If you have never filed all your income tax returns or have filed them incorrectly, this page is for you. And you don’t need a costly tax lawyer to assist you with this.

What is Voluntary Disclosure?

Revenue Canada Voluntary Disclosure program, commonly referred to as tax amnesty or tax pardon, is a fairness program that allows for taxpayers to voluntarily declare income and file returns that have never been filed or have been filed incorrectly.

This program waives civil penalties and avoids criminal prosecutions for those who are volunteering to act in accordance with their legal responsibilities, as under the Income Tax Act and Excise Tax Acts by reporting their affairs before the Canada Revenue Agency (CRA) begins any action or investigation.

Persons that use this program will pay the taxes owing and interest but penalties will be waived. As well, policies exist that acknowledge uncontrollable circumstances and can provide relief from interest in certain situations.

Non-residents are also accommodated and if they meet requirements, and can extend their submission of section 216 returns.

This program also allows for anonymous disclosure under the No-Name Policy, which protects the identities of the complying taxpayers.

No-Name Policy

If a taxpayer decides to keep his or her identify anonymous and confidential, he or she will be able to proceed with disclosure, free of prosecution for 90 days.

The 90 day period begins from the effective date of disclosure, which is determined by the date of a written voluntary disclosure submission or the receipt of a VDP Taxpayer Agreement Form as received by the CRA tax services office.

This period allows for the taxpayer to prepare and submit a complete disclosure without any CRA interference or prosecution. This anonymity is even applicable if the unreported income has been earned off-shore or through criminal activity.

Who Does this program apply to?

Tax amnesty can be applied in several scenarios including:

– Failure to report income
– Income with inaccurate or missing information
– Income earned off-shore or from criminal activity
– Not filed tax returns
– Improper expense claims
– Not remitted source deductions
– Neglecting to retain of a portion of a purchase price on the acquiring of assets from non-residents under section 116 of the Act.

Requirements for Voluntary Disclosure

Four conditions must exist for an individual to use Voluntary Disclosure:

1.The disclosure must be voluntary. If you are already being investigated, it is too late. You must initiate the disclosure and contact the Canada Revenue Agency before they contact you!

2.The disclosure must be complete and accurate. Previously pardoned penalties will be applied if a person reveals only partial information or provides information with material errors.

3.The disclosure needs to involve a penalty. If no penalty exists, declare and file as usual.

4.Disclosure must be information that is over one year old or, if less than one year, not simply employed as an attempt to use this program to file late and avoid penalty.

Legislative References for Voluntary Disclosure

The CRA has the legislative authority to waive or cancel penalties, in whole or in part, on a voluntary disclosure. The pertinent legislative provisions can be found in:

– subsection 220(3.1) of the Income Tax Act
– section 88 of the Excise Tax Act
– section 281.1 of the Excise Tax Act
– subsection 3.3(1) of the Customs Act
– subsection 126(1) of the Customs Tariff

If you have never filed all your income tax returns or have filed them incorrectly, this page is for you. And you don’t need a costly tax lawyer to assist you with this.

What is Voluntary Disclosure?

Revenue Canada Voluntary Disclosure program, commonly referred to as tax amnesty or tax pardon, is a fairness program that allows for taxpayers to voluntarily declare income and file returns that have never been filed or have been filed incorrectly.

This program waives civil penalties and avoids criminal prosecutions for those who are volunteering to act in accordance with their legal responsibilities, as under the Income Tax Act and Excise Tax Acts by reporting their affairs before the Canada Revenue Agency (CRA) begins any action or investigation.

Persons that use this program will pay the taxes owing and interest but penalties will be waived. As well, policies exist that acknowledge uncontrollable circumstances and can provide relief from interest in certain situations.

Non-residents are also accommodated and if they meet requirements, and can extend their submission of section 216 returns.

This program also allows for anonymous disclosure under the No-Name Policy, which protects the identities of the complying taxpayers.

No-Name Policy

If a taxpayer decides to keep his or her identify anonymous and confidential, he or she will be able to proceed with disclosure, free of prosecution for 90 days.

The 90 day period begins from the effective date of disclosure, which is determined by the date of a written voluntary disclosure submission or the receipt of a VDP Taxpayer Agreement Form as received by the CRA tax services office.

This period allows for the taxpayer to prepare and submit a complete disclosure without any CRA interference or prosecution. This anonymity is even applicable if the unreported income has been earned off-shore or through criminal activity.

Who Does this program apply to?

Tax amnesty can be applied in several scenarios including:

– Failure to report income
– Income with inaccurate or missing information
– Income earned off-shore or from criminal activity
– Not filed tax returns
– Improper expense claims
– Not remitted source deductions
– Neglecting to retain of a portion of a purchase price on the acquiring of assets from non-residents under section 116 of the Act.

