Sunday, January 30, 2011

HST comes to Ontario

The Ontario Harmonized Sales Tax came into effect July 1st. The 5% GST was replaced with the 13% HST, effectively eliminating the Provincial Sales Tax (PST). This resulted in an immediate 8% increase in the cost of retaining legal services for individuals.

Businesses actually benefit, as previously they could not recover the PST portion of disbursements unless they sold goods and registered for PST. Now they can claim the provincial portion as HST input tax credits.  And for those that were registered for PST, now they only have to track and remit one sales tax instead of two, saving on time and labour costs.

There was some confusion during the transition period over the tax rate for fees before and after July 1st on the same invoice. I heard of a few firms billing every client as of June 30th, in order to avoid any issues. Since the transition period was quite awhile ago, I will discuss it no further.

However, I have noticed an ongoing problem with “Place of Supply”, as the rules did change as of July 1st. In most cases, the address of the client is now the determining factor for what tax rate will be charged.

If your client resides or the business address is located in one of the following “participating provinces”:
  1. British Columbia - you charge 12% HST;
  2. Ontario, New Brunswick and Newfoundland and Labrador – you charge 13% HST;
  3. Nova Scotia – you charge 15% HST.
In all other “non-participating” provinces and territories, your clients are charged 5% GST.

Litigation services are determined by where the court or other tribunal that has jurisdiction over the matter is located. If the client is in Alberta but the matter will be heard in Ontario, the 13% HST is charged once the action is commenced. However, if the Alberta client retained you to investigate and determine whether a cause of action actually exists, then these services supplied prior to commencement of the action are charged at the 5% GST rate.  When the action commences, you begin charging this same client 13%.

If you have clients outside of Ontario, you can use Matter Manager – Billing – Taxes – to review and make changes to the tax rates you charge clients.

Some firms purchase and pass on client disbursements as “agents”.  When doing this, a $113.00 purchase appears on the client’s invoice as $113.00, rather than $100.00 plus $13.00 HST.  This can make it difficult for business clients to claim their HST input tax credits.  The above example seems obvious, but what about a Teranet purchase of $71.30 ($60.00, $10.00 fee, $1.30 HST).  If not broken down on your invoice, the client may mistakenly claim a $63.10 purchase and a $8.20 input tax credit.

As always, I invite your comments and suggestions for future posts. Next week – Transfers from trust to general.