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Getting Construction Companies Ready For the Ontario HST

Getting Construction Companies Ready For the Ontario HST. Hamilton Halton Construction Association Rino Bellavia 905-633-4905 rbellavia@bdo.ca January 15, 2010. Outline. Background to the HST ORST as Compared to the HST Planning Opportunities to Minimize tax

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Getting Construction Companies Ready For the Ontario HST

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  1. Getting Construction Companies Ready For the Ontario HST Hamilton Halton Construction Association Rino Bellavia 905-633-4905 rbellavia@bdo.ca January 15, 2010

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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%

  8. 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

  9. 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

  10. 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.

  11. 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

  12. 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

  13. 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

  14. ORST as Compared to the HSTSupply 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

  15. ORST as Compared to the HSTSupply 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

  16. ORST as Compared to the HSTSupply 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

  17. 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

  18. 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?

  19. 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?

  20. 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

  21. Revenue Issues Public Sector Rebate Table

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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?

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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

  32. 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

  33. 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

  34. 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

  35. 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

  36. 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

  37. 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

  38. 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

  39. 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

  40. 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

  41. 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

  42. QUESTIONS?

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