Requirements for Voluntary Disclosure

Four conditions must exist for an individual to use Voluntary Disclosure:

1.The disclosure must be voluntary. If you are already being investigated, it is too late. You must initiate the disclosure and contact the Canada Revenue Agency before they contact you!

2.The disclosure must be complete and accurate. Previously pardoned penalties will be applied if a person reveals only partial information or provides information with material errors.

3.The disclosure needs to involve a penalty. If no penalty exists, declare and file as usual.

4.Disclosure must be information that is over one year old or, if less than one year, not simply employed as an attempt to use this program to file late and avoid penalty.

Legislative References for Voluntary Disclosure

The CRA has the legislative authority to waive or cancel penalties, in whole or in part, on a voluntary disclosure. The pertinent legislative provisions can be found in:

– subsection 220(3.1) of the Income Tax Act
– section 88 of the Excise Tax Act
– section 281.1 of the Excise Tax Act
– subsection 3.3(1) of the Customs Act
– subsection 126(1) of the Customs Tariff

Companies that offer stock option plans to their employees may have to quickly re-evaluate these arrangements following significant changes to the tax treatment of stock options announced in the 2010 federal budget. Many of these changes are effective for stock options exercised after 4:00 pm (EST) on March 4, 2010.

These measures change the tax treatment of stock option cash-outs and eliminate the opportunity to defer tax on the employment benefit resulting from exercising qualifying stock options in public companies and private companies that are non-Canadian controlled private corporations (non-CCPCs). The budget measures also require employers to withhold tax on benefits from employee stock options exercised after 2010.

For employees with underwater stock options, the budget measures may provide some welcome tax relief. This relief may be available for stock option benefits going as far back as 2001.

Background Tax treatment of stock options

A stock option plan is an arrangement whereby a corporation gives an employee the right (an option) to purchase its shares at a given price. The price may be above or below the market price at the time the option is granted.

When the employee exercises the option to acquire the shares, the difference between the price the employee pays for the shares and their market value is treated as a taxable benefit to the employee.

If certain conditions are met, the employee can claim a deduction of one-half of the taxable benefit. The effect of this deduction is to tax the employment benefit at the same rate as a capital gain.

Generally, public company employees may qualify for the deduction if:

• The shares are normal common shares (not preferred shares)
• The exercise price is at least equal to the fair market value of the shares at the time the option was granted
• The employee deals at arm length with the corporation.

Before the 2010 federal budget, public company and non-CCPC employees were allowed to postpone the taxation on the benefit on $100,000 per year of qualifying stock options to when the shares were sold instead of when the options were exercised.

Stock options in Canadian controlled private corporations (CCPCs) are treated differently. As long as the employees deal at arm length with the corporation, the taxable benefit is reported when the employees sell the stock option shares, rather than when they exercise their options and acquire the shares. The 2010 federal budget does not affect these rules for CCPCs and their employees.

Stock option cash-outs

Some stock option plans have a stock appreciation right attached to them. Such plans allow the employee to receive a cash payment equal to the value of the options instead of purchasing the shares. In other words, the employee can cash out the options.

Before March 4, 2010, the same tax consequences for the employee resulted from the cash payment as from the issuance of shares — the employment benefit was included in income and the related one-half deduction was available if the required conditions were met. The employer could claim a deduction for the full amount of the cash payment.

The 2010 federal budget proposes to change these rules such that employees who receive a stock option cash-out can only claim the deduction of one-half of the employment benefit if the employer elects to forgo the deduction for the cash payment. If the employer does not make this election, it will be entitled to a corporate tax deduction for the payment but the employees must pay tax on the full value of the employment benefit. This change is effective for all stock options that are cashed out after 4:00 pm (EST) on March 4, 2010, regardless of when the options were issued.

The Department of Finance has not provided any grandfathering relief for stock option cash-out arrangements that were in place before the proposed changes to the rules in the 2010 federal budget. As such, employers and employees will need to reconsider the implications of any cash-out arrangements in place prior to March 4, 2010 before completing the transactions.

Finance has confirmed that an employer election to forgo the deduction for the cash payment when an employee cashes out his or her stock option rights can be made separately for each employee. In other words, it does not necessarily have to apply to all the employees in the stock option plan.

Finance has also indicated that the policy reason for not allowing employers to claim a deduction for a stock option cash-out payment is to preserve symmetry in the tax treatment of stock-based compensation. (When an employee exercises stock options and acquires shares, the employer does not get a deduction because it does not pay out cash.) This policy change also achieves more consistency with the U.S. tax treatment of stock options.

