July 1 may be the official beginning date of the Harmonized Sales Tax in Ontario but all current GST registrants currently doing business in Ontario, which means most registrants of the Outaouais region must take note that they could be required to collect the 13% HST as soon as next week, on May 1.
Indeed where services are involved or where goods are provided through rentals and leases, the HST transition rules provides that the 13% HST ( and not the 5% GST and separate 8% RST) applies in certain situations where contracts are entered into before July 1.
Service contracts and sales of goods:
Indeed, HST will apply to the portion of the consideration (i.e price) payable (or paid before being due) on or after May 1, in relation to any service to be rendered after July 1, 2010. (unless 90% or more of the service is rendered before July). Accordingly if a person enters into a contract to have renovations done to his house they will not evade application of the HST on the portion of the work performed after July1, even if he pays for the work in totality in May. However, there would be no HST applicable provided the price is actually paid before April 30 th. Since there is currently no RST on such real property contracts, consumers are advised to act rapidly to avoid the additional 8% tax payable due on the labor portion and profit of the service providers.
Vendors and service providers should ensure that their contracts contain adjustment clauses regarding application of HST for any contract signed after May 1st to provide protection in case the work, or part of the work cannot be completed before July 1. They will also need to modify their accounting systems and probably manually monitors the progression of any work relating to contracts signed after May 1 st; where work is done both before and after July 1, it will be necessary to properly allocate the consideration in order to determine which part of the consideration is subject to HST and which part is subject to GST only, or GST and RST. The tax collected will also have to be sent to the appropriate tax authority. This May 1st transition rule applies not only to real property contracts but to any service contract where part of the service is rendered after July 1, 2010.
It should be noted that this transition rule also applies to goods ( in opposition to services) that are purchased on or after May 1, but are delivered after July 1. For example if a person buys furniture on May 1, HST will apply if the goods are delivered after July 1; in such a case, there would be no difference in the amount of tax payable by the consumer ( furniture being subject to both GST and RST anyway) but the vendor could encounter problems if he does not account for HST and sends 8% of the tax collected as RST to the Ontario Ministry of Revenue. He could be assessed by CRA for not collecting and remitting the 8% portion of the HST and it may prove difficult to locate or then collect the tax from the consumer; in addition the 8% remitted as RST would be tax paid in error and it would only be refundable to the consumer, not the vendor. Accordingly, all vendors and service suppliers must be concerned by correct tax application regarding goods delivered or services rendered after July 1, with respect to any contract entered into on or after May 1.
Goods supplied by lease or rental.
Similarly, any portion of a leasing or rental contract is subject to HST for rental or leasing intervals occurring after July 1, For example if a person enters into a 4 year monthly lease of equipment on January 2009, any lease payment due after July 1 ( for a lease interval in or after July) becomes subject to HST and any prepayment of leases relating to intervals after July would also be subject to HST if these prepayments are made on or after May 1. Again, while this may not affect the amount of tax payable by the buyer ( where goods are subject to both GST and RST) it will still require the vendor to properly allocate, account for and remit tax to the appropriate authority. It will consequently be necessary to closely monitor this type of transactions and any related payments.
On the other hand, Ontario GST registrants that lease equipment, such as postal machine, or photocopiers and similar office equipment often have automatic payment from their bank account for such leases; they must remember that starting July 1, they will be entitled to a 13% "input-tax credit" ("ITC") and not only to the 5% ITC as is currently the case.
Other situations
There are many rules and exceptions to the general or transition rules regarding different types of transactions straddling the July1, or May 1 cut-off dates. For example, by exception, most prepayment contracts for funeral services are not subject to HST if entered into before July 1, even if, hopefully, the services are not rendered until much later. Vendors and purchasers alike are strongly advised to consult the rather lengthy CRA notice 247 on the subject of transactions straddling the July 1 date, available here, or to consult a commodity tax specialist in view of potential assessment issues involved and in view of the fact that many different rules govern sales or rentals of goods, services or "intangible property" such as admissions or memberships.
Finally, on May 1, new, significantly different rules for services and "intangible property" dealing with the "place of supply" which govern whether GST, HST and/or QST apply, also come into effect; these are particularly important for Outaouais region suppliers of services dealing with customers in both Ontario and Quebec; we will review again this matter in an upcoming column.
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