COMMODITY TAX/CUSTOMSPrepared by:
Tel: (416) 865-7266 • Fax: (416) 865-7048
Jamie M. Wilks
Tel: (416) 865-7804 • Fax: (416) 865-7048
4400- 181 Bay St, Brookfield Pl, Bay Wellington Twr
Toronto, ON M5J 2T3
In recent years, the most significant commodity tax developments were British Columbia's ("BC") and Ontario's harmonization of their provincial retail sales taxes ("PST") with the federal goods and services tax ("GST"), a multi-stage, national value-added tax ("VAT"). In the past year, that trend has been partly reversed, with BC announcing its intention to eliminate the HST and to re-implement the PST after a popular revolt. To a certain extent, however, the trend continues. Québec has agreed to further harmonize its provincial VAT, the Québec Sales Tax ("QST"), with the GST, while maintaining the QST's distinctly provincial character. These two trends, operating at cross-purposes, are the focus of this article.BACK TO THE FUTURE — BC WILL ELIMINATE HST AND
For over 60 years since BC adopted a PST in 1948 until July 1, 2010, BC maintained its PST. Effective July 1, 2010, BC eliminated its 7 per cent PST and harmonized its sales tax with the 5 per cent federal GST. The 12 per cent BC HST that came into effect on July 1, 2010, consists of a 7 per cent BC tax rate blended with the 5 per cent federal rate. The HST is levied under Part IX of the federal Excise Tax Act (Canada) ("ETA") and administered federally by the Canada Revenue Agency ("CRA").
Shortly after winning an election where he ran on a campaign of promising not to adopt the HST (or at least not indicating that he would adopt the HST), BC's Premier Gordon Campbell announced that BC would implement the HST. There was a public backlash, with the momentum eventually forcing the Premier to resign. That momentum also led to a referendum in which British Columbians voted 55 per cent to 45 per cent to eliminate the HST and reinstate the PST. Despite the province's efforts to educate the electorate on the benefits of the HST – and BC legally committing itself to make the HST more attractive by reducing the provincial tax rate of the HST to 5 per cent in two 1 per cent increments by July 1, 20141 – voters, nonetheless, chose to reject the HST in favour of the 7 per cent PST (without any promise of a PST rate reduction).Action Plan to Eliminate HST and Reinstate the PST
BC announced the results of the referendum on August 26, 2011, along with an action plan to reinstate the PST to replace the HST (the "Action Plan"). BC has committed to allow the same exemptions under PST as existed as of June 30, 2010. BC has given the required notice to the federal government to exit the Comprehensive Integrated Tax Coordination Agreement ("CITCA") between BC and the federal government relating to implementing the BC HST. Since BC is in material breach of the CITCA by exiting the CITCA within five years after HST implementation, BC has agreed to repay, over a 5 year period without interest, $1.6 billion of funding that the federal government gave to BC for entering into the CITCA.2Timeline
BC has announced that it intends to re-implement PST and eliminate HST as of April 1, 2013. The federal government announced, on February 17, 2012, proposed transitional rules for unwinding the 12 per cent BC HST as of that date.3 BC has announced that it will draft PST transitional rules to fit the HST transitional scheme (to avoid incidences of double or overlapping taxes and transactions escaping both taxes), but to date it has only released limited proposed rules dealing with new residential housing.4 The extended period before PST replaces HST is needed to permit BC to obtain the resources to administer its own PST again and for business to transition from HST to PST.BC's Challenges
Under the BC HST Transition Project Human Resources Agreement, CRA agreed to hire the former BC employees responsible for the administration of the PST. These employees will need to be rehired or replaced by BC. We understand that BC only currently employs a third of the 300 PST auditors in place before the transition to HST. The provincial government expects that it will need to register approximately 100,000 businesses as PST collectors before the PST is re-implemented. The province has to set up adequate resources and systems to administer PST reporting, collection, audit, assessment, enforcement and appeal processes.
The financial cost to BC of reverting to PST is enormous. In addition to having to fully repay the $1.6 billion received from the federal government to transition to HST, the transition costs associated with re-implementing the PST are estimated to be $700 million. Less tax revenues and growth are expected to be generated by the PST than the HST. In the Action Plan, the BC Finance Minister said:
Challenges for Businesses
"The return to the PST creates significant pressure on the government budget. In May I outlined the approximately $3 billion-hole created in the fiscal plan over the coming years if we return to the PST."
Businesses will have to be provided with information and trained "on the tax application, collection, compliance and reporting rules related to the PST. By the time PST is re-implemented, there will be an estimated 30,000 new businesses in BC with no PST experience. These businesses will need to be registered and provided with detailed information and training to enable them to comply with the tax law."
