 Harmonization 2010 Eric Paton

2PricewaterhouseCoopers LLP Agenda Background & Basic Concepts Point of Sale Rebates Other Rebates Input Tax Credit (“ITC”) Restrictions Transitional Rules Place of Supply Rules Issues and Planning

3PricewaterhouseCoopers LLP Background Federal sales tax replaced with the GST Quebec replaces its PST with a value added tax similar to GST Nova Scotia, New Brunswick & Newfoundland replace their PST and GST with a single harmonized sales tax (“Atlantic HST”) Ontario and BC proposed HST

4PricewaterhouseCoopers LLP 2009 Timelines March 26Ontario announcement June 18Guidelines on real estate transitional rules July 23BC announcement October 14Proposed Measures re Transitional rules November 12POS rebate additions in Ontario November 16Further details re ITC Restrictions, POS rebates and PSB rules November 19Further details re real estate transition rules ?????Place of Supply Rules

5PricewaterhouseCoopers LLP Ontario and BC Announcements Effective July 1, Ontario and BC retail sales taxes eliminated; -Replaced by Ontario Value-Added Tax (“OVAT”), and BC Value-Added Tax (“BCVAT”), combined with GST = harmonized sales tax (“HST”); -Ontario HST at 13%; BC HST at 12% -Canada Revenue Agency (“CRA”) will administer -One GST/HST return, One GST/HST audit

6PricewaterhouseCoopers LLP Basic Concepts Tax levied under the existing Excise Tax Act Much of how the tax will apply already exists Additional key areas involve unique elements (e.g. point of sale rebates and ITC restrictions); transitional rules; place of supply rules; multiple rate issues; new housing rebates

7PricewaterhouseCoopers LLP Point of Sale Rebates OVATBCVAT Books Children’s car seats Car booster seats Diapers Child-sized clothing and footwear Feminine hygiene products Newspapers Meals $4 and under Motor fuels Residential energy

8PricewaterhouseCoopers LLP Other rebates Rebate of provincial portion of HST to Public Service Bodies in addition to existing GST rebate New Housing Rebate on the first $400K: -6% of OVAT to a maximum of $24K -5% of BCVAT to a maximum of $26,250K -Maintains existing 2% PST New Rental Property Rebate on the first $400K per residential unit; same maximum levels as above

9PricewaterhouseCoopers LLP Miscellaneous Issues Ontario Sales Tax to apply to certain insurance premiums Private transfers of motor vehicles subject to HST Tax Inclusive Pricing – no announced change

10PricewaterhouseCoopers LLP ITC Restrictions Electricity, gas, combustibles and steam (except for use in manufacturing goods for sale and farming) Telecommunication Services (excluding internet access or toll-free numbers) Road vehicles < 3,000 kilograms (and related parts and certain services) Fuel for such road vehicles (Ontario only) Food, beverages and entertainment

11PricewaterhouseCoopers LLP ITC Restrictions Will apply for first 5 years, then phased out over three years -25% yr 6; 50% yr 7; 75% yr 8 Applies to -Businesses with more than $10 million* in taxable supplies (including zero-rated supplies) AND -Financial institutions -Excludes PSB’s Information released indicates many similarities to Quebec Sales Tax system * on associated group basis

12PricewaterhouseCoopers LLP ITC Restrictions Manual exercise vs. segregation on supplier billings Segregation on GST/HST returns? IT changes necessary to implement Impact on expense reports Training, education, controls Policies and procedures

13PricewaterhouseCoopers LLP ITC Restrictions – Energy Energy costs - manufacturing goods for sale -Existing definition of manufacturing and manufacturer? -Energy to light, heat, ventilate production site restricted -Apportionment rules Limited to the charge for the energy source? Distribution, delivery and other ancillary charges? Purchase for resale? Resale v. input to resupply e.g. landlords

14PricewaterhouseCoopers LLP ITC Restrictions – Energy Ontario company purchases energy (hydro) from local utility company Ontario company pays $20,000 plus HST of $2,600 ITC allowable: -Federal portion of HST: $20,000 x 5% = $1,000 -Provincial portion of HST for energy used to produce goods (must be determined)

