Download bdo-presentation-ah - Mechanical Contractors Association of

Getting Construction Companies Ready
For the Ontario HST
Hamilton Halton Construction Association
Rino Bellavia
905-633-4905
[email protected]
January 15, 2010
Outline
•Background to the HST
•ORST as Compared to the HST
•Planning Opportunities to Minimize tax
•GST/HST and Construction Contracts
•Other issues
•Let’s keep this informal
Page 2
Background to the HST
Setting the Landscape
•Limited guidance issued so far
•Limited legislation has been issued
•Relying on budget comments and some pronouncements
•Presentation is based on speculation
Page 3
Background to the HST
Overview
•Effective July 1, 2010
•Rate of 8% for the OHST and 5% for the GST
•Parallels the GST
•HST is a “value-added tax” rather than the Ontario Retail
Sales Tax (ORST) which is a consumption tax
•Elimination of the Ontario Retail Sales Tax
Page 4
Background to the HST
Overview
Part of Ontario’s Comprehensive Tax Package
Simultaneous decrease in rate of income tax for individuals,
small businesses and corporations
Intended to attract investment and employment to Ontario
Page 5
Background to the HST
Benefits of Replacing ORST with OHST
“Simpler” compliance
• Deal with only one government tax authority
• One potential compliance audit
PST is subject to interpretation
• Results in many judgment calls made by auditors
• Limited legislative guidance
Will eliminate embedded PST previously absorbed by persons engaged
exclusively in commercial activities as HST is recoverable as ITC’s
Page 6
Background to the HST
Costs of Replacing ORST with OHST
Additional tax to consumers
Expenditures not currently subject to ORST:
• i.e. professional fees, commercial rents, real property purchases
Additional tax on entities not exclusively engaged in commercial activities
(i.e. exempt supplies)
• Health Care services
• Financial institutions
Cash flow impact
• Like the GST, OHST will be remitted when billed, not when collected
• Purchases taxed at 13%
Page 7
Background to the HST
Point of Sale Rebates
Tax Relief from the OHST portion for:
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Books (including audio books)
Children’s clothing and footwear
Car seats and car booster seats
Diapers
Feminine hygiene products
Meals under $4.00
Page 8
ORST as Compared to the HST
Items for Resale
Example: Sale of Light Bulbs
ORST
• Purchased ORST exempt by issuing a PEC
• Charged ORST on the sale of the item
HST
• Purchase item and pay HST and claim an ITC
• Charge the HST on the sale of the item
Issues
• Cash flow issue with the HST
• Cash flow negative if you pay the supplier prior to filing the GST/HST return
Page 9
ORST as Compared to the HST
Items for Resale
OHST General Rule – Starting on May 1, 2010
For transactions that straddle the July 1, 2010 date
• Charge OHST starting on May 1, 2010
- Example: sale of goods on June 28, 2010 to be delivered
on July 2, 2010
- Charge HST not ORST
- Watch for these straddle transactions to ensure the
correct tax is calculated and remitted to the correct
government.
Page 10
ORST as Compared to the HST
Supply and Install
Example: Supply and Install Drywall
ORST
• “Real Property Contractor”
• Pay ORST on the cost of materials to be used in construction contract
- Contractor is the “user” of the materials
• No ORST charged to the customer
• Pay ORST on purchase of all installation tools
Page 11
ORST as Compared to the HST
Supply and Install
Example: Supply and Install Drywall
HST
• HST paid on materials and on installation tools
• HST recoverable by claiming an ITC
• HST charged to customer including labour component
Issues
• Cost savings since no ORST on materials and other costs
• Negative cash flow impact on purchases if paid prior to filing the GST return
• Negative Cash flow impact on receivables
• must remit GST/HST when billed not paid
Page 12
ORST as Compared to the HST
Supply and Install
Example: Supply and Install Drywall
Planning Point
• Keep inventory of “supply and install” goods at a minimum as of June 30, 2010
• Take delivery after June 30, 2010 to minimize ORST paid
• No ORST refund for goods in inventory on June 30, 2010
• Inventory rebate only available to suppliers to residential housing industry
