Harmonization 2010

1. Harmonization 2010 Eric Patoneric.paton@ca.pwc.com PwC

2. Agenda Background & Basic Concepts Point of Sale Rebates Other Rebates Input Tax Credit (“ITC”) Restrictions Transitional Rules Place of Supply Rules Issues and Planning PricewaterhouseCoopers LLP

3. Background 1991 - Federal sales tax replaced with the GST 1992 - Quebec replaces its PST with a value added tax similar to GST 1997 - Nova Scotia, New Brunswick & Newfoundland replace their PST and GST with a single harmonized sales tax (“Atlantic HST”) 2010 - Ontario and BC proposed HST PricewaterhouseCoopers LLP

4. 2009 Timelines PricewaterhouseCoopers LLP

5. Ontario and BC Announcements Effective July 1, 2010 Ontario and BC retail sales taxes eliminated; Replaced by Ontario Value-Added Tax (“OVAT”), and BC Value-Added Tax (“BCVAT”), combined with GST = harmonized sales tax (“HST”); Ontario HST at 13%; BC HST at 12% Canada Revenue Agency (“CRA”) will administer One GST/HST return, One GST/HST audit PricewaterhouseCoopers LLP

6. Basic Concepts Tax levied under the existing Excise Tax Act Much of how the tax will apply already exists Additional key areas involve unique elements (e.g. point of sale rebates and ITC restrictions); transitional rules; place of supply rules; multiple rate issues; new housing rebates PricewaterhouseCoopers LLP

7. Point of Sale Rebates PricewaterhouseCoopers LLP

8. Other rebates • Rebate of provincial portion of HST to Public Service Bodies in addition to existing GST rebate • New Housing Rebate on the first $400K: • 6% of OVAT to a maximum of $24K • 5% of BCVAT to a maximum of $26,250K • Maintains existing 2% PST • New Rental Property Rebate on the first $400K per residential unit; same maximum levels as above PricewaterhouseCoopers LLP

9. Miscellaneous Issues • Ontario Sales Tax to apply to certain insurance premiums • Private transfers of motor vehicles subject to HST • Tax Inclusive Pricing – no announced change PricewaterhouseCoopers LLP

10. ITC Restrictions Electricity, gas, combustibles and steam (except for use in manufacturing goods for sale and farming) Telecommunication Services (excluding internet access or toll-free numbers) Road vehicles < 3,000 kilograms (and related parts and certain services) Fuel for such road vehicles (Ontario only) Food, beverages and entertainment PricewaterhouseCoopers LLP

11. ITC Restrictions Will apply for first 5 years, then phased out over three years 25% yr 6; 50% yr 7; 75% yr 8 Applies to Businesses with more than $10 million* in taxable supplies (including zero-rated supplies) AND Financial institutions Excludes PSB’s Information released indicates many similarities to Quebec Sales Tax system * on associated group basis PricewaterhouseCoopers LLP

12. ITC Restrictions Manual exercise vs. segregation on supplier billings Segregation on GST/HST returns? IT changes necessary to implement Impact on expense reports Training, education, controls Policies and procedures PricewaterhouseCoopers LLP

13. ITC Restrictions – Energy Energy costs - manufacturing goods for sale Existing definition of manufacturing and manufacturer? Energy to light, heat, ventilate production site restricted Apportionment rules Limited to the charge for the energy source? Distribution, delivery and other ancillary charges? Purchase for resale? Resale v. input to resupply e.g. landlords PricewaterhouseCoopers LLP

14. ITC Restrictions – Energy Ontario company purchases energy (hydro) from local utility company Ontario company pays $20,000 plus HST of $2,600 ITC allowable: Federal portion of HST: $20,000 x 5% = $1,000 Provincial portion of HST for energy used to produce goods (must be determined) PricewaterhouseCoopers LLP

15. ITC Restrictions – Telecom Telecom Services e.g. telephone service, voicemail, L/D Definition – is it telecom or input to broader supply? Internet access? Web hosting excluded – what about ancillary access? Toll Free v. access v. ancillary charges Resale v. own use e.g. data processing Outsourcing of telecom function PricewaterhouseCoopers LLP

16. ITC Restrictions – Road Vehicles Road vehicles, related parts, certain services and fuel Purchase or lease Public v. private roads Excludes trailers and semi-trailers Parts & service for 12 months post acquisition of vehicle Car allowances Expense reimbursements Impact on taxable benefits Notion of resupply PricewaterhouseCoopers LLP

17. ITC Restrictions – Road Vehicles Example Ontario company pays $40,000 for new automobile and HST of $5,200 Automobile weighs less than 3,000kg ITC restrictions: $3,200 ($40,000 x 8% OVAT) $500 (GST on portion of purchase price greater than $30,000 federal ITC restriction) PricewaterhouseCoopers LLP

18. ITC Restrictions – Food, Beverage, Entertainment Restriction for food, beverages and entertainment Follows 50% income tax restrictions (same as existing restriction for GST) Direct payments Allowances and expense reimbursements PricewaterhouseCoopers LLP

