June 1, 2012
Businesses across Canada have had to cope with a flood of indirect tax changes over the last few years, requiring significant changes to their systems and processes. And now, another wave is coming. For example, just yesterday Quebec released details on the upcoming harmonization of the QST with the GST/HST, effective January 1, 2013.
The federal government and several other provinces are also proposing changes to the GST/HST and provincial sales taxes. Even the elimination of the penny this fall brings its own complications for point-of-sale systems that must be addressed.
Businesses will need to determine the impact of the changes as soon as possible so they can adjust and test their systems. Businesses that act quickly may also be able to take advantage of potential tax-saving opportunities.
This TaxNewsFlash-Canada summarizes selected proposed changes and their potential impact on businesses. For a handy one-page thumbnail of these changes, see our table here.
Indirect taxes in Canada include goods and services tax (GST), harmonized sales tax (HST), Quebec Sales Tax (QST), provincial sales tax (PST) (also known as retail sales tax (RST)) as well as payroll taxes and excise taxes.
Business will likely have to prepare for one or more of these proposed changes:
- QST harmonization with GST, effective January 1, 2013
- Shortened Ontario refund deadline of December 31, 2012 for overpaid RST
- British Columbia’s transition back to GST and PST from HST
- Extension of Manitoba’s PST to more services and many insurance contracts
- Complex rules to calculate GST/HST liabilities for pension plans
- Prince Edward Island’s change to HST from GST and PST
- Nova Scotia’s HST rate reductions in 2014 and 2015.
Quebec proposes to further harmonize the rules for its provincial QST with the rules for the federal GST, effective January 1, 2013. Businesses will, however, still have to deal with two tax systems in the province: the GST and the modified QST.
Quebec released details on May 31, 2012 on the upcoming harmonization of the QST and GST/HST. In a 16-page bulletin, Quebec confirmed previously released details and provided new information, including some transitional rules.
One of the most significant changes under the harmonized QST system will make financial services QST-exempt (as opposed to QST zero-rated). As a result, businesses providing financial services in Quebec will generally no longer be entitled to claim input tax refunds (ITRs) for QST payable after December 31, 2012 related to these services. These businesses should expect to be subject to many new complex rules as a result of this change.
Among the most important points in the May 31, 2012 bulletin, Quebec confirmed that it will propose transitional rules for capital properties so that the change to QST-exempt financial services (from zero-rating) should not give rise to a repayment of previously claimed input tax refunds (ITRs) for QST paid on these properties.
Among other things, the May 31, 2012 bulletin includes:
- Provisions to remove GST from the QST base (i.e., QST will be calculated on the price before GST) and increase the QST rate to 9.975% (from 9.5%) as of January 1, 2013
- Provisions to eliminate ITRs for QST that becomes payable after December 31, 2012 for goods and services related to QST-exempt financial services
- New transitional rules related to the current change-of-use rules
- A requirement to cancel QST registration for some financial service providers that are currently registered in the QST system but not in the GST system
- A requirement to register for QST for some financial institutions (FIs) that carry on activities both in Quebec and another province
- Mirroring of reporting periods for QST and GST systems
- A requirement for FIs to use the same allocation methods for claiming eligible GST input tax credits (ITCs) and ITRs
- A provision to reduce QST rebates for registered pension plan entities to 33% (from the current 100%, 88% or 77% rebate rates)
- A new QST election for some transactions within a closely related group that includes a listed FI
- A new QST annual information return for registered FIs
- Partial elimination of the compensation tax for FIs as of January 1, 2013, subject to some rules
- Provisions for the Quebec and federal governments and certain other entities to pay GST/HST and QST, effective April 1, 2013, and to be entitled to rebates
- Changes to optional QST registration for non-residents of Quebec.
Although legislative changes related to these announcements have not yet been released, the bulletin provides businesses with new and important details on the harmonization of the QST that should help them prepare for the upcoming changes.
What does it mean?
Some anticipated effects on businesses include:
- Systems will have to accommodate a QST rate with three decimal points in calculations
- Businesses providing financial services will have to significantly change their systems and processes to accommodate the change in these services’ tax status from zero-rated to QST-exempt
- Businesses that provide financial services will need to understand the effect on their business of the change from the compensation tax to the denial of ITRs for the QST on their inputs into financial services
- Some businesses outside Quebec may have to register for QST.
Does it apply to my business?
Many businesses across Canada can be affected by the proposed QST changes, including those who:
- Charge QST on sales
- Provide financial services
- Are holding companies.
British Columbia will transition from HST back to GST and a new PST effective April 1, 2013. While the proposed new PST is similar to the old PST (i.e., prior to July 1, 2010), the new PST will likely vary in some respects. For example, the province says it intends to make the new PST law clearer and easier to administer for both the government and businesses. Businesses that had to revamp their systems when the HST was introduced in 2010 will now have to reverse the process to go back to GST and PST and make the appropriate changes to address any changes to the new PST.