• Need to lobby for a change
• Consider filing rebate anyway for ORST in inventory as of June 30, 2010
• Need to review legislation when issued to see if there is a refund position
Page 13
ORST as Compared to the HST
Supply and Install – Manufacturing Contractor
Example: manufacture and install kitchen cabinets
ORST
• “manufacturing contractor”
• Install into real property - “user”
• Must pay ORST on the manufactured cost
• Includes raw materials, manufacturing labour, manufacturing overhead
• Equipment used directly in manufacturing purchased ORST exempt
• Pay ORST on depreciation of equipment
• No ORST charged to the customer
Page 14
ORST as Compared to the HST
Supply and Install – Manufacturing Contractor
Example: manufacture and install kitchen cabinets
HST
• HST paid on raw materials and manufacturing equipment
• HST recoverable by claiming an ITC
• HST charged to customer on full contract value
Issues
• Cost savings since no ORST on manufacturing costs
• Negative Cash flow on purchases if paid prior to filing GST/HST return
• Negative cash flow impact on receivable
• GST/HST remitted when invoiced not when invoice paid
Page 15
ORST as Compared to the HST
Supply and Install – Manufacturing Contractor
Example: manufacture and install kitchen cabinets
Planning Point
• Keep inventory of manufactured goods at a minimum as of June 30, 2010
• Take delivery after June 30, 2010 to minimize ORST paid
• No ORST refund for goods in inventory on June 30, 2010
• Inventory rebate only available to suppliers to residential housing industry
• Need to lobby for a change?
• Consider reducing self assessment on goods in inventory as of June 30, 2010
• Ministry may not agree
• Need to review legislation carefully when issued to see if there is a
postion
Page 16
Revenue Issues
Impact on Current Bidding
• Need to estimate ORST to be paid until June 30, 2010
• Will depend on the timing and progress of the work
• Will need to make assumptions
Page 17
Revenue Issues
B.C., Ontario and Federal Governments agree to pay
the GST and HST effective July 1, 2010
• B.C. and Ontario previously did not pay the GST
• Feds did not previously pay the PST
• Impact on existing contracts?
Page 18
Revenue Issues
Review existing contracts extending beyond July 1, 2010
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Consider OHST implications
Are prices “plus value added taxes”?
Are prices “tax included”?
Any provision to pass on ORST savings to customer?
Page 19
Revenue Issues
Municipalities, Universities, Schools, Hospitals
•Public Service Bodies presently recover GST as a
percentage of GST paid
•Public service bodies will also be able to claim rebates on
provincial OHST portion
•Entities in the MUSH sector will need to track federal
portion and provincial portion separately to calculate
rebates
Page 20
Revenue Issues
Public Sector Rebate Table
GST
OHST
Municipalities
100%
78%
Universities/Colleges
67%
78%
School Boards
68%
93%
Hospitals
83%
87%
Charities, Qualifying
Non-Profit
Organizations
50%
82%
Page 21
Planning for the HST
Planning Opportunity
Accelerate purchases before July 1, 2010 with no ORST but
Ontario HST
• Most services (subject to transitional rules)
• Where full recovery of OHST is not available
• Some of your customers may be looking for this
Page 22
Planning for the HST
Planning Opportunity
Prepayment of taxable items before May 1, 2010
• Works only for consumers
• example: Golf fees for 2010
• Important when no full recovery of OHST
Page 23
Planning for the HST
Planning Opportunity
Delay purchases that have ORST charged
• ORST is an additional unrecoverable cost
• HST eligible for a rebate or ITC
• Lease now; buy later? (contract structuring)
- Example: large equipment purchase
Page 24
Planning for the HST
HST Risk Areas
•13% risk if GST/HST is not collected
•Evaluate every revenue source including “cost recoveries”
Watch for unusual transactions
• example: sale of equipment, rent of extra space etc
Page 25
Planning for the HST
Consider Whether To Change GST Filing Frequency
• Smaller companies have the choice to file annually,
quarterly or monthly GST returns
• Evaluate cash flow issues relating to the HST on expenses
and revenues
• Does it make sense to change the filing frequency?
