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Ontario and HST Transitional Rules

Ontario proposal to implement the HST with effect from July 1, 2010 at rates of 13 percent and 12 percent, respectively. Business owners should start planning for the transition now. Proposed transitional rules published by both provincial governments on October 14, 2009 will require businesses to charge HST on certain transactions before July 1, 2010 or to self-assess the provincial component of the HST in respect of prepayments made before May 1, 2010.

Sales of goods and services
Under the proposed rules, HST will apply to sales of goods where ownership and delivery are transferred to the purchaser on or after July 1, 2010. If either ownership or delivery of the goods occurs before July 1, 2010, the sale will not be subject to HST regardless of when the customer is invoiced for or pays for the purchase.

HST will apply to services that will be performed on or after July 1, 2010, however, if substantially all (90 percent) of the service is performed before July 2010, HST will not apply. If services are performed over a period that straddles July 1, 2010, only the portion of the payment that relates to the services performed on or after July 1, 2010 will be subject to HST. Specific rules are proposed for funeral and cemetery services, passenger transportation services, and freight transportation services.

Vendors should be aware that their obligation to charge HST may begin as early as May 1, 2010. Vendors will be required to charge HST on prepayments received on or after May 1, 2010 in respect of goods where delivery and ownership will transfer on or after July 1, 2010 and in respect of services that will be performed on or after July 1, 2010 (unless substantially all of the service is performed before July 2010).

Leases and licenses
Leases, licenses, and similar arrangements will be subject to HST beginning with lease and license periods that start on or after July 1, 2010. This proposal extends to leases of non-residential real property (for example, rental of short-term accommodation in a hotel) and leases of commercial real property. HST will not apply if the lease or license period begins before July 2010 and ends before July 31, 2010.

Leases, licenses, and similar arrangements will be subject to HST as early as May 1, 2010. If a licensor or lessor receives a prepayment on or after May 1, 2010 in respect of a lease or license period that occurs on or after July 1, 2010, the prepayment will be subject to HST (unless the period ends before July 31, 2010). In such cases, the provincial component of the HST will be included in the supplier's net tax for its reporting period that includes July 1, 2010; the GST component will be included in the reporting period in which the prepayments were actually made.

Prepayments that are not subject to HST
Prepayments received prior to October 14, 2009 for sales of goods and services will not be subject to HST even if the property or services are provided on or after July 1, 2010. Similarly, leases and licenses that start in July 2010 will not be subject to HST if the prepayments are received prior to October 14, 2009.

If a prepayment is made prior to May 1, 2010, a supplier is not required to collect the HST. However, the purchaser, lessee, or licensee may be required to self-assess the provincial component of the HST. Self-assessment is discussed in more detail below.

Sales of intangible personal property
If the consideration for the supply of IPP does not vary with the amount of use or the profits generated from the property (for example, a lump-sum payment for a copyright), the application of HST depends on when the payment is made or when the payment becomes due. If the payment is made or is due prior to July 1, 2010, HST will not apply. However, if payment is made or becomes due on or after July 1, 2010, HST will apply even though the IPP was supplied prior to July 1, 2010. There are specific rules for memberships, admissions, and passenger transportation passes.

Self-assessment requirement for purchasers, licensees, and lessees. In certain circumstances, businesses will be required to self-assess the provincial component of the HST with respect to prepayments made between October 14, 2009 and May 1, 2010:

where businesses use the quick method of accounting to account for their net tax;
where inputs are acquired for use in making exempt supplies; and
where a business whose annual taxable sales are greater than $10 million acquires inputs that are subject to ITC restrictions.

The self-assessment requirement will apply to prepayments made in respect of the following transactions:

purchases of goods where delivery and ownership will be transferred on or after July 1, 2010;
purchases of services that will be performed on or after July 1, 2010 (unless substantially all of the service will be performed before July 1, 2010); and
leases or licenses for which the payments are in respect of lease or license periods that start on or after July 1, 2010 (unless the period ends before July 31, 2010).

In such circumstances, businesses will be required to self-assess the HST in the return for the reporting period that includes July 1, 2010 by no later than November 2010. Prepayments made after May 1, 2010 will be paid to the vendor, as discussed above.

Ontario tabled Bill 218 (Ontario Tax Plan for More Jobs and Growth Act, 2009) on November 16, 2009 with the necessary amendments to the Retail Sales Tax Act, and the corresponding federal legislation (the Economic Recovery Act (Stimulus) and the Provincial Choice Tax Framework Act) received royal assent on December 15, 2009. Business owners should familiarize themselves with these transitional rules in order to avoid potential assessments for failure to self-assess or to charge the correct amount of tax.