19. Impact Vendors of PST taxable goods/services After-tax price is equivalent Tax on vendor’s inputs removed Overall product demand favourably impacted??e.g. technology, manufacturers, exporters Vendors of PST exempt goods/services Just cash flow if purchaser can claim ITCs Cost increase to entities such as financial institutions and public sector bodies Cost increase to individual consumers PricewaterhouseCoopers LLP

20. Transitional Rules – sale of goods PricewaterhouseCoopers LLP

21. Transitional Rules – most services PricewaterhouseCoopers LLP

22. Transitional Rules – intangibles Waiting on clarification of treatment from Ministry Difficulties in classifying nature of software for HST purposes IPP under existing GST TPP under existing PST Service contracts – right to receive IPP? Education/training credits PricewaterhouseCoopers LLP

23. Transition Rules – property rentals PricewaterhouseCoopers LLP

24. Transitional Rules – sales of commercial real property PricewaterhouseCoopers LLP

25. Ontario Transitional Rules – sales of most residential property PricewaterhouseCoopers LLP

26. HST Transitional Rules • May 1st Rule • On the earlier of the day the consideration for the supply: • Is paid; or • Becomes due • Consideration is due on the earlier of: • Date invoice issued • Date invoice would normally have been issued • Date required to pay per agreement PricewaterhouseCoopers LLP

27. HST Transitional Rules Special rules for when consideration is due: Deposits: when applied to consideration Consignment: when sold by consignee Other considerations: Refunds, adjustments, rebates, bad debts Coupons Prepayments PricewaterhouseCoopers LLP

28. Place of Supply Rules • ‘Place of supply’ (POS) rules not yet released • Impact • POS rules should not penalize suppliers in HST provinces • POS rules determine which rate of tax applies (5%, 12%, 13%) • Rate of self-assessment (to the extent it is required) • Current POS rules regarding tangible personal property are likely sufficient (destination based) • Changes are likely to be needed for POS rules regarding services and intangible personal property (origin based) • Consider system capabilities in POS determination PricewaterhouseCoopers LLP

29. Current HST Place of Supply Rules – Sale of Goods • General rule • POS = province in which supplier delivers the TPP or makes it available to customer • Three deeming rules • Supplier ships the TPP to destination in a particular province specified in the contract for carriage • Supplier contracts with a common carrier or consignee on behalf of customer to ship TPP to a province • Supplier sends the property by mail or courier to an address in a particular province PricewaterhouseCoopers LLP

30. Current HST Place of Supply Rules – Services & Intangibles • Services • >90% of service performed • ‘place of negotiation’ and >10% of service performed • where >50% of service performed in HST provinces, province in which greatest proportion is performed • Intangibles • >90% rule • ‘place of negotiation’ and >10% rule • >50% rule PricewaterhouseCoopers LLP

31. Canada-Ontario Agreement Formalizes details of the original HST MOA Legislative amendments introduced by Canada prior to March 31, 2010 CRA and CBSA systems in place by July 1, 2010 to administer HST 8% rate can be reviewed in 2 years Inter-provincial supplies Ontario HST will not apply to supplies made outside Ontario based on place of supply rules Registrants outside Ontario will be required to collect HST for taxable supplies made in Ontario PricewaterhouseCoopers LLP

32. What to do now? Assemble group to: - Analyze impact - inputs/revenues - Incorporate into Budgeting process Existing contracts: Sharing of any PST savings Adding OVAT and BCVAT references Government contracts Tax Inclusive contracts Consider impacts on RFPs, new contracts, bids PricewaterhouseCoopers LLP

33. Systems Impacts Sales system Tax and rates Rebates, coupons, deposits, bad debts Disclosure requirements? Transitional and Place of supply rules Purchase system Capture OVAT and BCVAT Restrictions PricewaterhouseCoopers LLP

34. Centralized vs Decentralized New vs Older systems No change to current processes for “other” provinces Greater number of tax calculations in total Issues of automating complexity and “in flight” transactions System Changes & Change Control Testing Training e.g. Call Centre's Communication Customer Facing Systems Billing, Invoice, PoS Tax System Reporting Layer Corporate SystemsSub & General Ledgers Tax Codes Internal Systems Data Warehouse GRCSystem Layer Master Data Customer, Vendor, Product Where the changes need to be made PricewaterhouseCoopers LLP

35. Other considerations Reporting Pricing/Customer literature/website information Customer communication e.g. call centre staff Expense reports Taxable benefits Outsourcing Internal resources and time constraints PricewaterhouseCoopers LLP

36. PST Issues – They’re not gone yet PST refunds – get them while you can PST Audits and Assessments - 4 year window for assessments - When will they stop auditing???? Audit Issues - Custom Software - Software as a Service - Non-resident insurance - Tax on imported administrative materials PricewaterhouseCoopers LLP

37. Important GST issues that will be bigger • ITC Documentation requirements • Exported IPP and place of supply rules • Damages/termination payments • Contracts should clearly specify that GST is extra (not included) PricewaterhouseCoopers LLP

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