April 6, 2009
Submitted by PricewaterhouseCoopers LLP
After 18 years of maintaining a retail sales tax alongside the federal GST, Ontario is making a bold move to modernize sales taxes in the province. In his budget, Finance Minister Dwight Duncan announced that Ontario will be “harmonizing” its sales tax system with the GST, effective July 1, 2010. Instead of a 5% federal GST and 8% Ontario Retail Sales Tax (RST), there will be a single 13% Harmonized Sales Tax (HST) in Ontario. This system has been in operation in Newfoundland and Labrador, Nova Scotia and New Brunswick since 1997.
This decision will be applauded by most economists as a step toward
improving the productivity and competitiveness of Ontario’s economy.
With regard to the IT industry, on the cost side, harmonization with
the GST will be beneficial. Currently, many costs borne by the industry
are subject to unrecoverable RST, including purchases of hardware and
equipment, office furniture and supplies, and vehicles. Although
Ontario exempts certain purchases of production materials, machinery
and equipment, these exemptions have been available to the IT industry
on only a very limited basis. Under the HST, the industry will be able
to recover the HST paid on these purchases by claiming input tax
credits on their GST/HST returns.
On the sales side, the complexity of the RST rules as they currently
apply to the industry has been the subject of much debate and concern.
Consequently, implementation of the HST will effectively remove these
issues and simplify the application of tax. It will also remove the
RST-driven incentive for certain suppliers to move their servers
outside of Ontario, an unfortunate result of Ontario’s taxing software
access charges based on the location of the software, as opposed to
that of the user. Importantly, business consumers may see the effective
cost of IT services decrease with the advent of a harmonized tax.
What should the IT industry do before the new HST system is introduced?
Although business systems currently used for the GST can also be used
to comply with the HST, some modifications may be required. In
addition, the transition to the HST in Ontario will give rise to many
of the same issues that arose with the GST rate reductions on July 1,
2006, and on January 1, 2008.
The HST in Ontario will substantially mirror the GST, but there are
certain differences which will require systems modifications. In
particular, during the first 8 years of the tax, large businesses
(annual taxable sales in excess of $10 million) have restricted input
tax credits for certain categories of expenditures, such as energy
(other than for producing goods for sale), most telecommunication
services, food, beverages and entertainment, and road vehicles weighing
under 3000 kg (including repairs, parts and fuel).
Apart from systems issues, Ontario IT companies should plan for the
removal of the RST from costs and may wish to postpone certain major
purchases that are currently subject to RST. On the other hand, Ontario
IT companies should recognize that their business customers may
consider deferring major purchases of RST-taxable software until the
HST is implemented.
Experience suggests that transitional rules will apply to transactions
straddling the implementation date, such as long-term leases, equipment
rentals and fixed-price contracts.
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