Example of new tax treatment of stock option cash-out
The following analysis illustrates the effect of the change by comparing the after-tax cost of stock option cash-outs to employees and employers under the old pre-budget rules and the new post-budget rules.

As the table shows, the employee after-tax proceeds of a $100 cash-out payment can remain the same pre- and post-budget at $77 (columns 1 and 2). However, the pre-budget regime caused the CRA to effectively lose a total of $7 in tax revenue per $100 of benefit, rather than receiving $23 in tax revenue from the employee. The reason for this tax revenue difference is the employer tax savings of $30 from claiming a deduction for the $100 cash payment to the employee.

Post-budget, the elimination of the employer tax deduction results in the CRA receiving $23 per $100 of benefit (when the employer elects to forgo the deduction (column 2)). If the employer does not elect to forgo the deduction (column 3), the CRA receives $16 in tax (compared to $23) but the net after-tax proceeds to the employee fall to $54 because the employee cannot claim the stock option deduction.

The table illustrates that the cash-out without the employer election to forgo the deduction may be the least appealing, even though less tax is paid initially, because the employee is significantly worse off.

If the employer did not elect to forgo the deduction (column 3), the employee would get a better result (from a tax point of view) by acquiring the shares instead of taking the cash-out option. The employee could then sell the shares to achieve the same cash position as the cash-out option with the employer election to forgo the deduction.

Accounting implications of tax changes
In situations where employees holding options to acquire shares under an employee stock option plan are entitled or can choose to receive cash in lieu of shares and they elect to receive those cash payments, these cash-settled grants were generally classified in the financial statements as a liability.

For Canadian GAAP purposes, transactions settled in equity instruments are generally classified as equity-settled awards and other transactions are classified as liability (cash-settled awards).

For these cash-settled awards, the company may have recorded a future tax asset on the basis that it will receive a deduction when the employee ultimately elects to receive cash payments and the cash payment is made. The proposed budget changes may require the company to review its accounting treatment of its future tax asset.

In addition, as a result of the proposed budget changes, companies may choose to modify the terms of their existing stock option agreements such that their existing liability classified stock option awards are reclassified as equity-settled awards. In these cases, they need to carefully consider the accounting treatment for the change in terms and conditions.

Deferral of stock option taxable benefit

Before the 2010 federal budget, public company employees who exercised stock options could generally defer tax on the related taxable benefit on up to $100,000 of annual qualifying employee stock options until the shares were actually sold. The budget proposes to eliminate this deferral, effective for stock options exercised after 4:00 pm (EST) on March 4, 2010.

As such, employees who exercise stock options after 4:00 pm (EST) on March 4, 2010 will not be able to defer tax on any of their employment benefit.

Employer withholding tax requirements

The budget states that, for benefits arising on the issuance of securities after 2010, employers must withhold tax on a stock option employment benefit from the employee pay. The amount of the withholding can be reduced for the 50 percent stock option deduction if the employee qualifies for the deduction.

As a result, employees who exercise stock options after 2010 will effectively have to pay the tax right away, rather than when they file their tax return for the year.

This tax withholding measure does not apply to options granted before 2011 under a written agreement entered before 4:00pm (EST) on March 4, 2010, if the agreement includes restrictions on the optioned shares disposition.

Background

Before the budget, employers were technically required to withhold tax on the employment benefit at the time of exercise. However, if the employee was not paid any cash, the CRA administratively waived the tax withholding requirement on the benefit for Canadian resident employees.

The budget does not provide details on how the employer will, as a practical matter, withhold the appropriate tax on the employment benefit when the employee does not receive any cash compensation on the exercise of the stock option.

Presumably, the employee will have to provide cash to the employer so that the employer can remit the required employee withholding tax to the CRA. Non-CCPC private companies will unfortunately place their employees in a difficult position where no market in which to sell the shares is available to the employee. Amendments to such plans will likely be necessary.

Employees who exercise stock options will need to keep in mind when considering whether to sell any of the shares that they will effectively need to have funds to pay a tax liability as soon as they exercise their options.

Underwater stock options

Shares purchased through a stock option plan are usually expected to increase in value. However, some employees who exercised stock options and did not sell the shares right away may have seen the shares value fall since the day they exercised their options.

Depending on how much the shares value has fallen, employees with these underwater stock option shares who deferred the taxable benefit when they exercised their options (as described above) could end up with a deferred tax liability greater than the value of the shares. The budget proposes a special election that the employee can make to ensure that any tax liability on the deferred stock option benefit, when realized, does not exceed the proceeds from the shares disposition.