Page 26
Planning for the HST
•Update billing systems to provide for OHST and
elimination of Ontario RST
Conduct
•HST Impact Analysis
•HST Implementation Strategy
•Staff Training
•Post-Implementation Review
Page 27
Recovery Opportunities
ORST Overriding Rules
ORST continues to apply on pre October 15, 2009
transactions
• where consideration becomes due or is paid on or before
October 14, 2009
• Example: sale of tickets in September 2009 for an event
that takes place in July 2010
Page 28
Recovery Opportunities
ORST Overriding Rules
After October 14, 2009 and before May 2010
• Where consideration becomes due or is paid within these dates
• ORST should be collected on July 1, 2010 straddle transactions
No ORST required to be collected if:
• Self assessment of OHST by purchaser, or
• Exclusively in commercial activities
File for refund if ORST was paid in error
Page 29
Recovery Opportunities
Examples:
ORST Charged After October 14, 2009
• Leased equipment for the period after July 1, 2010
• Goods delivered after July 1, 2010
• Services provided after July 1, 2010
Page 30
GST/HST On Construction Contracts
When is GST is payable?
• GST is generally payable when consideration is paid or
becomes due
• Override rule for real property construction services*
• GST is deemed to become due on any consideration that
has not been paid or invoiced on the last day of the month
following the month in which substantial completion is
reached.
• *Applies to construction, renovation, alteration or repair
of real property
Page 31
GST/HST On Construction Contracts
Requirement to collect HST started on October 15, 2009
• OHST applies if the payment is attributable to property delivered or
services performed after July 1, 2010
• Example:
- OHST applies to April 2010 progress billing if attributable to
property delivered or services performed after July 1, 2010
Page 32
GST/HST On Construction Contracts
Remittance of OHST Collected Prior to July 1, 2010
• If OHST applies to pre July 1, 2010 billing it is reported on
GST/HST return that includes July 1, 2010 and before
November 2010
• Does not apply to sale of residential property
Page 33
GST/HST On Construction Contracts
Example
Building is substantially completed on May 2, 2010
Contract is for $1,500,000 with the following billings:
• $500,000 due on March 31, 2010
• $500,000 due on May 15, 2010
• $500,000 less $150,000 holdback is due on August 15, 2010
• $150,000 holdback is due on September 1, 2010
First two payments attributable to property and services delivered
prior to July 1, 2010
70% of last two payments attributable to post
July 1, 2010
Page 34
GST/HST On Construction Contracts
Result
Substantial completion occurs on May 2, 2010
GST owing on the $350,000 payment ($17,500) due August
15, 2010 needs to be remitted by June 30, 2010
GST does not apply to the $150,000 holdback
• GST on holdback is due September 15, 2010
Page 35
GST/HST On Construction Contracts
Result
March 31, 2010 and May 15, 2010 billings
100% attributable to property delivered and services
performed before July 1, 2010
No OHST would be collected on these payments, only GST
Page 36
GST/HST On Construction Contracts
Result
August 15, 2010 Payment of $350,000
$150,000 related to holdback not due until Sept 15, 2010
70% of $350,000 attributable to property delivered and services
performed after July 1, 2010
OHST of 8% of 70% times $350,000 or $19,600
For OHST, substantial completion is deemed to be
June 1, 2010 (not May 2, 2010)
OHST due July 31, 2010 because of the substantial completion
rule
Page 37
GST/HST On Construction Contracts
Result
$150,000 Holdback on September 15, 2010
70% attributable to property delivered or services
rendered after July 1, 2010
OHST of 8% of 70% times $150,000 or $8,400
Reported on September 2010 GST Return
GST of $7,500 is also reported on September return
Page 38
ITC Restrictions on OHST Paid
ITC’s Restricted for “Large Businesses”
• TAXABLE sales over $10,000,000 annually
• On an associated basis
Recovery of ITC’s on OHST paid restricted as follows:
• First 5 years
• After first 5 years, phased in over next 3 years
Page 39
ITC Restrictions on OHST Paid
Restricted purchases:
•Energy (except for energy used for farming or for
production of goods for sale)
•Telecommunications services other than internet access
or toll free numbers
•Road vehicles less than 3000 kilograms and related fuel,
parts and certain services
•Food, beverages and entertainment
Page 40
ITC Restrictions on OHST Paid
Self Assessment of the HST
Transactions after October 14, 2009 and May 1, 2010
• Applies where the HST was not collected
• Applies to large businesses that are subject to the restrictions
• Applies to straddle transactions that relate to the post June 30,
2010 period
• Can’t prepay or purchase before May 1, 2010 and avoid the HST
Page 41
QUESTIONS?
Page 42