Ian Portsmouth: Welcome to the Business Coach Podcast, an advice-oriented series that tackles the top issues and opportunities facing Canada’s small businesses. I’m your host, Ian Portsmouth, the Editor of Profit Magazine, and we’ve developed this podcast in cooperation with BMO Bank of Montreal.
Heather Weber: July 1st will be a very important day for Canadian businesses in 2010. Of course most companies will be closed for Canada Day on July 1st, but it is also the first day of the Harmonized Sales Tax in British Columbia and Ontario. Although the new taxation scheme will have a great impact on business owners in those two provinces, it also has repercussions for companies in other provinces, and the time to plan for them is running out. Heather Weber is a certified general accountant and the leader of the Indirect Tax Group at Meyers Norris Penny LLP, an accounting and business advisory firm. Heather joins me on the phone from her office in Kelowna, British Columbia. Heather welcome to the Business Coach Podcast.
Heather Weber: Thank you.
Ian Portsmouth: So Heather, let’s start with the most basic of questions, what is the HST?
Heather Weber: OK. The Harmonized Sales Tax is a blend of the Goods and Services Tax that we have across the country right now that is administered by the federal government in Ontario and B.C. It will be combining their existing provincial sales taxes. So, in British Columbia, the HST will become 12% and in Ontario the HST will become 13%. The Harmonized Sales Tax will be administered by the federal government so they will no longer be a provincial sales tax in those two provinces.
Ian Portsmouth: Now, why is government bringing in the Harmonized Sales Tax, what is the benefit to us?
Heather Weber: The benefit of the Harmonized Sales Tax is like the GST, it is a recoverable tax, it is a value added tax. So, it is a tax that is paid at each stage of a transaction, so when a good might go through ten different businesses before it finally reaches the end consumer, each of those businesses will have to pay the HST in acquiring their piece of whatever it is they are making, however if they are registered for HST and carrying on taxable activities, they will be able to recover that tax.
So, unlike a provincial sales tax, there doesn’t get to be a build up of tax into the cost of a good, and it will allow those two provinces to be more competitive both nationally and worldwide. Because right now with the provincial sales tax, the PST gets embedded in the cost of doing business, even an accounting firm has to pay PST on their computers, their desks and everything and, and so that becomes part of their cost of doing business, even a manufacturing company has some PST it is not able to recover.
So that is one of the big benefits of having a harmonized sales tax, is to make businesses more competitive on a national and worldwide scale, without having the tax embedded.
Ian Portsmouth: And of course, there is only one tax that you need to process now, instead of two.
Heather Weber: That is right. And so the cost of administering tax, currently businesses have to file their provincial sales tax return and the good and services tax return. They have to worry about two sets of auditors that come to visit them and check up on how they are doing. So, after July 1st, there will be just the federal government that they will be filing their HST return to. So, that is expected to cut down on administration cost. However the, to add in the¦ although the PST is not going to be applicable after July 1st, the PST auditors will still be around.
Ian Portsmouth: So, in your view, how well prepared are small businesses in B.C. and Ontario for adopting the HST, just a few short months from now?
Heather Weber: I am actually concerned that they aren’t as prepared as they need to be. Part of the problem is that the government hasn’t released the legislation to administer the sales tax. What has been released is a number of notices and bulletins on how the federal government will treat different part of the tax, and the government passed the bill, saying that they will bring in Harmonized Sales Tax, but the actual legislation has not been released and I heard a lot of businesses saying, well I am going to wait until the legislation comes in. I do not want to deal with this now. And the problem is because it encompasses such a large portion of a business, even a business that only operates in one province which very few do now, there is a lot of things that need to be changed and a business may have to start collecting taxes as early as May 1st, depending on what services or goods they are providing.
Ian Portsmouth: So, really they only have four to six weeks from now to prepare.
Heather Weber: It is a very short time period and some businesses will have to, if a business is a large business which is $10 million or more in sales and that includes an associated group, they’ve got many changes to make. Not just a simple matter of changing the rate, they have to do adjustments to their accounting system to recapture certain input tax credits. There are a lot of different things that are changing and we thought that because we have HST in Nova Scotia, New Brunswick and Newfoundland, that we would just use the rules that are in the Act right now for those provinces. But the government is saying that they are bringing in all sorts of new rules. So, there are a lot of things going on.
Ian Portsmouth: Now that you mention the Atlantic Provinces that adopted HST back in 1997, can you give us a sense of how well they fared when they had to make the transition? Did they make the same mistake?