Effectively, the election mechanism converts the taxable employment benefit from the employee income into a deemed taxable capital gain. In exchange, the employee pays a special tax equal to the actual proceeds received on the sale of the shares. By making the election, the employee applies the capital loss realized on the disposition of the shares to the deemed taxable capital gain, thereby using allowable capital losses that otherwise must be applied to taxable capital gains.

As such, employees who deferred the taxable benefit on a stock option exercise and who dispose of the shares for proceeds less than the taxable benefit can elect to pay tax equal to the proceeds of disposition instead of paying tax on the taxable benefit. To take advantage of the election, the employee must make the disposition before 2015.

In assessing whether they should take advantage of the special relief, employees should keep in mind that the election reduces the potential for tax relief from using the capital losses otherwise available on the underwater shares against capital gains realized from disposing of other property.

Relief available as far back as 2001
The budget proposes to allow these elections for the previous 10 years (which goes beyond the normal three-year assessment period). Thus, it may be possible for employees to go back as far as 2001 to obtain relief for a deferred employment benefit that was realized on shares that were sold before the March 4, 2010 budget announcement.

To take advantage of this tax relief, employees must make the special election on or before their tax return filing due date for 2010 (generally April 30, 2011). For dispositions after 2010 but before 2015, the deadline for making the election will be the tax filing due date for the year the disposition occurs.

Example of underwater stock option election
The following example illustrates the tax consequences of making the underwater stock option election.

Assume that Mr. X is granted a stock option by his public company employer (Pubco) in 2008, when the fair market value of the Pubco shares equals the exercise price of $1,000. Mr. X exercises the option in 2009, when the fair market value of the shares has increased to $10,000. Thus, Mr. X has a taxable employment benefit of $9,000 in 2009 ($10,000 fair market value minus $1,000 exercise price). Mr. X chooses to defer the $9,000 employment benefit until he disposes of the shares. However, by 2010, the fair market value of the shares has declined to $1,000. Mr. X chooses to dispose of the shares in July 2010.

The following table illustrates the results of Mr. X making the underwater stock option election. This analysis assumes that Mr. X is subject to a combined federal/provincial top marginal tax rate of 46%.

As the table shows, by making the election, Mr. X will reduce his normal $2,070 tax liability to $1,000. With the election, he claims a $9,000 deduction to remove the entire employment benefit from his income but instead he has to include in his income a deemed taxable capital gain of $4,500 ($9,000 benefit — 50% capital gain inclusion rate). He is then able to use his allowable capital loss of $4,500 ($10,000 cost base of the shares $1,000 proceeds = $9,000 — 50%) to offset the deemed capital gain of $4,500. Thus, no capital loss remains for carryover.

Making this election completely eliminates Mr. X regular tax liability for the employment benefit/capital gain and uses up his capital loss. He is then left with paying the special tax equal to his proceeds of disposition of $1,000. This results in a current tax savings of $1,070 ($2,070 -$1,000).

However, if Mr. X expects to realize capital gains that he could use his allowable capital loss of $4,500 to offset, he may be better off not making the special relief election. In this situation, he would carry over the $4,500 capital loss and apply it against $4,500 in taxable capital gains to realize tax savings of $2,070 ($4,500 — 50%). Doing this would completely offset the $2,070 tax cost of the employment benefit while allowing him to keep the $1,000 proceeds from disposing of his underwater shares.

Generally, to make the special relief election worthwhile, an employee would have to see a significant drop in the value of the stock option shares (e.g., a loss of at least 80 percent of the stock value in our example) and not be able to use the related capital losses to reduce tax on other gains.

Also, depending on the exercise price, even if the shares significantly decline in value, an election may not be beneficial if the proceeds of disposition of the stock option shares are high in relation to the taxable employment benefit.

If the shares sale proceeds exceed the tax on the deferred taxable benefit, the election is not helpful.

Non-arm length employees stock options

The 2010 federal budget proposes to amend the income tax rules to clarify that the disposition of rights under a stock option agreement to a non-arm length person results in an employment benefit at the time of disposition (including cash out). Although the government considered that these benefits were taxable in these circumstances under existing tax rules, it also believed that clarification of these rules was warranted.

Tax planning to use tax losses in a corporate group structure may be allowed by the Canada Revenue Agency , using management fees as a tool for that planning may not be. As the recent case, Les Entreprises Rejean Goyette Inc. v. Her Majesty the Queen (2009 CCI 351), in which the Tax Court of Canada (TCC) denied the taxpayer’s deduction of inter-corporate management fees because there was no formal management agreement and, therefore, no legal obligation to pay them.

Luxembourg Foreign Investment

The Luxembourg government actively encourages foreign investment. There are no formalised legal regimes aimed at foreign investment as such (other than the tax-exempt holding companies and collective investment funds ) but on an ad hoc basis the government offers a variety of types of assistance including guarantees, cash, tax incentives, subsidised loans, assistance with development and construction projects etc.

