Chapter Twenty-One GST/HST

A Confusing Landscape  GST Only – Alberta  GST and PST –Manitoba (5% + 7%) –Saskatchewan (5% + 5%) –PEI (5% + 10%)  GST and QST – Quebec (5% + 7.5%) © 2010, Clarence Byrd Inc.2

A Confusing Landscape  HST at 12 Percent – British Columbia  HST at 13 Percent –New Brunswick –Newfoundland –Ontario  HST at 15% - Nova Scotia © 2010, Clarence Byrd Inc.3

4 Transaction Tax Concepts Manufacturer Wholesaler Retailer Customer

© 2010, Clarence Byrd Inc.5 Single Stage Transaction Tax – Retail Sales Tax  5% ($50,000) = $2,500

© 2010, Clarence Byrd Inc.6 Account-Based VAT  Manufacturer = 5% ($10,000)$ 500  Wholesaler = 5% ($15,000)750  Retailer = 5% ($25,000) 1,250 $2,500

© 2010, Clarence Byrd Inc.7 Invoice-Credit VAT (GST)  Manufacturer 5%($10,000) $ 500  Wholesaler –5%($25,000)$1,250 –5%($10,000)( 500) 750  Retailer –5%($50,000)$2,500 –5%($25,000)( 1,250) 1,250  Total$2,500

© 2010, Clarence Byrd Inc.8 Liability For GST/HST ETA 165(1) -... every recipient of a taxable supply made in Canada shall pay to her majesty in right of Canada, tax in respect of the supply calculated at the rate of 5% on the value of the consideration for the supply.

© 2010, Clarence Byrd Inc.9 Liability For GST/HST  The liability is on the purchaser of the goods and services.

© 2010, Clarence Byrd Inc.10 The Concept Of Supply  ETA 123 – “Supply” means the provision of property or a service in any manner, including sale, transfer, barter, exchange, license, rental, lease, gift, or disposition.

© 2010, Clarence Byrd Inc.11 The Concept Of Supply  Taxable Supplies –Supplies made in the course of commercial activity  Includes –Fully taxable at 5% –Zero-rated  taxable at 0%  vendor gets input tax credits

© 2010, Clarence Byrd Inc.12 The Concept Of Supply  Commercial Activity –In general: business carried on by a person, including an adventure in the nature of trade –Exclusions  no expectation of profit  exempt supplies  employment services

© 2010, Clarence Byrd Inc.13 Supply Categories  Fully Taxable Supplies –Full Tax (GST/HST) And Full ITCs –Examples  Travel  Clothing  Restaurant Meals  Electricians

© 2010, Clarence Byrd Inc.14 Supply Categories  Zero-Rated Supplies –Tax At 0%, Full ITCs –Examples  Basic Groceries  Prescription Drugs  Exports  Foreign Travel

© 2010, Clarence Byrd Inc.15 Supply Categories  Exempt Supplies –No Tax, No ITCs –Examples  Health Care  Used Residential Housing  Financial Services

© 2010, Clarence Byrd Inc.16 Applying the GST/HST Rates BBBBasic approach –R–R–R–Rate is applied to consideration received –I–I–I–Includes all non-refundable federal taxes –P–P–P–Provincial sales taxes QQQQuebec and PEI include GST in base OOOOther Provinces (non-HST) do not

© 2010, Clarence Byrd Inc.17 Applying the GST/HST Rates  On Trade-Ins – GST/HST on Net Amount Example: An individual acquires a new Buick at a cost of $38,000. He trades in his old Toyota and receives an allowance of $17,000, paying the net amount of $21,000. GST = [(5%)($21,000)] = $1,050

© 2010, Clarence Byrd Inc.18 Collection And Remittance Of GST/HST  Liability is on recipient of supply.  Provider responsible for collection and remittance

© 2010, Clarence Byrd Inc.19 Requirement To Register  A person is required to register if the person is providing taxable supplies in Canada.  An exception for “small suppliers”.

© 2010, Clarence Byrd Inc.20 Small Supplier Exemption  Small Supplier Threshold –<$30,000 per year in taxable supplies  May Voluntarily Register –may want input tax credits.

© 2010, Clarence Byrd Inc.21 Small Supplier Exemption  Last 4 Calendar Quarters Test –Over $30,000 on cumulative basis  Calendar Quarter –Over $30,000 in a single quarter

© 2010, Clarence Byrd Inc.22 Input Tax Credits  Costs Other Than Capital Costs –No Matching –Prorated For Taxable Usage  ≥ 90% = All  ≤ 10% = None

© 2010, Clarence Byrd Inc.23 Input Tax Credits  Capital Costs –No Matching Or Allocation –Real Property: Pro Rate Based On Commercial Usage –Other:  > 50% Commercial – 100%  ≤ 50% Commercial - Nil

© 2010, Clarence Byrd Inc.24 Input Tax Credits  Restrictions On Certain Costs –Club Dues –50% Meals And Entertainment –Auto Costs > $30,000 –Reasonable In Circumstances

© 2010, Clarence Byrd Inc.25 GST/HST And Accounting  No Matching  No Allocation (Amortization, etc.)  Some Deductions Don’t Influence GST (e.g., Wages, Interest)

© 2010, Clarence Byrd Inc.26 Example – Alberta Business  GAAP Income Statement Sales$6,700,000 Cost Of Sales( 4,200,000) Amortization Expense( 1,400,000) Salaries( 500,000) Other Expenses( 200,000) Total $ 400,000

