consideration is paid without becoming due. When consideration becomes due will be determined in a manner consistent with the federal rules regarding consideration.
B.C. says detailed PST transitional rules for specific types of transactions, including goods brought, sent or delivered into British Columbia and goods used in the improvement of real property, will be made available as soon as possible.
B.C. also says detailed information for persons selling goods and services who will be required to collect and remit the PST will be made available as soon as possible.
B.C. will administer the PST and the PST transitional rules.
B.C. announced new relief measures for purchasers and builders of new homes. The B.C. new housing rebate threshold will be increased to $850,000, effective April 1, 2012 to March 31, 2013; meaning qualifying newly built homes will now be eligible for a provincial HST rebate of up to $42,500 (previously $26,250). Eligible purchasers of new homes with a purchase price of up to $850,00 will be entitled to a rebate of 71.43% of the provincial component of the HST paid up to a maximum of $42,500.
Builders will be asked to pay or credit the enhanced portion of the rebate to the purchaser where they have agreed to pay or credit the existing B.C. new housing rebate.
The existing new rental housing rebate will also be enhanced so that the rebate will be calculated as 71.43% of the provincial component of the HST paid, up to a maximum of $42,500.
In addition, purchasers of new secondary vacation or recreational homes outside the Greater Vancouver and Capital regional districts priced up to $850,000 will be eligible to claim a provincial grant of up to $42,500, effective April 1, 2012.
B.C.’s portion of the HST will continue to apply before April 1, 2013. Purchasers will be eligible for the new higher B.C. HST new housing rebate, of up to $42,500, and builders will continue to claim input tax credits.
B.C.’s portion of the HST will no longer apply to newly built homes where construction begins on or after April 1, 2013. Builders will once again pay 7% PST on their building materials. On average, about 2% of the home’s final price will again be embedded PST.
For newly built homes where construction begins before April 1, 2013, but ownership and possession transfer after, purchasers will not pay the 7% provincial portion of the HST. Instead, purchasers will pay a temporary, transitional provincial tax of 2% on the full house price. Builders will receive temporary housing transition rebates to offset PST on materials to help prevent double-taxation on homebuyers.
B.C. transition tax
The transition tax will apply to sales of newly constructed or substantially renovated housing where:
- the HST does not apply to the sale (GST applies)
- the construction or substantial renovation of the new housing is 10% or more completed as of April 1, 2013, and
- ownership or possession of the new housing transfers, or a deemed sale of the new housing (i.e., self-supply) occurs, before April 1, 2015.
Self-supply of new housing
For GST/HST purposes, in some cases, a builder is considered to have made a self-supply of new housing and is required to pay GST/HST on the self-supply. These are generally cases where the builder claims input tax credits for costs incurred during construction and the builder is also the final owner of the new or substantially renovated housing. For example, a builder that constructs a traditional apartment building and operates it as a landlord or a public service body that constructs and operates a social housing complex, is required to pay GST/HST on the self-supply.
In cases where the builder is required to pay GST on a self-supply made on or after April 1, 2013 and the construction or substantial renovation of the housing is more than 10% completed as of April 1, 2013, the builder will be required to pay the B.C. transition tax of 2% calculated on the fair market value of the housing. The transition tax will become payable on the day that the self-supply occurs.
B.C. transition rebate
For sales of newly constructed or substantially renovated housing that will be subject to the B.C. transition tax, B.C. intends to provide a transition rebate to the builder. A transition rebate will only be available if the transition tax has become payable in respect of the new housing for which it is claimed. For builders who make sales of newly constructed or substantially renovated housing that is subject to the transition tax, the transition rebate for new housing will be calculated on the total consideration for the housing and on the degree of completion of the housing as of April 1, 2013.
For builders who are required to self-assess and pay the B.C. transition tax on a self-supply of new housing on or after April 1, 2013, the B.C. transition rebate will be calculated on the fair market value under the self-supply rules and on the degree of completion of the housing as of April 1, 2013.
Builder certification requirements
To claim the B.C. transition rebate, the builder will be required to certify that the builder paid PST on substantially all of the building materials that were incorporated on or after April 1, 2013 into the newly constructed or substantially renovated housing. The builder will also be required to keep receipts for audit purposes.
Special transitional rules will apply to sales of new housing where a written agreement of purchase and sale was entered into on or before November 18, 2009, or the housing construction began before July 1, 2010 (the HST start date in B.C.) and for which ownership and possession transfer after March 31, 2013 (the HST end date in B.C.).
Builder disclosure requirements
Written agreements of purchase and sale of newly constructed or substantially renovated housing may be unclear about the taxes and rebates that are included in the sale price stated in the agreement, especially with the impending transition to the PST/GST.
For these reasons, builders will be required to make certain disclosures to purchasers and to the CRA. B.C. intends to impose penalties on builders for failing to comply with the disclosure requirements.
Your KPMG adviser can keep you up-to-date on developments and help you assess possible opportunities that may be available to your business during this transitional period. For details, contact your KPMG adviser.
Information is current to February 17, 2012. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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