Luxembourg has a wide range of customised investment incentives specifically for new ventures to the principality. This includes the offer of land with favourable conditions at one of the country municipal business parks or national industrial parks which are equipped with the infrastructure necessary to support a successful business.

In addition, there are incentives for investment available to Luxembourg and foreign investors alike under the laws of 28th July 1923 and 27th July 1972.

Luxembourg Tax Treatment of Offshore Operations.

Offshore companies are taxed as follows :

A 1929 holding company loses its tax-exempt status if at least 5% of its dividends received relate to foreign participations that are not subject to tax at a rate comparable to the Luxembourg corporate income tax rate. An effective tax rate is considered to be comparable if it is at least 11%, equating to approximately one-half of the current corporate income tax rate that applies to regular resident taxpayers and is in line with the tax rate generally applicable to dividends received from participations that do not qualify for a full exemption.

Further, the taxable base needs to be determined under a method similar to the methods used in Luxembourg. An auditor or accountant is required to certify annually that the eligibility requirements have been met. A 1929 holding company that loses its tax-exempt status is subject to the normal corporate income tax regime.

For newly incorporated 1929 holding companies, the amendment applied as from 1 January 2004. For existing 1929 holding companies (i.e. those incorporated under the law applicable before 1 January 2004), the new rules will not apply before they are terminated in 2010.

1. income from trade or business carried on in Luxembourg or arising there;
2. income from dependent services (ie employment income) performed or arising in Luxembourg;
3. pension income resulting from former activity in Luxembourg;
4. investment income arising or paid from Luxembourg;
5. income from leasing of goods etc situated in Luxembourg or exploited by a Luxembourg entity;
6. capital gains on the sale of property or substantial participations in Luxembourg companies.

Each of these categories is further defined in considerable detail in the legislation.

Luxembourg eventually signed up to the compromise on the European Savings Tax Directive reached in January, 2003, and has imposing a withholding tax on non-residents investment returns, like Switzerland, as from July, 2005 (initially at a rate of 15%, rising to 20% in 2008, and 35% in 2011).

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.

US structures

Corporate Income Tax Forecast Methodology

The corporate income tax forecast is produced by:

• Forecasting total annual corporate tax liability.
• Forecasting annual liability by payment type advance payments, final payments, delinquent payments and refunds.
• Convert the annual tax liability forecast by payment types into a quarterly collections forecast.

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.

Corporate Liability Model

The corporate income tax model is similar in nature to the personal models. However, the transition from collections to liability is far more complex. A specific corporate tax year may start any time during the same calendar year. Many corporations use calendar year or fiscal year as their tax year, but not all. As a result, collections and refunds for a given tax year are spread over several years The differing tax years also means that payments are received on multiple tax years simultaneously. For example, an average of 72 percent of advanced payments received during a calendar year belongs to that tax year. The remaining 28 percent belong to the prior tax year.. In essence collections are split by tax year and then shifted back in time to create a liability data set.

This produces a monthly liability variable for each payment type. The monthly data are then converted to annual data prior to forecasting each payment type. The main driver behind the total liability model is corporate profits.

Collections Model

The spreading equations take the annual liability forecasts by payment type and convert them into monthly collections forecasts. The steps involved in this process are laid out below:

• Annual forecasted liability by payment type is spread equally over the months of the year.
• The liability series for all payment types except refunds is split into two pieces based on when collections for a given tax year’s liability occur. (The reverse of the process used to convert collections to liability).
• The forecasts are then shifted forward in time to account for the time between when the liability is incurred and collections occur.
• Historical seasonally patterns are applied to the forecasts using X-11 determined seasonal factors.
• Monthly forecasts are summed to get quarterly collections forecasts.

Forecaster Judgement

The raw collections forecasts must be adjusted to account for tax law changes that are not included in the liability models. This includes recent legislation and policy actions such as adding more tax auditors at the Department of Revenue. Kicker credits that have yet to be taken are also reflected in this manner.

In addition, recent collections trends must be taken into consideration. If there is reason to believe that collections patterns will vary from historical patterns, then the forecast can be adjusted accordingly outside of the forecasting models. Both of these items can have significant impacts on the final revenue forecast.

A good understanding of Canada’s complicated tax rules is essential to maximizing reducing tax risk, profit, and maintaining compliance.

Most transactions involve indirect taxes, including GST/HST and PST. These taxes can easily increase the cost of doing business – especially if refund and tax minimization opportunities are overlooked.

