Prior to the implementation of HST in Ontario on July 1, housebuilders, renovation contractors and about anyone involved in "real property" contracts were not considered as "vendors" for purpose of the Ontario Retail Sales Tax ("RST"). For example, a roofer renovating your house would not collect the 8% RST on the price charged to repair the roof ( Although the 5% GST did apply). This does not mean that there was no RST involved; in fact, the roofer was considered the "consumer" of the roofing materials and he paid the 8% tax on the purchase of the construction materials. In effect, his profit and labor costs were the only elements "exempted" from the RST.
Persons involved in such "real property" contracts were not required to register for RST and simply paid the 8% tax at time of purchase of their construction materials. Thus, this created a particular transition issue: these contractors have RST "tax-paid" inventory of construction materials and when they use (or consume) these materials in contracts realized on or after July 1, they must collect not the 5% GST but the new 13% HST. The materials being, in effect hit twice by the 8% tax. The Ontario Ministry of Revenue has somehow attempted to alleviate this "double taxation" problem. A special refund is available for real property contractors allowing them to recover the 8% RST originally paid on certain qualifying construction materials.
RETAIL SALES TAX TRANSITORY REBATE:
Unfortunately, the rebate is somewhat limited. First of all, the rebate is limited to RST paid on construction materials used in residential real property repair and renovation contracts. No rebate is allowed for RST paid on materials used in commercial or non-residential real property; the rationale for this being persons paying the 13% HST on repair and renovation contracts are entitled to recover the full 13% as an "input-tax credit ("ITC") in any event. More importantly, no rebate is allowed for RST paid on construction materials used in situations where a "new housing rebate" or "RST new house transitional rebate" is available. Effectively, this disqualifies construction materials used in most new housing projects sold after July 1.
Finally, the rebate is limited to RST paid on qualifying construction materials effectively used in qualifying residential repair and renovation contracts completed not later than December 30, 2010 and the refund claim must also be filed no later than December 30!
Nevertheless, it is an important refund available to all persons such as plumbers, electrical contractors, renovation specialists, doors and windows contractors, pavement and landscaping contractors and nurseries. These persons may recover the 8% tax embedded in their inventory on June 30th.
COMPLEX COMPLIANCE REQUIREMENTS.
As if the above restrictions were not enough to discourage contractors from claiming the rebate, the Ontario Ministry of Revenue has recently published Tax Tip no. 16 , available here, outlining the required "supporting documentation" that should be included with the refund claim:
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itemized receipts/invoices showing RST was charged
on constructions materials purchased on or before
June 30, 2010 - proof HST was charged for the repair or improvement • of a residential building (e.g., sales invoices, conditional sales agreement, etc.). Each item must correspond with an item for which RST was charged at the time of purchase
- address at which the installations were made
- schedule listing each invoice claimed (date of • invoice, amount of tax paid, supplier name, etc.) with corresponding real property contract(s).
And the claim must be filed by December 30th, latest! Accordingly, to qualify for the refund contractors must not only have an inventory of tax-paid construction materials on hand on June 30th, but also segregate materials used in residential vs commercial contracts as well as being able to match purchase invoices to specific residential contracts completed before December 30!
Many, especially smaller businesses will probably just forget the refund in view of the administrative nightmare to obtain the refund. A better alternative would be to seek the help of professional sales tax consultants, who for a contingency fee will prepare and negotiate the refund claim with the appropriate authorities; Such specialized consultants will know how to make the refund claim acceptable to the authorities. Since these consultants usually do not charge any fees until the claim is paid, it is a better, no-risk alternative, than to do nothing.
Let's simply hope that the administration of this refund program is done in a reasonable and fair manner by Ontario Ministry of Revenue officials and that the requirements outlined in Tax Tip 16 are not applied too literally. It should be sufficient to obtain the refund to demonstrate satisfactorily, in accordance with sound accounting principles that the tax-paid materials were indeed used in residential real property contracts.
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