Retail Sales and HST – Part I

By Mark A. Wales, CPA, CA, LPA,
sole-practitioner, St. Thomas and Simcoe

HST and the impact on a transaction are probably raised every day in public practice. The questions may overlap from different clients or be completely different depending on a client’s needs.

HST is a tax that has many specialized rules and regulations and varies from industry to industry. Therefore, it can become very complex quickly. However, when one follows some basic principles, they will likely never be offside with the government in their operations. This is the first article of a three part series exploring HST and how it impacts Retail Sales; particularly in the agricultural industry.

The History of HST – What is HST? Where did HST come from?

To begin, HST may be referred to as a value-added tax or a consumption tax. The concept is that the end user who consumes a good or service pays the tax which in turn the business collecting the tax then remits it to the government. This tax then subsidizes the cost of running the government and the public services that we enjoy every day including our road infrastructure, health care system, education system, social pensions, etc. HST is another form of revenue for the government to tax people on the consumption of goods and services.

Looking at HST, it is a relatively new tax in Ontario as it came into existence in Ontario on July 1, 2010. HST is structurally comprised of two taxes; the Federal sales tax known as GST and the Provincial sales tax known as PST. HST is introduced when a Province outsources the administrative responsibilities of their Provincial tax to the Federal Government to monitor and collect the tax and then distribute their share back to the Province all for a fee. Even under this system, the Province still maintains authority over what items are taxed at the prevailing Provincial rate. Therefore, there are still many goods or services which are exempt from one or both taxes in various combinations including most groceries, medical services and certain financial institute transactions.

The conversion to the HST system is great news for businesses as it diminishes the administrative burden on businesses by reducing the number of reports required to be filed and the quantity of auditors that may visit in any given year for different but similar taxes. In addition it streamlined the tax rate to be charged on many items and it increased the recovery of taxes paid on eligible purchases for registered businesses. For some businesses, it was expected they would see a decrease in their purchase cost which they would pass along to the customer since they could now claim the Input Tax Credit (ITC) for the full tax rate paid on goods and services of 13% instead of only 5% before the transition. The expected decrease in cost was overshadowed by other market adjustments and has probably never occurred.

However, the downside to this amalgamation of taxes is that many items which would have only been charged the GST (5%) went up overnight to the new HST rate of 13%. The impact of this transition was mostly observed on services and was less on goods as the Province’s tax system was focused on taxing goods and not services so the 8% for PST and 5% for GST was already being charged on these transactions before the transition. Therefore, the purchase of most goods was not affected as much by this transition. The largest impact was for services including professional fees for services such as legal and accounting. Also, many costs in construction went up overnight now that trades people had to start charging 13% instead of 5% for their services.

Not all is grim as this transition did not affect businesses as much since any registered businesses could reduce the HST collected by any HST paid on eligible purchases (known as Input Tax Credits). However, for non-business customers or non-registered businesses, the HST tax impacted many people’s decisions about major purchases from home purchases to home renovations because of the 8% extra cost.On a final note for this article, there was a misconception on the transition to HST that the rate of 13% would be charged on everything and the cost of everything would go up by 8% across the board.

Hopefully, this article has helped to dispel some of that misunderstanding because there are many goods and services which were exempt or zero-rated supplies before the transition and they retained their status after the transition. Therefore, under the current HST sales tax system in Ontario the actual tax a business must charge could be 0%, 5% or 13% depending on the specific goods or services being provided. Even though the Province gave administrative function for collection and policing the provincial portion of the tax, the Province maintains and sets the rate of tax it wishes to charge on all goods or services and Federal government sets its own rate of tax it wishes to charge on any goods and services. Therefore, each good or service being provided by a business regardless of their industry must be reviewed carefully to the specific tax acts to ensure a business avoids overcharging their customers and over claiming their input tax credits on purchases.

For the next article, I will discuss the issue around when to register your business for HST and the subsequent administrative obligations of registering along with the common pitfalls many businesses face.