HST basics: five things you must know

Here are five fundamentals that businesses in Ontario and B.C. need to know about the new tax:

1. HST combines the federal Goods and Services Tax (GST) with the provincial sales tax (PST) into a single tax.
2. Ontario businesses will charge 13 per cent.
3. B.C. businesses will charge 12 per cent (the lowest HST rate in Canada).
4. HST applies to both goods and services, adding the provincial sales tax to services that would previously only have had GST applied.
5. As of May 1, 2010 businesses that sell goods or services to be delivered, installed or performed on or after July 1, 2010 are required charge HST.

Which businesses will need to charge HST?

HST will apply to goods, services, real property and intangible property, such as contractual rights and patents. (We’ve included two charts below to show how the tax status of many goods and services will change.)

You will need to charge HST if:

• you have sales over $30,000 in the calendar year or any four consecutive quarters;
• your business is registered for the GST already.

Current GST registrants won’t need to apply for a new number. The business number (BN) you use for your GST account number will be the same number you will use for your HST account and your filing frequency stays the same.

Why harmonize?

In both Ontario and British Columbia, the HST is being introduced to help businesses cut red tape and save money. The purpose of harmonization is to make businesses more competitive and to stimulate the economy.

Here’s how this works.

Under the current tax system, you can claim back the GST you’ve paid on all of your business expenses, but you can’t do the same for PST. As a result, goods have a tax history that has PST added at every step of the supply chain. These hidden PST costs are included in the final price, with consumers paying tax on the embedded tax.

As a value-added tax, GST is different. There is no hidden tax, because businesses can use the GST they pay out as an input tax credit. The business only remits the difference between the GST it has collected and the GST it has paid.

Harmonization brings the same system and advantages to the collection of the retail sales tax portion. Every business expense that includes HST, from phone services to office supplies, will help reduce the total amount of tax remitted to the government.

Claiming input tax credits

Not all businesses will be able to claim input tax credits on the PST portion of the HST right away.

Small and medium-sized companies with annual taxable sales under $10 million will be able to claim input tax credits for the sales tax paid out after July 1, 2010. However, financial institutions and large businesses with annual taxable sales of more than $10 million will have to wait five years to claim input tax credits paid on the provincial portion of the HST for certain expenses. Then, full input tax credits will be phased in over a three-year period.

Once the HST is fully phased in, the estimated savings for business are substantial.

In B.C., its estimated that businesses will save $1.9 billion in input costs. In Ontario, the HST will slash about $4.5 billion annually in hidden sales taxes once its fully phased in.

Lessons learned from other provinces

The HST is not new to Canada. Already, Quebec and the Atlantic provinces have tax harmonization. And around the world, more than 130 countries have adopted value-added taxes.

Interestingly, prices actually dropped slightly in the eastern provinces after the HST was introduced. According to the C.D. Howe Institute, lessons from the implementation of HST in the eastern provinces suggest that harmonization in Ontario and B.C. will not lead to higher consumer prices.

In Ontario, businesses can expect to save more than $500 million annually in compliance costs while B.C. businesses can expect to save $150 million a year.

Sales tax harmonization will simplify tax compliance for businesses since they will only have to manage one sales tax system, says Ted Wigdor, vice-president, government and corporate affairs, with Certified General Accountants of Ontario. That means one harmonized tax base, one set of sales tax returns and one consistent reporting period, all of which will benefit small- and medium-sized enterprises.

HST implementation checklist

The following checklist will help you identify the systems you will need to change to be ready for the introduction of the HST on July 1, 2010.

• Do you need to modify your cash registers or point-of-sale systems?
• Do you need to update automatic payments to include HST?
• Do you need to update your e-commerce website to add the HST? (Remember, your business might be closed for the July 1 holiday, but your website is not!)
• Do you need to update your accounting software to accommodate the new tax?
• Do you need to update your accounts receivable / accounts payable / invoicing software?
• Do you need to make adjustments to the way you do your input tax/taxable benefits calculations?
• Are there any other aspects of your business that will be affected by the new tax?

Sample HST remittance calculation

To better understand how value-added tax works, let’s take a British Columbia accounting firm as an example.

Scenario: The firm hires an independent contractor to work on an accounting project. The contractor bills the accounting firm $1,000 and the accounting firm, after reviewing the work and managing the project, bills its client $2,000.

As of July 1, 2010: calculating the “value-added”

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Total HST remitted to government: $240.

Even though $360 of HST is collected between the two companies, only $240 is remitted to the government. That’s because while the accounting firm collected $240 in HST, it keeps $120 of the funds collected to cover the money paid out to the contractor and only remits the remaining $120 to the government.

In reality, each business will likely have other qualifying HST deductions as well from the tax paid on other business expenses, so the amount paid to the government would likely be reduced even further.