The impact on business will be enormous. There will be the financial and pricing considerations. Certain businesses, particularly in the service and real estate sector, may not need to charge, collect and remit PST on their sales/supplies even though they had these obligations relating to BC HST. On the other hand, businesses will incur PST as costs of doing business, whereas currently under HST, they can generally claim input tax credits ("ITCs") to recover HST payable (subject to certain limited exceptions). Subcontractors might turn the tables on construction contractors who had insisted that subcontractors pass on the tax savings on construction inputs available as a result of the replacement of PST with HST.
Accounting, information technology ("IT") systems, purchasing, sales and other operations and functions will also be affected. Tax clauses in contracts need to be reconsidered and changed. There will be increased tax compliance with separate PST returns, filings, audits, remittances and self-assessment. If there were non-tax enhancements to the IT codes since the implementation of HST, it may be impossible to return to the PST IT codes in effect prior to July 1, 2010, without losing the enhancements. There will need to be extensive testing of IT system changes before putting them into actual use. The general PST rules going forward will be subject to various transitional rules. For example, there could be special tax compliance relating to returned goods and cancelled sales straddling the PST reimplementation date.
These changes go far beyond businesses within BC. For example, under the provincial place of supply rules for HST, an Ontario wholesaler registered for the GST/HST and selling goods to a retailer in BC could be considered to supply/sell the goods in BC and need to charge, collect and remit HST on its sales of goods to the retailer. Even if delivery and transfer of ownership of the goods occur in Ontario but the wholesaler ships, or arranges with a carrier to ship, the goods to BC, the BC wholesaler could be required to charge, collect and remit the HST.5 As a wholesaler not carrying on business in BC, the wholesaler would have no compliance obligations relating to PST. The GST/HST is designed to be a truly national, multi-stage VAT administered federally across Canada, with a single national GST/HST registration for each business. The PST will be a provincial retail sales tax limited jurisdictionally to BC. The province is limited constitutionally to "direct" taxation within the province.Transitional Rules
Generally, under the proposed federal transitional rules, if tax under Part IX of the ETA becomes payable (or is paid) after March 31, 2013, without having been paid (or becoming payable) before April 1, 2013, in respect of a taxable supply of property or service in BC, no HST (only 5 per cent GST) will apply. If the tax becomes payable or is paid before April 1, 2013, then the 12 per cent BC HST would generally apply. There are a number of special transitional rules proposed for imported goods, imported taxable supplies and other specific situations. In order to maintain the integrity of the GST/HST, the federal government proposes to introduce special anti-avoidance rules for transactions covered by the transitional rules.
It will be interesting to see how the BC government's financial squeeze might affect the transitional rules for the implementation of the PST. It could be beneficial for businesses to accelerate capital equipment purchases to access ITC claims for HST paid and avoid increasing their capital cost burden with PST. The government could seek, however, to reverse the revenue loss arising from this planning by introducing aggressive transitional rules. One other transitional measure that could be introduced is requiring contractors and trades to self-assess and remit PST on construction materials inventory on hand as of the implementation date of PST.One Possible Path Forward for BC
Ironically, in last year's Forbes' survey of the best countries to do business, Canada has moved up from last year's ranking of fourth to first place, in no small part because of the implementation of HST in BC and Ontario. By allowing GST/HST registrants doing business in, and with, Canada to claim ITCs to recover BC and Ontario HST on business inputs, business costs are reduced. These registrants become more competitive internationally, whether exporting goods, technology or services abroad. A single GST/HST regime, as opposed to two separate tax regimes, can also reduce administrative and compliance costs for businesses.
To address this concern but to be responsive to BC's referendum vote to extinguish the HST and return to the PST, one possible solution or compromise would be to implement a provincial VAT ("PVAT") similar to the QST (discussed below). The most visible opposition came from consumer and industry groups opposed to the taxing under HST of previously PST exempt items, such as bicycles and restaurant meals. BC could relieve PVAT on these items through zero-rating,6 thereby preserving ITCs on business inputs for the businesses that supply such items (i.e., retailers, restaurants, etc.). Such a move could perhaps be a prelude to extinguishing the PST/PVAT and re-implementing the HST.QUÉBEC HARMONIZES THE QST WITH THE GST — ALMOST
Since July 1, 1992, the QST has been substantially harmonized with the federal GST in many respects. In recent years, there has been increasing political and financial pressure for the federal and Québec governments to more fully harmonize the QST with the GST regime. A key plank of the Conservative party's platform in last May's federal election was a promise to enter into an agreement with Québec to more fully harmonize the GST with the QST within 100 days of being elected. In return, Québec would receive $2.2 billion compensation for harmonization, proportional to what the HST provinces received for harmonizing their sales taxes with the GST.