© 2010, Clarence Byrd Inc.27 Example (Continued)  Other Information:  Capital Expenditures - $2,000,000 for a building (40% commercial) - $1,000,000 for equipment (70% commercial)  Purchases of goods for resale were $4,500,000  Other Expenses of $200,000, related to fully taxable supplies  $5,000,000 of sales were fully taxable, the remainder were exempt  No provincial sales taxes in Alberta

© 2010, Clarence Byrd Inc.28 Solution To Example Sales (5%)($5,000,000)$250,000 Purchases (5%)($4,500,000)( 225,000) Other Expenses (5%)($200,000)( 10,000) Building (5%)($2,000,000)(40%)( 40,000) (5%)($2,000,000)(40%)( 40,000)Equipment (5%)($1,000,000)(100%)( 50,000) GST Payable (Refund)($ 75,000)

© 2010, Clarence Byrd Inc.29 Relief For Small Business  Quick Method –<$200,000 Taxable Sales –Collect Usual GST/HST –Don’t Track ITCs, except for capital expenditures –Apply Given % To GST Inclusive Sales (Varies By Province (see Figure 21-4 in text) –1% credit on first $30,000

© 2010, Clarence Byrd Inc.30 Example  Annual filing retail store in Alberta has annual sales of $125,000, resulting in GST included sales of $131,250. In addition, there are $20,000 in capital expenditures. –Basic Tax [(1.8%)($131,250)]$ 2,363 –Credit [(1%)($30,000)]( 300) –Capital Expenditures (5%)($20,000)( 1,000) –GST Payable$1,063

© 2010, Clarence Byrd Inc.31 Relief For Small Business  Simplified ITC Accounting –GST On Sales – Regular Procedures –Input tax credits based on a multiplier applied to most purchases GST/HST Rate ÷ GST/HST Rate –Excluded from multiplier calculation:  Capital expenditures for real property  Purchases of zero-rated supplies  Purchases from non-registrants  Cost not eligible for input tax credits (e.g., 50 percent of meals) –Must track capital expenditures on real property separately

© 2010, Clarence Byrd Inc.32 GST/HST Procedures And Administration  Liability –Revenues when customer is invoiced –Input tax credits when invoice is issued

© 2010, Clarence Byrd Inc.33 GST/HST Procedures And Administration TTTTaxation Year –W–W–W–Will have fiscal year –U–U–U–Usually the same as income tax fiscal year IIIIf non-calendar income tax year; CCCCan use calendar year for GST/HST

© 2010, Clarence Byrd Inc.34 GST/HST Procedures And Administration  Filing –Taxable sales > $6,000,000  Monthly Filing  Returns one month after the end of the filing period –Taxable sales between $1,500,001 and $6,000,000  Quarterly filing  Returns one month after the end of the filing period –Taxable sales < $1,500,001  Annual filing  Three months after the end of the filing period

© 2010, Clarence Byrd Inc.35 GST/HST Procedures And Administration  Payment, Instalments and Interest –Payment is due when returns are due –Annual filers may be required to pay quarterly instalments –Non-deductible interest at prescribed rate plus 4 percent (2 percent on amounts owing to the taxpayer) –Late filing penalty of one-quarter of one percent per month, for a maximum of 12 months

© 2010, Clarence Byrd Inc.36 GST/HST Procedures And Administration  Appeals –Informal procedures –Notice of objection  90 days after the date on the notice of objection –Tax Court Of Canada –Federal Court Of Appeals –Supreme Court Of Canada

© 2010, Clarence Byrd Inc.37 Employee/Partner GST/HST Rebate EEEEmployees and partners are usually non- registrants EEEEmployees and partners have deductible expenses on which GST/HST is paid TTTThe rebate allows them to recover this GST/HST –M–M–M–Must be employee or partner of an employer or partnership that is a GST registrant –A–A–A–Also government employees –E–E–E–Expenses must be non-reimbursed

© 2010, Clarence Byrd Inc.38 Employee/Partner GST/HST Rebate CCCCalculation –M–M–M–Multiply eligible expenses by GST/HST Rate ÷ GST/HST Rate –R–R–R–Rebate is a refund of GST/HST paid on costs that were deducted for income tax purposes –R–R–R–Rebate is added to income or deducted from UCC in the year it is received

© 2010, Clarence Byrd Inc.39 New Housing Rebate  GST /HST paid at usual rate  Rebate available equal to 36 percent of GST paid  Maximum = $6,300 [(5%)($350,000)(36%)]  Phase out provision  If harmonized: provincial rebates vary

© 2010, Clarence Byrd Inc.40 New Housing Rebate Reduction (Non-Harmonized Province) [A][($450,000 – B) ÷ $100,000] Where: A = The lesser of 36 percent of the GST paid and $6,300 [(5%)(36%)($350,000)] B = The greater of $350,000 and the cost of the home

© 2010, Clarence Byrd Inc.41 New Housing Rebate - Example Example On July 1, 2010, Gary and May Lartch acquire a new home in Alberta at a cost of $385,000. GST paid was $19,250 [(5%)($385,000)] Rebate [$6,300][($450,000 - $385,000) ÷ $100,000 = $4,095

© 2010, Clarence Byrd Inc.42