2 June 2006

Is Your Business Ready For the New GST Rate?

The following is excerpted from a notice from Ernst & Young.

As announced on May 2, 2006, in federal Minister of Finance Flaherty’s first budget, the goods and services tax (GST) rate will drop from 7% to 6% effective July 1, 2006. As the GST rate is a component of harmonized sales tax (HST), a corresponding reduction in the HST rate from 15% to 14% will also be made. Bill C-13, containing the proposed amendments to the Excise Tax Act (ETA) intended to implement the rate change, was introduced on May 11. This Alert describes some of the implications to businesses as a result of the rate reduction and hghlights other commodity tax changes that were announced in the budget.

Transitional Measures

Although the rate reduction is not going to have a significant effect on most purchases, transitional rules are needed for guidance and to ensure some equity for transactions that straddle the effective date.

The general transitional rule is as follows: where GST becomes payable before July 1,
2006, the current 7% rate will apply, and where GST becomes payable on or after July 1, 2006, the 6% rate will apply. For most supplies, GST becomes payable the earliest of when a supplier issues an invoice for a supply, when payment for a supply is due under an agreement, and when the payment for a supply is made.

Specific transitional rules have been introduced for sales of real property because for consumers, real estate is the area where the GST reduction can result in significant savings, and the government wants to ensure that the full benefit of the reduction is passed on to the purchaser.
Under these rules, the rate of tax that applies to the sale of real property depends on when the agreement of purchase and sale was entered into and when the transfer of ownership and/or possession takes place. …

The new housing rebate program will continue to rebate 36% of the GST paid on the purchase of a new home (with a purchase price of $350,000 or less) but in the case of properties that are taxed at the lower rate, the amount of the rebate will be lower, with the maximum rebate
amount declining from $8,750 to $7,560.

Transitional rules will apply to financial institutions that are required to self-assess
GST on certain imported services and intangible property. The 7% rate will apply to the consideration for those supplies attributable to the portion of the taxation year before July 1, 2006, and the 6% rate will apply to the remainder of that consideration.

Anti-avoidance measures have also been proposed that are intended to prevent
non-arm’s length parties from entering into transactions for the purpose of obtaining the benefit of the rate reduction where the transactions are not primarily for commercial purposes. These rules will clearly have limited application (primarily to financial institutions and the non-profit sector) because most commercial businesses receive full input tax credits.

Implications for Businesses

Businesses have less than six weeks to adapt to the lower rate. In that time, systems will have to be changed to ensure that the proper rate of tax is collected and, more important, sales and client service staff will need to be armed with answers to questions….

Not all transitional issues can be addressed as simply as the examples below, and businesses will need to determine how the rate change affects all aspects of their operations.

Housekeeping Changes as a Result of the Rate Reduction

Many of the changes necessary to complete the rate reduction transition are regulatory and/or administrative and have not been included in Bill C-13. The Canada Revenue Agency has since announced the new regulatory input tax credit factors for employee allowances (6/106 for GST and 14/114 for HST) and employee reimbursements (5/105 for GST and 13/113 for HST). The budget papers outline the new factors for those using various streamlined accounting methods. It is expected that all necessary non-legislative transition