Special rules for transactions that staddle the implementation date

Service businesses that have not charged provincial sales tax may need to charge both taxes on work that overlaps the July 1 implementation date.

If over 90 per cent of the work is done before July 1, the business will charge GST only. However: If more than 10 per cent of the work is done after July 1, the business will need to charge GST on the pre-transition portion of their work and charge HST on the remaining portion. These rules apply to the taxable supplies of personal property and services made in Ontario or B.C.

Consider a design firm that creates a brochure a client. Work begins in May and the brochure is completed at the end of July. Seventy per cent of the work is performed in May and June, while the remaining 30 per cent is performed in the month of July.

Since more than 10 per cent of the work overlaps the HST implentation date, the firm must charge both GST and HST. Here is an example of how the company would invoice both taxes:

Invoice for services rendered

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How goods & services will be taxed as of July 1, 2010

Wondering which products and services will see a change in their tax status as of July 1? Here’s a run-down of some of the key ones:

Goods & services that will have the HST added in both provinces

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Goods and services with variable PST/HST status in Ontario and B.C.

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* While the Ontario tax rate for prepared foods and beverages under $4 is often said to be tax exempt, that is not correct. According to a GST/HST bulletin GI-064, businesses will get an instant point-of-sale rebate on the 8 per cent provincial portion of the HST. There are strict guidelines for qualifying products as well as how the HST must be shown on the sales receipt.

Consumers will normally receive the rebate by being paid by the retailer at the point of sale. The consumer can file a rebate claim with CRA using Form GST189 within four years of the purchase if the vendor does not pay or credit the rebate amount at the point of sale. Be sure to visit the link in the further reading section below to learn more about which products qualify for this instant rebate.

Further reading

For more on how transitional rules for the HST may affect your business, go to http://www.cra-arc.gc.ca/tx/pstr/trnstnl/menu-eng.html.

For more information on the HST and how to get registered, go to “Demystifying the GST / HST” at http://www.canadaone.com/ezine/oct03/gst.html.

For more information on qualifying products for Ontario’s Point-of-Sale rebate on Prepared Foods and Beverages http://www.crfa.ca/pdf/cra_pos_rebates.pdf.

For more information on point-of-sale rebates for Ontario newspapers visit http://www.cra-arc.gc.ca/E/pub/gi/gi-060/gi-060-e.pdf.

For more information on transition rules for services and personal property, visit http://www.cra-arc.gc.ca/E/pub/gi/notice247/notice247-e.html#P1.2

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On July 1, 2010, the provincial sales tax (PST) will be harmonized with the federal goods and service tax (GST), resulting in a federally administered single sales tax imposed at 12%. The proposed harmonization will impose significant additional costs on the health care industry.

Now is the time for medical and health care professionals to consider the implications of harmonization on their costs, compliance systems and customers. Medical and health care professionals are persons licensed or otherwise certified to provide such services and include doctors, dentists, nurses, and other health care providers (e.g., chiropractors, orthopedists, optometrists, physiotherapists, podiatrists, chiropodists, osteopaths, audiologists, pathologists, occupational therapists, psychologists and midwives).

Most services provided by medical and health care professionals are not currently subject to either the GST or the PST. Under B.C.’s proposed harmonization with the GST, these services should remain exempt from B.C. HST with no direct impact to the consumer. However, where supplies made by a medical or health care professional are taxable (e.g., therapeutic massages, cosmetic surgery, sales of certain goods such as toothbrushes, etc.) these supplies will be subject to the B.C. HST. This represents a significant increase to the price of these supplies to consumers, and it is recommended that the tax status of these items be reviewed in detail prior to the introduction of the B.C. HST.

Impact on purchases made by medical and health care professionals

Currently, the PST applies to a relatively narrow base of goods and services used by medical and health care professionals in their practices. The B.C. HST will apply to a much broader base of goods and services. As a result, medical and health care professionals will be required to pay additional non-recoverable tax on the purchase of goods and services that are not currently subject to the PST. Consequently, their overhead costs will likely increase, and these professionals may be forced to pass on the additional costs to their customers.

The following table highlights a number of typical expenses that are currently subject to the GST but not the PST. Acquiring these items under the B.C. HST will become more expensive than under the current regime.

Other issues to consider

With the implementation of the B.C. HST fast approaching, medical and health care professionals should  consider a number of strategic planning activities:

• Timing of purchases – stocking up on purchases of goods that do not currently attract the PST but that will attract the B.C. HST on July 1, 2010, will assist in reducing overall costs.
• Real estate issues – consider purchasing real property prior to the implementation of the B.C. HST to minimize the taxes due on the purchase (i.e., 5% GST instead of 12% B.C. HST on the purchase of real property).
• Corporate structure – consider reviewing the structure to determine the optimal treatment for income tax and B.C. HST purposes.
• Current contracts – discussing the impact of the B.C. HST on suppliers will assist in determining whether a supplier’s costs will be positively affected by the implementation the B.C. HST and, as such, allow the medical or health care professional to purchase these products at a lower price.

