On February 25, Finance Canada announced the introduction of new "place of supply" rules. The rather long document is available here. Such rules are not new and became important when the Harmonized Sales Tax (HST) first appeared in 1997 when most of the Maritime provinces merged their retail sales tax with the GST. The introduction of the HST created situations where it was not obvious which rate should apply, GST or HST. For example, if someone makes a long distance phone call from Ottawa to Newfoundland, must the telephone company collect the GST or the HST? Is it the place of origin or the destination of the phone call that determines the rate? Over the years, such questions, which sometimes resulted in lengthy negotiations if not, litigation were resolved by introduction of the "Place of supply" regulations which "deems" the supply to have happened in a specific province under certain special circumstances.
Until now, these arcane rules created few problems in our area, and across the country as a whole because the relatively small number of residents in the Maritimes resulted in few situations where major problems occurred. Nevertheless, most tax practitioners have encountered situations where GST registrants where assessed for failure to collect the HST when they sold goods or services in the Maritimes.
With Ontario and BC joining the HST system, with different rates to boot, place of supply rules become extremely important, especially here, in the Outaouais region. While it is fair to say that most local businesses did not have to bother much with such rules because relatively few had dealings with the Maritimes, this is no longer the case. Most businesses in the area have, to some extent, cross-border transactions with Quebec, if not across Canada, including BC. Moreover, the majority of "transnational" companies with transactions from coast-to-coast are located in Ontario. Accordingly, rules had to be changed; whether they have really been simplified remains to be seen. It is important to note that while Quebec has harmonized its retail sales tax with the GST, it was not merged into the HST and remains a different beast in many respect, thus compounding tax administration problems for local businesses.
Generally speaking, (there usually exists an exception to confirm the rule), no changes are made to place of supply rules concerning supplies of real property or supplies of tangible personal property; on the other hand, significant changes are made to rules applying to supplies of services or of intangible property (such as memberships, patents, rights to use software etc...)
5%, 12% or 13% and what about the QST?
Let's imagine a situation where a Quebec lawyer is hired by an Ottawa resident to contest a traffic violation ticket he received while in Vancouver . Should the lawyer collect the GST at 5%? Does the QST at 7.5% also apply? Or does the Ontario HST rate of 13% apply rather than the 12% BC HST? This is not a simple matter and the "place of supply" regulations provide the answer.
Under the current rules (and current tax situations before July 1), there is no question that the 5% GST applies and the only question that remains is whether or not the QST applies. Since the client is a non-resident and the service is performed outside Quebec the zero-rating provisions apply and there is no QST.
The QST situation remains the same under the new rules. With respect to HST however, at first glance , it would be expected, under the new supply rules that the 13% Ontario HST rate would apply because the client has an Ontario address ( a welcomed simplification is that questions of where the contract was negotiated are no longer applicable). However, would you be surprised to learn that there's an exception concerning litigation services? In such case, the correct answer is 12%, the BC rate because contesting would likely be in that province. To further cloud the issue, this exception to the general rule only applies to litigation services. Services rendered before litigation begins would remain subject to the general rule (and 13% rate). If the client merely consults his lawyer and does not litigate the 13% rate would apply; should he consult and then decide to litigate, part of the service would be taxed at 12% and another at 13%!
It may be tempting to always charge 13%, but this is not a professional way to conduct business and is not even a viable solution when the question is whether the service was rendered, ( or deemed to be rendered) in Quebec or Ontario.
This is really just another proof that sales tax matters are not simple and cannot simply be considered as afterthoughts. HST, and its arcane "place of supply" rules will make tax matters administration more cumbersome, especially here, in the Outaouais region where cross-border transactions are far from exceptional. Those that fail to familiarize themselves with the rules as they apply to their specific situations risk assessments with interest and penalties down the road.
To illustrate the scope of these changes, let me say the document referred to at the beginning of this column contains 51 different examples. The list is not exhaustive.
By the way, these changes come into effect on May1, not July 1. The time to plan for HST reform is now.
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