15PricewaterhouseCoopers LLP ITC Restrictions – Telecom Telecom Services e.g. telephone service, voic , L/D -Definition – is it telecom or input to broader supply? -Internet access? -Web hosting excluded – what about ancillary access? -Toll Free v. access v. ancillary charges -Resale v. own use e.g. data processing -Outsourcing of telecom function

16PricewaterhouseCoopers LLP ITC Restrictions – Road Vehicles Road vehicles, related parts, certain services and fuel -Purchase or lease -Public v. private roads -Excludes trailers and semi-trailers -Parts & service for 12 months post acquisition of vehicle -Car allowances -Expense reimbursements -Impact on taxable benefits -Notion of resupply

17PricewaterhouseCoopers LLP ITC Restrictions – Road Vehicles Example Ontario company pays $40,000 for new automobile and HST of $5,200 Automobile weighs less than 3,000kg ITC restrictions: -$3,200 ($40,000 x 8% OVAT) -$500 (GST on portion of purchase price greater than $30,000 federal ITC restriction)

18PricewaterhouseCoopers LLP ITC Restrictions – Food, Beverage, Entertainment Restriction for food, beverages and entertainment -Follows 50% income tax restrictions (same as existing restriction for GST) -Direct payments -Allowances and expense reimbursements

19PricewaterhouseCoopers LLP Impact Vendors of PST taxable goods/services -After-tax price is equivalent -Tax on vendor’s inputs removed -Overall product demand favourably impacted?? e.g. technology, manufacturers, exporters Vendors of PST exempt goods/services -Just cash flow if purchaser can claim ITCs -Cost increase to entities such as financial institutions and public sector bodies -Cost increase to individual consumers

20PricewaterhouseCoopers LLP Transitional Rules – sale of goods Consideration paid or become due Goods delivered or ownership transferred before July 1, 2010 Goods delivered and ownership transferred after June 30, 2010 Before October 15, 2009 GST and PST if applicable After October 14, 2009 and before May 1, 2010 GST and PST if applicable GST and PST (consumer) GST only if purchased by non- consumers (businesses may have to self assess for provincial portion of HST) After May 1, 2010GST and PST if applicable HST

21PricewaterhouseCoopers LLP Transitional Rules – most services Consideration paid or become due Services performed before July 1, 2010 Services performed after June 30, 2010 Before October 15, 2009 GST and PST if applicable After October 14, 2009 and before May 1, 2010 GST and PST if applicable GST and PST if purchased by consumer GST only if purchased by non-consumers (businesses may have to self assess for provincial portion of HST) After May 1, 2010 and before July 1, 2010 GST and PST if applicable HST (unless 90% or more performed before July 1, 2010 in which case GST and PST if applicable would apply)

22PricewaterhouseCoopers LLP Transitional Rules – intangibles Consideration becomes due, or is paid, before July 1, 2010 Consideration becomes due, or is paid, on or after July 1, 2010 GST appliesHST applies Waiting on clarification of treatment from Ministry Difficulties in classifying nature of software for HST purposes IPP under existing GST TPP under existing PST Service contracts – right to receive IPP? Education/training credits

23PricewaterhouseCoopers LLP Transition Rules – property rentals Consideration paid or become due Lease period before July 1, 2010 Lease period after June 30, 2010 Before October 15, 2009 GST and PST if applicable After October 14, 2009 and before May 1, 2010 GST and PST if applicable GST and PST if leased by consumer GST only if leased by non-consumers (businesses may have to self assess for provincial portion of HST) After May 1, 2010 and before July 1, 2010 GST and PST if applicable HST (unless lease period begins before July 1, 2010 and ends before July 30, 2010 in which case GST and PST if applicable would apply)

24PricewaterhouseCoopers LLP Transitional Rules – sales of commercial real property Ownership or possession of the home is transferred before July 1, 2010 Ownership and possession of the home is transferred after June 30, 2010 GST appliesHST applies

25PricewaterhouseCoopers LLP Ontario Transitional Rules – sales of most residential property Ownership or possession transferred before July 1, 2010 Ownership and possession transferred after June 30, 2010 Purchase and sale agreement entered into on or before June 18, % HST does NOT apply Builder will have to pay transitional tax Purchase and sale agreement entered into after June 18, % HST applies (subject to rebates)