Farmers in BC

Currently, farmers are exempt from paying PST on the cost of many items purchased for use in the farming business.  If a farmer is registered to collect GST/HST, any HST paid on costs for the farming business are recoverable as input tax credits. As most agricultural products are zero-rated (they are considered taxable, but the HST rate is zero), very little or no HST would be collected.  Many farmers are small suppliers, so registering to collect GST/HST is not mandatory, but would probably be to their advantage.  See Who has to register to collect GST/HST?

 Proposed General Transitional Rules for BC HST

Transitional rules are required to determine which tax – the existing PST (Social Services Tax) or the BC component of the HST – would apply to transactions that straddle the July 1, 2010 implementation date.

November 18, 2009 – New home sales – Grandparenting

Where written agreements of purchase and sale are entered into on or before November 18, 2009, and both ownership and possession of the homes are transferred under the agreement after June 2010, the sales will be subject to the federal component of the HST, but not the provincial component.  This would apply to sales of newly constructed or substantially renovated single-unit homes to individuals, and to sales of residential condominiums to all persons including individuals.

Sales of these grandparented homes would not be eligible for the new housing rebate or new rental housing rebate.

October 14, 2009

Certain purchasers that are non-consumers may have to self-assess the BC component of the HST on consideration that becomes due, or is paid, after October 14, 2009 and before May 1, 2010 for goods and services provided on or after July 1, 2010.  This would not apply if the non-consumer is a GST registrant and would therefore be entitled to an input tax credit.

Note:  Consumer means an individual who acquires goods or services for the individual’s personal consumption or use or for the personal consumption or use of another individual.  See the detailed information in Canada Revenue Agency’s Notice 247 regarding this topic.

A GST registrant in BC or Ontario should not be collecting the provincial portion of the HST prior to May 1, 2010, for goods or services provided in BC or Ontario, even if the goods or services are to be provided on or after July 1, 2010.  Prior to May 1, only the 5% GST should be collected for these goods or services.

May 1, 2010

The HST would generally apply to consideration that becomes due or is paid on or after this date, for property and services provided on or after July 1, 2010.

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	 Funeral services – HST will not apply to funeral services where the contract is entered into before July 1, 2010.      Â
	 Transitional PST inventory rebate for residential real property contracts – A rebate will be available for PST embedded in construction materials purchased before July 1, 2010, but used in residential property contracts on or after July 1, 2010.      Â
	 Subscriptions to newspapers, magazines and other periodical publications – HST will not apply to subscriptions paid before July 1, 2010.      Â
	 Passenger transportation services – HST will generally not apply to the cost of continuous journeys that commence before July 1, 2010.      Â
	 Freight transportation services – HST will generally not apply to the cost of a freight transportation service performed on or after July 1, 2010 if the service is part of a continuous freight movement of goods that begins before July 2010.       Â

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For further information on the BC HST and the proposed transitional rules, see the following on the BC Ministry of Finance website

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	 News Release      Â
	 Harmonized Sales Tax and HST General Transitional Rules      Â
	 HST Rebates and Exemptions      Â
	 Rebate threshold and transitional rules for new housing      Â
	 Point-of-Sale Rebates for BC HST      Â
	 Comprehensive Integrated Tax Coordination Agreement Between the Government of Canada and the Government of British Columbia (pdf)      Â

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	 Notice247 Harmonized Sales Tax for Ontario and BC – Questions and Answers on General Transitional Rules for Personal Property and Services      Â
	 Notice246  Harmonized Sales Tax for BC – Questions and Answers on Housing Rebates and Transitional Rules for Housing and Other Real Property Situated in BC.      Â
	 GST/HST Information Sheets:  Transition to the Harmonized Sales Tax  Â

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	 GI-053 Freight Transportation Services      Â
	 GI-054 Passenger Transportation Services      Â
	 GI-055 Transportation Passes      Â
	 GI-056 Services      Â
	 GI-057 Memberships      Â
	 GI-058 Admissions      Â
	 GI-059 Intangible Personal Property      Â
	 GI-070 Goods      Â

  

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	 GI-061 Point-of-Sale Rebate on Motor Fuels      Â
	 GI-062 Point-of-Sale Rebate on Feminine Hygiene Products      Â
	 GI-063 Point-of-Sale Rebate on Children’s Goods      Â
	 GI-065 Point-of-Sale Rebate on Books       Â

  Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.Â