Among these changes, British Columbia proposes to transition from a federal-provincial harmonized VAT regime to a goods and services tax (GST) and provincial sales tax (PST) regime, while Quebec proposes to harmonize more of its provincial tax rules with the federal GST.
Some of these changes will create unrecoverable tax costs and new compliance issues for many businesses. Companies may have to significantly change their accounting systems and processes to accommodate new or modified tax regimes in the provinces where they do business. An early understanding of the impact of these changes could result in more effective management and implementation of these changes.
Quebec proposes to harmonize more of its Quebec Sales Tax (QST) rules with the rules for the federal GST, with effect from 1 January 2013. Despite these changes, Quebec will maintain its QST separate from the GST, so businesses will still have to deal with two separate tax regimes in the province.
One of the most significant changes under the modified QST will make financial services QST-exempt, as opposed to QST zero-rated. As a result, businesses providing financial services will generally no longer be entitled to claim input tax refunds for the 9.975 percent QST paid on expenses related to these services, significantly increasing some costs. Other changes propose 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 percent (from 9.5 percent) as of 1 January 2013
- require some non-residents of Canada to cancel their optional QST registration.
British Columbia will transition from HST back to GST and a new PST, with effect from 1 April 2013. Businesses that had to revamp their systems when the HST was introduced in 2010 will have to revamp them again to return to GST and PST, as well as making appropriate changes to address the new PST, including:
- increased costs due to unrecoverable PST paid
- two different sets of rules, tax bases, and tax returns
- transitional issues for many items such as credit notes and returned goods.
Manitoba has applied its 7 percent PST to many insurance contracts since 15 July 2012. As taxable insurance contracts are renewed or certain premiums are paid on or after that date, many businesses have to pay or self-assess the 7 percent PST on these contracts or premiums.
Prince Edward Island
Prince Edward Island proposes to harmonize its PST with the GST with effect from 1 April 2013, to create a new 14 percent HST (reduced from the current effective combined GST/PST rate of 15.5 percent).
GST/HST and financial institutions
Complex Federal draft regulations for some financial institutions were released in early 2011. These entities 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 upcoming elimination of the Canadian penny and a revised transition date of early February 2013 (from fall of 2012). 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 or the remittances of GST/HST. However, some businesses may still need to take steps to adjust their sales procedures.
Now is a good time to consider which of these changes will affect businesses in the coming year. Preparing for changes to systems and processes can help a business avoid costly errors and take advantage of any opportunities to reduce the tax burden.