Harmonized Sales Tax (“HST") will become a reality in Ontario and British Columbia on July 1, 2010. Notwithstanding, some businesses will be required to start collecting HST on May 1, 2010.
Businesses in the HST Zone (HST Zone = Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador) will have to use the newly released place of supply rules, some of which are different than the existing place of supply rules for Nova Scotia, New Brunswick and Newfoundland/Labrador. The applicable HST rates are
- Ontario = 13% (5% GST and 8% provincial HST component)
- British Columbia =12% (5% GST and 7% provincial HST component)
- Nova Scotia = 13% (5% GST and 8% provincial HST component)
- New Brunswick = 13% (5% GST and 8% provincial HST component)
- Newfoundland/Labrador = 13% (5% GST and 8% provincial HST component)
In addition, some businesses outside the HST Zone will also be required to charge collect and remit HST to the Federal Government in accordance with the place of supply rules when the place of supply is within the HST Zone.
On February 25, 2010, Canada's Department of Finance released its proposed harmonized sales tax (HST) place of supply rules (See http://www.fin.gc.ca/n10/data/10-014_1-eng.asp#_Toc252889005) which will be used to determine whether a supplier must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient must pay HST in connection with an acquisition or importation and at what rate. Simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.
The HST place of supply rules for services have evolved from the existing rules to reflect the addition of the larger economic provinces of Ontario and British Columbia to the HST Zone.
The first question to ask when applying the HST place of supply rules is: What is being supplied/sold? Is it property (tangible personal property, real property or intangible property) or a service? If the supplier is supplying/providing a service, then the HST place of supply rules for services should be used.
The next question is whether one of the specific place of supply rules applies or the general place of supply rules for services. Ask whether any of the following types of services are being provided and, if so, go to the specific place of supply rule:
- personal services (e.g. a hair cut)
- services in relation to real property (e.g., constructing a house);
- services in relation to intangible property (e.g., designing a trade mark)
- computer-related services and Internet access;
- telecommunication services;
- premium rate telephone services;
- services in relation to a location specific event (e.g., participation in a conference);
- passenger transportation services;
- services supplied on board conveyances;
- baggage charges;
- services of child supervision;
- services related to a ticket, voucher or reservation;
- freight transportation services;
- postage and delivery services;
- customs brokerage services;
- air navigation services;
- repairs, maintenance, cleaning, alterations and other services relating to goods;
- service of a trustee in respect of a trust governed by an RRSP, RRIF or RESP.
If the supplier is not providing any of the above listed specific services (and note the devil may be in the details or the unpublished legislation or regulations), then the general place of supply rules for services will apply, There are 4 general place of supply rules for services, which must be applied in following order. Rule #1 and Rule # 2 are the fundamental rules. Rules #3 and Rule #4 are tie-breaker rules.
Rule #1: If a supply of a service is made and, in the normal course of business, the supplier obtains a particular address of the recipient that is
(a) a home or business address in Canada of the recipient,
(b) where the supplier obtains more than one home or business address in Canada of the recipient, the home or business address that is most closely connected with the supply, or
(c) where the supplier does not obtain a home or business address in Canada of the recipient, another Canadian address that is most closely connected with the supply,
the supply will be regarded as made in the province in which the particular address is situated.
Department of Finance Example: An accounting firm in Calgary, Alberta is hired to conduct a financial audit of a company with a business address in Kelowna, British Columbia. In the course of the audit, 60 per cent of the work is performed in Calgary and the remaining 40 per cent is performed at the company’s Kelowna address. Because the supplier obtains the recipient's British Columbia business address, the service will be subject to HST at a rate of 12 per cent (a 5 per cent federal component and a 7 per cent British Columbia component).
Canada Revenue Agency Example: A supplier in Quebec agrees to design a web-site for a company located in Ontario. The service is performed entirely in Quebec. The business address of the recipient is obtained by the supplier, which is in Ontario. HST will apply at the rate of 13%.
NOTE: The CRA has indicated that it will release additional guidance on how they plan to interpret the "most closely connected with the supply" requirement. The CRA plans on establishing a hierarchy of criteria to apply. The hierarchical criteria will be released in due course. However, we have been informed that the first criteria to apply are not the place of the billing address.
Rule # 2: If, in the normal course of business, an address in Canada of the recipient is not obtained by the supplier of a service, the supply will be regarded as having been made in a participating province if the part of the service that is performed in Canada is performed primarily in the participating provinces. In such instances, the supply will be regarded as made in the participating province in which the greatest proportion of the service is performed.
Department of Finance Example: A human resources consulting firm with offices in a number of provinces is hired to conduct an executive search in British Columbia and Alberta for a US-based company. The consulting firm does not obtain a Canadian business address or any other address in Canada that is used by the supplier in connection with the supply. Seventy per cent of the services performed in Canada are performed in British Columbia. The service will be subject to HST at a rate of 12 per cent (a 5 per cent federal component and a 7 per cent British Columbia component).
Rule #3: If (a) Rule #2 applies (i.e., no address in Canada of the recipient is obtained and the service that is performed in Canada is performed primarily in the participating provinces), and (b) a single participating province cannot be determined as being the participating province in which the greatest proportion of the service is performed because the service is performed equally in two or more particular participating provinces, then the supply will be regarded as made in the particular participating province for which the rate of the provincial component of HST is highest.
Rule #4: If Rule 3 applies, but a single participating province still cannot be determined to be the place of supply because the particular rate of the provincial component of the HST in two or more of the particular participating provinces is the same, the supplier will be required to charge HST by applying that particular rate. In other words, if 3 applies but a single HST province cannot be identified (same 13% rate in more than one province), the services will be subject to 13% HST.
The application of the HST place of supply rules for services in any given situation may be a complicated factual and legal task. We would be pleased to help. We are helping many clients prepare for HST and can take some of the pressure off you.
Cyndee Todgham Cherniak is counsel in the International Trade Law, the Business Law, the Tax Law, and the Environment, Energy & Emissions Trading Groups in Toronto. Contact her directly at 416-307-4168 or firstname.lastname@example.org.