Heather Weber: I am expecting they probably did, I think when any new tax comes in, it’d probably be instinctive to try and ignore it as long as you can. However, what the government has said that it found with the Atlantic provinces, is that after several years of having the HST in place, and of course for some of those Atlantic provinces, the HST was actually a decrease in their current tax rate, because their provincial sales taxes were very high. And so when the HST came in, it was actually a lower rate, even though the HST is the broader based tax than most provincial sales taxes. But what the study has shown and I am not from the Atlantic Provinces, so I didn’t live and breathe that, but what the studies have shown is that, after several years, prices were reflecting the savings that businesses were realizing. And I think that is an important reason why a business needs to be thinking about the Harmonized Sales Tax as soon as possible and planning for how it will impact their business, because if they don’t understand where they may have cost increases or decreases, they are not going to be able to respond and adjust their prices or their business structure to pass that on to their consumers. And at the end of the day, that is what the consumers will be looking for is, because this tax is much broader than the existing provincial sales tax, they are going to want to know that they are getting, you know, some sort of benefit passed on to them, whatever savings that business is realizing by being able to recover their income tax credit.
Ian Portsmouth: So, business owners have to think about pricing issues, I presume they also have to worry about point of sale systems and adjusting those, correct?
Heather Weber: Exactly. There is a lot of different areas in a business that will be impacted, I mean, the obvious ones of pricing their products, adjusting their paperwork, like you know making sure that their invoices print up with the right information, disclosure on sales contracts, internal things like how they calculate taxable benefits for employees, you know that will be impacted by the change in the rate. Their advertising purchases, you know, making sure that they are paying the right rate of tax on purchases. So, there are a lot of areas of a business, even a business that operates only in one province that will need to be reviewed and depending how computerized the system is, there may be more or less adjustments needed.
Ian Portsmouth: Now, companies that are not located in B.C. or Ontario or the Atlantic Provinces for that matter, still have to worry about the HST. Can you explain why that is?
Heather Weber: Well, companies that are not located in the HST provinces, if they have sales to those provinces, depending on what type of goods or services they are providing, because they are registered for GST, they will be required to charge HST. So for example, a company in Saskatoon is selling car parts and they ship them all across the country, well they could have four different tax rates that they need to charge, because they’ll have HST at 12 % in B.C., 5 % tax rate in Alberta or Manitoba or Saskatchewan, they will have a 13 % HST in Ontario and the Maritime provinces, and they might have to charge 0 % taxes if they are shipping goods out of the country. So they can have a number of different tax rates. Most businesses will have to be watching where they are sending their goods to know what tax rate they’re required to charge.
Ian Portsmouth: So, the onus on collecting the HST and paying the HST is on the supplier, whereas with PST the onus is on the buyer to make amends with the government.
Heather Weber: Exactly, and because someone that is registered for GST is registered for HST, even if they sell goods to another province and they have no other ties to that province, you’re absolutely right, they’ll be required to collect the correct rate of tax, it will no longer be on the purchaser to self assess the tax.
Ian Portsmouth: Heather, HST expenditures can be recovered by an input tax credit, so would you recommend companies differ major PST taxable purchases until July 1st?
Heather Weber: It depends on what type of company it is and whether they are entitled to input tax credit, but certainly, like right now under the current system, if a company is registered for GST they are able to recover their 5 % and then, any PST that they pay becomes part of the cost, they have to capitalize it on their equipment or whatever. So, after July 1st, if a business is able to claim input tax credit, they will be able to claim the full 12 %. However, depending on the type of business for example, vehicles, there is no benefits if you are a large business, there is no benefits to differing the purchase from now until July 1st, because if you are considered a large business you can’t claim the provincial portion of the vehicle anyway.
So, it is important to have an understanding of the rules, to know what category you fit in, whether you are a large business or not a large business, and whether you are impacted by different rules. Some purchases, companies may want to accelerate, because currently there is only GST for example on purchases of land or building, real property, and so after July 1st, even from a cash flow point of view, businesses may want to think about acquiring some of those type of things before July 1st, just so they do not have the outlay of cash, depending on what type of business. I mean, real property is maybe a bad example because some businesses can get their GST number anyways but.
Ian Portsmouth: So, clearly Heather, companies have their work cutout for them over the next few weeks. Thanks for joining the Business Coach Podcast to discuss the incoming HST.
Heather Weber: Thank you very much for having me.
Ian Portsmouth: Heather Weber is a certified general accountant and the leader of the Indirect Tax Group at Meyers Norris Penny LLP in Kelowna.
That’s it for another episode of the Business Coach Podcast. Be sure to check out other episodes which you can download from BMO.com, profitguide.com and iTunes.
For other tools to help you build your business, visit BMO.com/coach. Until next time, I am Ian Portsmouth, the Editor of Profit Magazine, wishing you continued success.