26PricewaterhouseCoopers LLP HST Transitional Rules May 1st Rule On the earlier of the day the consideration for the supply: Is paid; or Becomes due Consideration is due on the earlier of: Date invoice issued Date invoice would normally have been issued Date required to pay per agreement

27PricewaterhouseCoopers LLP HST Transitional Rules Special rules for when consideration is due: Deposits: when applied to consideration Consignment: when sold by consignee Other considerations: Refunds, adjustments, rebates, bad debts Coupons Prepayments

28PricewaterhouseCoopers LLP Place of Supply Rules ‘Place of supply’ (POS) rules not yet released Impact -POS rules should not penalize suppliers in HST provinces -POS rules determine which rate of tax applies (5%, 12%, 13%) -Rate of self-assessment (to the extent it is required) -Current POS rules regarding tangible personal property are likely sufficient (destination based) -Changes are likely to be needed for POS rules regarding services and intangible personal property (origin based) -Consider system capabilities in POS determination

29PricewaterhouseCoopers LLP Current HST Place of Supply Rules – Sale of Goods General rule -POS = province in which supplier delivers the TPP or makes it available to customer Three deeming rules -Supplier ships the TPP to destination in a particular province specified in the contract for carriage -Supplier contracts with a common carrier or consignee on behalf of customer to ship TPP to a province -Supplier sends the property by mail or courier to an address in a particular province

30PricewaterhouseCoopers LLP Current HST Place of Supply Rules – Services & Intangibles Services ->90% of service performed -‘place of negotiation’ and >10% of service performed -where >50% of service performed in HST provinces, province in which greatest proportion is performed Intangibles ->90% rule -‘place of negotiation’ and >10% rule ->50% rule

31PricewaterhouseCoopers LLP Canada-Ontario Agreement Formalizes details of the original HST MOA Legislative amendments introduced by Canada prior to March 31, 2010 CRA and CBSA systems in place by July 1, 2010 to administer HST 8% rate can be reviewed in 2 years Inter-provincial supplies -Ontario HST will not apply to supplies made outside Ontario based on place of supply rules -Registrants outside Ontario will be required to collect HST for taxable supplies made in Ontario

32PricewaterhouseCoopers LLP What to do now? Assemble group to: - Analyze impact - inputs/revenues - Incorporate into Budgeting process Existing contracts: -Sharing of any PST savings -Adding OVAT and BCVAT references -Government contracts -Tax Inclusive contracts Consider impacts on RFPs, new contracts, bids

33PricewaterhouseCoopers LLP Systems Impacts Sales system -Tax and rates -Rebates, coupons, deposits, bad debts -Disclosure requirements? -Transitional and Place of supply rules Purchase system -Capture OVAT and BCVAT -Restrictions

34PricewaterhouseCoopers LLP Where the changes need to be made Centralized vs Decentralized New vs Older systems No change to current processes for “other” provinces Greater number of tax calculations in total Issues of automating complexity and “in flight” transactions System Changes & Change Control Testing Training e.g. Call Centre's Communication Master Data Customer, Vendor, Product Internal Systems Data Warehouse Corporate Systems Sub & General Ledgers Customer Facing Systems Billing, Invoice, PoS Tax Codes GRC System Layer Tax System Reporting Layer

35PricewaterhouseCoopers LLP Other considerations Reporting Pricing/Customer literature/website information Customer communication e.g. call centre staff Expense reports Taxable benefits Outsourcing Internal resources and time constraints

36PricewaterhouseCoopers LLP PST Issues – They’re not gone yet PST refunds – get them while you can PST Audits and Assessments - 4 year window for assessments - When will they stop auditing???? Audit Issues - Custom Software - Software as a Service - Non-resident insurance - Tax on imported administrative materials

37PricewaterhouseCoopers LLP Important GST issues that will be bigger ITC Documentation requirements Exported IPP and place of supply rules Damages/termination payments Contracts should clearly specify that GST is extra (not included)

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