March 25, 2010
On February 25, 2010, the Department of Finance proposed amendments to the rules relating to the harmonized sales tax (HST), including place of supply, self-assessment and rebate, and the imported taxable supply rules relating to the provincial component of the HST in regulations under the Excise Tax Act (ETA). Tax Executives Institute’s comments address the timeframes for issuing guidance, the absence of controlling guidance, the resulting uncertainty for business, and the increased complexities that arise with the proposed changes. TEI urges the Department to release regulations and obtain approval from the Governor in Council as soon as possible to permit sufficient time for companies to implement the new HST regime.
Background
Tax Executives Institute is the preeminent association of business tax executives. The Institute’s 7,000 professionals manage the tax affairs of 3,000 of the leading companies in Canada, the United States, Asia, and Europe and must contend daily with the planning and compliance aspects of Canada’s business tax laws.
Canadians make up 10 percent of TEI’s membership, with our Canadian members belonging to chapters in Vancouver, Calgary, Montreal, and Toronto, which together constitute one of our nine geographic regions. Our non-Canadian members (including those in Europe and Asia) work for companies with substantial activities in Canada. In sum, TEI’s membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). TEI concerns itself with issues of tax policy and administration and is dedicated to working with government agencies to reduce the costs and burdens of tax compliance and administration to our common benefit. In that connection, TEI has been and continues to be a strong supporter of the simplification of sales tax administration and the goal to have the harmonized sales tax model adopted by all Canadian provinces that impose a sales tax.
Proposed Place of Supply Rules
a. Services. News Release 2010-014 notes that, "[w]ith the addition of Ontario and British Columbia to the HST system, a number of changes are proposed to the place of supply rules . . . [to] ensure that the HST legislation functions properly with various provincial rates. The place of supply rules also need to be modernized to provide for proper tax treatment of inter-provincial transactions involving services and intangible personal property." Under the current rules for services not subject to a more specific rule, a supply of a service is regarded as made in a province if ―
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all or substantially all (generally, 90 percent or more) of the part of the service that is performed in Canada is performed in that province, or
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the place of negotiation of the supply is in the province and all or substantially all of the service is not performed outside the province.
Under the proposed general rules for supplies of services, "greater emphasis will be placed on the location of the recipient of the supply and the place of negotiation will be eliminated as a criterion for determining where a supply of a service is made. These proposed general rules for services would apply to supplies of services except where a specific exception applies." Other rules will apply to personal services, services related to real property or tangible personal property, services related to a location-specific event or litigation, and other specific types of services.
Although the Institute generally supports the new rules, the complexity and number of rules related to services are difficult to distill into clear guidance that can easily be implemented, especially by companies in the technology sector. For example, for national service contracts that are now subject to provincial sales tax (PST), the current rules appear to result in situations where both PST and HST will be levied on the same fee. Consider the following example:
Company has several maintenance contracts where the majority of the services are performed in Ontario, but a portion of the services are performed on hardware in other provinces (Saskatchewan, Manitoba, and PEI). Under the current place of supply rules, Company A is required to charge Ontario HST on the entire consideration for the contract. It is, however, also required to collect Saskatchewan, Manitoba, and PEI PST (to the extent services are performed in these provinces).1
National contracts are often entered into for a single price, or based on the actual use of the tangible personal property. In these situations, it is imperative that vendors be able to segregate this fee into its provincial components and charge HST or PST based on the amount of the fee that relates to services performed in each province. TEI recommends that the proposed rule for the supply of a service that relates to tangible personal property be based on the location of the equipment on a province-by-province basis, rather than the primary location of the equipment.
b. Effective Date. The February 25, 2010, announcement was the first indication businesses had that the revised rules would be effective May 1, 2010, for supplies made in Nova Scotia, New Brunswick, Newfoundland, and Labrador. The proposed changes would generally apply to taxable (other than zero-rated) supplies made in these provinces after April 30.
The revised rules make fundamental changes to the existing rules, requiring companies to overhaul the systems they have used since April 1, 1997, in order to gather and store new information. Suppliers must also communicate with their customers to explain the different tax treatments imposed under the new rules. Finding additional resources to implement these new rules will be very difficult on such short notice (especially given the resources already devoted to tax compliance matters). In these circumstances, TEI recommends that companies be permitted to apply the extant place of supply rules to all supplies made in provinces other than Ontario and British Columbia prior to July 1, 2010.
Finally, the Institute asks that the Department confirm whether Quebec has agreed to use the new rules for determining when supplies are subject to Quebec Sales Tax (QST).
The Need for Immediate Guidance
Originally, the governments of Canada, Ontario, and British Columbia committed to have all policy and administrative details finalized before March 31, 2010. Although the new HST regimes will be effective July 1, 2010, they will generally apply to prepayments starting on May 1, 2010, for goods and services provided after July 1, 2010. Thus, businesses must be prepared to deal with the new rules on that earlier date. If the March 31, 2010, commitment is not met, businesses will have a difficult time getting their systems in place to meet the May 1, 2010, implementation date.
TEI renews its request that the Department issue the final regulations as soon as possible and also consider utilizing any expedited process that may be available to it given the concerns that have been raised above. We also recommend that the Department request Canada Revenue Agency to provide administrative leniency in the conduct of its audit program, particularly with respect to supplies made between May 1, 2010, and 90 days after issuance of necessary guidance.
Conclusion
Tax Executives Institute appreciates the opportunity to continue to work with the Department of Finance on this important initiative. TEI would be pleased to meet with the Department to discuss this issue. If you should have any questions, please feel free to contact TEI’s Vice President for Canadian Affairs, Sherrie Ann Pollock, at 416.955.7373 (sherrieann.pollock@rbcdexia.com). Alternatively, questions may be directed to Diana M. Spagnuolo, Chair of TEI’s Canadian Commodity Tax Committee, at 403.237.2948 (diana.m.spagnuolo@esso.ca).
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1 See GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax: Place of supply rules for determining whether a supply is made in a province, Ex. 82 (February 2010).