As anticipated, on September 30, 2011, after the federal Conservatives won reelection with a majority government, the federal and Québec governments concluded a Memorandum of Agreement (the "MOA") relating to the further harmonization of QST with GST effective as of January 1, 2013 (the "Amended QST"). To this end, they undertook to use their best efforts to negotiate a CITCA by April 1, 2012. The Québec government will receive its $2.2 billion compensation in two stages: 1) $733 million on the implementation of the Amended QST; and 2) $1.467 billion one year after the implementation.Differences with the HST
The HST is enacted in Part IX of the ETA and administered federally by the CRA. A business registers with the CRA nationally under a single GST/HST registration and files a single GST/HST return periodically. By contrast, the Amended QST will generally continue to be administered and enforced provincially by Revenue Québec. There will be a separate QST registration issued by Revenue Québec and a separate QST return filed periodically.
Under the MOA, the Amended QST will generally have a tax base, administration, structure and definitions that produce results identical to the GST, albeit with certain limited flexibility to maintain certain unique features. Such features are set out in Annex A of the MOA. Among them, Québec will generally continue to tax motor vehicle sales at the retail level only. The Amended QST will generally be collected by the Societé de l'assurance automobile du Québec where the transfer of vehicle ownership is registered.
Whereas the HST is an aggregate tax rate blending the 5 per cent federal and provincial rates, the QST is shown as a separate tax at a separate tax rate than the GST. However, the Amended QST will no longer be compounded on the GST component (i.e., no "tax on tax"). The QST rate rose by 1 per cent from the former 8.5 per cent to the current 9.5 per cent effective January 1, 2012. The current effective QST rate when compounded on GST is 9.975 per cent of the "consideration" (excluding the GST component). As the 9.975 per cent rate will go into effect when the Amended QST is implemented, there will be no effective QST rate change (i.e., the amount of QST calculated or levied will remain the same).Similarities with the HST
Like with HST where the HST provinces control the provincial rate of the blended HST, Québec sets the QST rate.7
To eliminate incidents of interprovincial transactions escaping both QST and HST or being subject to both QST and HST, the provincial place of supply rules for the Amended QST will be harmonized with the provincial place of supply rules under the GST/HST system (although this harmonization already substantially occurred effective May 1, 2010, when the amendments to the GST/HST provincial place of supply rules took effect for the implementation of BC and Ontario HST). It will be interesting to see how Québec deals with the interaction between the place of supply rules and zero-rating export rules for financial services.
As permitted under the recent CITCAs entered into with Ontario, BC and Nova Scotia for HST, Québec can deviate from the GST base up to 5 per cent of the value of the estimated GST base for Québec.8 Under the HST, these deviations from the base are effected by point-of-sale rebates for the provincial component of HST. Under the QST, such deviations may be effected by exemptions, zero-rating, rebates, taxation and other measures. The "measures mentioned in Annex B that Québec implemented prior to the execution of this MOA represents 3 per cent of the estimated GST base."9
The large business ITC restrictions for the provincial components of BC and Ontario HST are modeled on the existing QST input tax refund ("ITR") restrictions. Like under the CITCAs for these two HST provinces, Québec has agreed to phase out and eventually eliminate its restrictions. These large business ITR restrictions must be eliminated no later than eight years after the implementation of the Amended QST.10
Under the existing QST regime, financial services are QST-free zero-rated supplies,11 allowing financial institutions (and others) to claim ITRs to recover the QST paid on inputs relating to such supplies. Once the Amended QST is implemented, financial services will generally be QST-free exempt supplies, which can lead to ITR restrictions. As such, financial institutions will begin to absorb QST on business inputs as unrecoverable costs, to the extent that they relate to supplying exempt financial services. There will presumably be parallel QST rules to those established under the ETA for financial institutions to allocate expenses between exempt financial activities (restricted from ITC claims) and taxable activities (eligible for ITC claims),12 and to permit non-financial institutions and certain de minimus financial institutions to claim ITCs related to their exempt financial services in certain circumstances.13 To offset or reduce the adverse impact of this change, Québec has announced that it will eliminate an existing special provincial tax on financial institutions.14
For "selected listed financial institutions" ("SLFIs"), within the meaning of Part IX of the ETA, including those operating outside Québec, the Amended QST will be integrated into the existing GST/HST SLFI rules (the "SLFI Rules"). Such SLFIs include certain types of investment funds, such as mutual fund trusts, pension plans, banks, and insurance companies. The federal government will, in effect, impose the Amended QST on SLFIs in much the same way that it currently imposes the provincial portion of the HST ("PHST") on SLFIs. For the purpose of the SLFI Rules, Québec will be deemed to be a HST province. The federal government will collect unrecoverable Amended QST ultimately payable by SLFIs as if the Amended QST were the provincial portion of HST payable in Québec.