Businesses will have to carefully plan for the proposed changes as well as transitional rules for a range of items such as credit notes, promotional supplies and self-assessing tax for goods brought into the province. Businesses that sell new homes have to follow transitional rules specific to their industry.
What does it mean for businesses?
Transitioning back from HST to GST and PST will have a significant impact for many businesses. These businesses will likely have to deal with:
- Increased costs due to unrecoverable PST paid
- Two sets of rules, tax bases, and returns
- Self-assessment on items such as promotional goods
- All required changes to systems and processes to address the new PST and related compliance issues
- Many financial institutions across Canada that operate in B.C. or have customers there will be affected by this change, particularly when calculating their tax liabilities.
Does it apply to my business?
Businesses across Canada will have to change many of their systems to address the new B.C. PST, including businesses that:
- Have operations in B.C
- Have clients located in B.C.
- Advertise their name and B.C. telephone number in a B.C. telephone directory.
Ontario recently announced it was shortening the deadline to recover any overpaid PST to no later than December 31, 2012 (from mid-July 2014). The deadline may be earlier depending on the circumstances. As a result, many businesses only have a few months left to review their Ontario pre-July1, 2010 invoices and recover any overpaid Ontario PST.
Does it apply to my business?
Businesses may have overpaid taxes for various reasons. For example, they may have:
- Incorrectly applied transitional rules for the implementation of the Ontario HST
- Paid Ontario PST on goods or services consumed outside Ontario
- Paid Ontario PST on tax-exempt goods and services.
Manitoba proposed in its 2012 budget to apply its 7% RST to many insurance contracts and more services effective July 1, 2012. The implementation date was recently extended to July 15, 2012 for RST on insurance contracts only. The RST will apply to new taxable services effective July 1, 2012.
Manitoba recently released a new bulletin for RST and insurance, which among other items, explains when tax is payable, lists taxable and non-taxable insurance contracts and reviews the RST registration requirements.
What does it mean?
The Manitoba RST of 7% will apply to many insurance contracts. Insurers, brokers, and other providers of insurance contracts have to review their systems and processes to determine how the proposed changes will apply to their operations, including who is responsible for collecting and remitting the 7% RST.
Does it apply to my business?
Many businesses that provide or sell insurance contracts will have to determine whether their contracts are taxable or non-taxable based on the recently released RST bulletin.
Nova Scotia recently announced proposed changes to its current 15% HST rate. The province plans to reduce the HST rate to 14% (from 15%) on July 1, 2014 and to 13% (from 14%) on July 1, 2015.
Prince Edward Island
In its 2012 budget, Prince Edward Island announced its plans to harmonize its PST (currently 10%) with the 5% GST effective April 1, 2013 to create a new HST at the reduced rate of 14% (from an effective combined GST/PST rate of 15.5%). As such, many businesses will have to make the appropriate changes, including some businesses that do not operate in the province but provide services or sell goods to clients there.
While it appears that P.E.I. is still in the early stages of HST implementation, businesses will likely encounter similar implementation issues (i.e., transitional issues and system changes) as when Ontario and B.C. introduced HST in 2010. Further details on the province’s transition to HST will be released later.
New rules for pension plans
Many pension plans across Canada became subject to complex rules for selected listed financial institutions (SLFIs), effective January 1, 2012. Under these rules, pension plans have to calculate their GST/HST liabilities and generally are required to pay or claim an additional amount of GST/HST.
What does it mean for these pension plans?
Many pension plans may have to, among other items:
- Voluntarily register and file GST/HST returns annually to help avoid more frequent filing periods
- Comply with numerous new rules, including complicated calculations
- Review the recent GST/HST pension plan rules to determine the appropriate changes based on their changed status (from non-SLFIs to SLFIs).
Does is apply to my business?
Many businesses and organizations have pension plans for their employees. These entities have to determine whether their pension plans are qualifying pension plans and whether they are qualifying employers under the recent GST/HST pension plans rules.
GST/HST — Upcoming rules for some FIs
A second set of lengthy and complicated draft regulations for selected listed financial institutions was released in early 2011 and included numerous new concepts and measures with a few implementation dates. These financial institutions are still waiting for these regulations to be published in their final version to determine whether there will be additional changes.
Elimination of the penny
The federal government recently announced the elimination of the Canadian penny, which will affect businesses across Canada. The GST/HST will continue to be calculated on the pre-tax price; only the final total for cash payment will be rounded to the nearest five cents. Electronic payments will not be rounded and will continue to be paid to the nearest cent. As such, the elimination of the penny should not affect the calculation of GST/HST on taxable sales or the remittance of these taxes. However, some businesses may still need to take steps to adjust their sales procedures.
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Your KPMG adviser can help you manage the impact of these and other federal or provincial indirect tax changes that may affect your business. We can help you manage your indirect tax compliance obligations in all relevant jurisdictions and also help you ensure that you are not missing refund opportunities. For details, contact your KPMG adviser.
Information is current to May 31, 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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