Doing business in Canada means having to navigate the indirect taxes — GST, HST, PST and QST — or potentially face a costly tax bill.
Unlike income tax, sales taxes apply to most transactions done throughout the year, not just when you file your tax return. As a result, even small mistakes can quickly multiply, leaving your company on the hook for a substantial amount of tax it should have remitted, plus interest.
Such a mistake cost one Ontario company nearly $1 million, when it failed to give sufficient time to its IT department to change its systems from charging 5% GST to the new 13% HST. As a result, the company charged too little tax on several purchases, which it could not later collect from customers.
With a rash of changes pending in many provinces, the more you do business in, the more you need to ensure your accounting and point-of-sale systems stay current.
If you do business in British Columbia, for instance, you’ll need to be ready in less than a year for that province’s return to a GST and provincial sales tax system on April 1, 2013, from an HST system — a move that was made not that long ago.
Companies will also have to deal with B.C. transitional rules for a range of items including credit notes, bad debts, taxable benefits, promotional supplies and self-assessing tax for goods brought into the province. New-home builders will need to follow special transitional rules.
PST also increases costs for many businesses because they can’t recover this tax as they can with GST or HST. If your B.C. company is considering purchasing an asset that will be subject to the reinstated PST, you may benefit from purchasing that asset while HST applies. On the other hand, businesses that can’t claim input tax credits because their sales are HST-exempt may want to delay acquiring services and certain property that are subject to HST but should not be subject to PST based on the old rules.
As part of Ontario’s transition to HST, the province has suddenly reduced the time available for companies to recover any overpayment of PST before HST took effect on July 1, 2010. Companies need to submit claims by Dec. 31, 2012, or possibly earlier, which means you have only a few months left to review your transactions to determine whether you overpaid any PST.
In Quebec, the province is taking steps to make QST essentially the same as GST. Currently, the 9.5% QST applies to the GST-included price of taxable purchases. As of Jan. 1, 2013, the new rate of 9.975% will be combined with the 5% GST for an effective rate of 14.975%. Businesses will have to adjust their point-of-sale systems to allow for three decimal points instead of two.
Some of the most important and complex QST changes will affect businesses providing financial services, such as insurance brokers. Under the current rules, these services are zero-rated, meaning customers don’t pay the tax on these services but the businesses providing them can still claim input tax refunds to recover QST paid. Under the new system, financial services will be exempt, so companies providing them will not be able to claim input tax refunds, increasing their costs.
Changes are also coming in the Atlantic provinces — Nova Scotia is reducing its HST rate to 14% from 15% as of July 1, 2014, and to 13% on July 1, 2015; Prince Edward Island switches to HST at 14% instead of PST and GST as of April 1, 2013.
For companies in Manitoba, many insurance policies will soon cost more when the province begins applying its 7% PST to certain types of insurance coverage on July 1, 2012. If your company sells insurance or collects premiums in Manitoba, you have only a short time to get your systems ready to collect this tax.
As if all this wasn’t enough, the elimination of the penny this fall brings its own complications for point-of-sale systems. Non-cash payments made with cheques, credit or debit cards can still be settled to the cent if businesses choose to do so but cash transactions will require price rounding. You’ll have to calculate GST or HST on your prices before you do any rounding.
Taking the time to get these taxes right can save you money and time dealing with the tax authorities.
Dianne Bomben is a senior manager in KPMG Enterprise’s indirect tax practice in Toronto.