Ironically, a large share of the burden of this change will be imposed on SLFIs that are based outside of Québec and otherwise may not be subject to QST. Once this change is implemented, investment funds may be charged unrecoverable QST through the GST/HST system to the extent they have investors or plan members who are resident in Québec. The QST liabilities are imposed on the funds, adversely affecting not only the Québec investors in the funds, but also investors outside Québec.Implementation
By June 1, 2012, 1) Québec and Canada intend to finalize all policy and administrative details; 2) Québec and Canada intend to sign all agreements relevant to the CITCA; and 3) Québec intends to announce all legislative and other measures, all of which are necessary to further harmonize QST with GST.
However, further harmonizing the QST with the GST may present unique challenges. Unlike with Ontario and BC HST, where PST was repealed, subject to certain transitional rules, further harmonization of QST with GST involves the integration of two distinct, and necessarily different, regimes since the GST operates at the federal level and the QST operates at the provincial level. In view of the foregoing, it will be interesting to see whether the parties can adhere to the ambitious timeline set out in the MOA and whether there will remain any unintended gaps or traps in the interaction of the GST and QST as a result of this further harmonization.ONGOING CHANGES TO SLFI RULES
The Department of Finance ("Finance") has continued to develop and revise the SLFI Rules, first announced in May 2010, for determining the ultimate HST liabilities of investment funds and other SLFIs. The SLFI Rules are intended to remove any incentive for investment funds or their investment managers to relocate to provinces without the HST. In essence, under the SLFI Rules, the ultimate burden of the PHST levied on funds is based on the residence of their investors rather than on where goods or services supplied to the funds are sourced, received or performed. To the extent that investment funds that are SLFIs have non-resident investors, or investors based in non-HST provinces, they are ultimately relieved from PHST.
Although the amendments to the SLFI Rules came into effect on July 1, 2010, Finance has not yet published final SLFI regulations, notwithstanding that SLFIs were required to file their annual returns for 2010 under the amended SLFI Rules by the end of June 2011. In January 2011, Finance released a revised draft of the amended SLFI Rules (the "January Proposals"), which contained a number of significant changes to the draft SLFI Rules released in mid-2010. Although certain of the changes to the draft SLFI Rules contained in the January Proposals were intended to be relieving measures for taxpayers, in general, the effect of the changes was to make already almost impenetrable regulations even more complex.
As a result of the complexity of the draft SLFI Rules, there is a significant degree of confusion regarding the application of the SLFI Rules and the compliance obligations associated therewith. Furthermore, one suspects that there will be a high degree of inadvertent (and unintended) noncompliance with SLFI Rules, as investment funds struggle to understand their compliance obligations. It is hoped that, given the complexity of the revised SLFI Rules, and the absence of final regulations, that CRA will exercise certain administrative tolerance in the enforcement of the revised SLFI Rules.
The January Proposals also note that there will be consultations on the possible extension of the SLFI Rules to a broader class of investment vehicles than those currently covered. At present, for example, private equity funds structured as limited partnerships are not subject to the SLFI Rules. For such funds based in Ontario or other HST provinces (or Québec once the Amended QST is implemented), they are at a distinct disadvantage vis-à-vis both private equity funds based in non-HST provinces (or Québec until the Amended QST is implemented), as well as SLFI investment funds.
With BC leaving the HST, SLFIs will be relieved from the burden of paying their proportional share of the BC PHST once the HST is eliminated in BC. There may, however, be complex SLFI HST transitional rules to deal with BC exiting HST. On the other hand, SLFIs will be liable for their proportional share of unrecoverable QST once the Amended QST is implemented, and there may be complex SLFI QST transitional rules to deal with the entry of the Amended QST into the SLFI regime.
- To reflect the BC government's legal commitments, the federal government introduced on June 9, 2011, the British Columbia HST Regulations (SOR/2011-121) to give effect to the two incremental 1 per cent BC tax rate decreases to the HST if BC voted not to extinguish the HST in the referendum.
- CITCA, section 49 and Annex C. The BC Department of Finance released on January 11, 2012 "Terms Agreed for Repayment of BC HST Transition Funding".
- Finance Canada News Release, Department of Finance Announces Transitional Rules for the Elimination of the Harmonized Sales Tax in British Columbia, February 17, 2012.
- BC Ministry of Finance, Tax Information Notice, HST Notice #12, Enhanced New Housing Rebates and Transitional Rules for Re-implementation of the British Columbia Provincial Sales Tax, February 17, 2012.
- ETA, section 144.1, and sections 1 and 3 of Part II, Schedule IX to the ETA.
- A taxable supply assessed a 0 per cent tax rate (no tax) pursuant to subsection 165(3) of the ETA.
- MOA, clause 10(a).
- MOA, clause 10(d).
- MOA, clause 15.
- Zero-rated supplies are taxable supplies, albeit at a 0 per cent rate pursuant to the second paragraph of section 16 of An Act respecting the Québec sales tax (Québec).
- ETA, section 141.02.
- ETA, section 185.
- MOA, clause 13.