Getting Construction Companies Ready For the Ontario HST

Hamilton Halton Construction Association

Rino Bellavia905-633-4905rbellavia@bdo.ca

January 15, 2010

Outline

•Background to the HST to the HST

•ORST as Compared to the HSTORST as Compared to the HST

•Planning Opportunities to Minimize taxPlanning Opportunities to Minimize tax

•GST/HST and Construction ContractsGST/HST and Construction Contracts

•Other issuesOther issues

•Let’s keep this informalLet’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 HSTBenefits 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 HSTCosts 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:

• 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 HSTItems 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 HSTItems 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 HSTSupply 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 HSTSupply 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 HSTSupply 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 HSTSupply and Install – Manufacturing ContractorExample: 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 HSTSupply and Install – Manufacturing ContractorExample: 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 HSTSupply and Install – Manufacturing ContractorExample: 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

• 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

Universities/Colleges

School Boards

Hospitals

Charities, Qualifying Non-Profit Organizations

100%

67%

68%

83%

50%

78%

78%

93%

87%

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

ExampleExample

Building is substantially completed on May 2, 2010Building is substantially completed on May 2, 2010

Contract is for $1,500,000 with the following billings:Contract is for $1,500,000 with the following billings:• $500,000 due on March 31, 2010$500,000 due on March 31, 2010• $500,000 due on May 15, 2010$500,000 due on May 15, 2010• $500,000 less $150,000 holdback is due on August 15, 2010$500,000 less $150,000 holdback is due on August 15, 2010• $150,000 holdback is due on September 1, 2010$150,000 holdback is due on September 1, 2010

First two payments attributable to property and services First two payments attributable to property and services delivered prior to July 1, 2010delivered prior to July 1, 2010

70% of last two payments attributable to post 70% of last two payments attributable to post July 1, 2010July 1, 2010

Page 34

GST/HST On Construction Contracts

ResultResult

Substantial completion occurs on May 2, 2010Substantial completion occurs on May 2, 2010

GST owing on the $350,000 payment ($17,500) due GST owing on the $350,000 payment ($17,500) due August 15, 2010 needs to be remitted by June 30, August 15, 2010 needs to be remitted by June 30, 20102010

GST does not apply to the $150,000 holdbackGST does not apply to the $150,000 holdback• GST on holdback is due September 15, 2010GST on holdback is due September 15, 2010

Page 35

GST/HST On Construction Contracts

ResultResult

March 31, 2010 and May 15, 2010 billingsMarch 31, 2010 and May 15, 2010 billings

100% attributable to property delivered and 100% attributable to property delivered and services performed before July 1, 2010services performed before July 1, 2010

No OHST would be collected on these payments, No OHST would be collected on these payments, only GSTonly GST

Page 36

GST/HST On Construction Contracts

ResultResult

August 15, 2010 Payment of $350,000August 15, 2010 Payment of $350,000

$150,000 related to holdback not due until Sept 15, 2010$150,000 related to holdback not due until Sept 15, 2010

70% of $350,000 attributable to property delivered and 70% of $350,000 attributable to property delivered and services performed after July 1, 2010services performed after July 1, 2010

OHST of 8% of 70% times $350,000 or $19,600OHST of 8% of 70% times $350,000 or $19,600

For OHST, substantial completion is deemed to be For OHST, substantial completion is deemed to be June 1, 2010 (not May 2, 2010)June 1, 2010 (not May 2, 2010)

OHST due July 31, 2010 because of the substantial OHST due July 31, 2010 because of the substantial completion rulecompletion rule

Page 37

GST/HST On Construction Contracts

ResultResult

$150,000 Holdback on September 15, 2010$150,000 Holdback on September 15, 2010

70% attributable to property delivered or services 70% attributable to property delivered or services rendered after July 1, 2010rendered after July 1, 2010

OHST of 8% of 70% times $150,000 or $8,400OHST of 8% of 70% times $150,000 or $8,400

Reported on September 2010 GST ReturnReported on September 2010 GST Return

GST of $7,500 is also reported on September returnGST 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