Harmonized Sales Tax (HST): The New HST and the Place of Supply Rules

Just when you thought you were safe to purchase services from an Alberta lawyer or consultant, the new “Place of Supply Rules” were recently announced by the Department of Finance.  These are Federal rules, but apply to all HST participating provinces as well as the non-participating provinces.  Of note, they came into effect May 1, 2010, as this is the date that suppliers are generally required to start collecting HST (13% in Ontario, 12% in British Columbia) for supplies made or deemed to be made after June 30 pursuant to the HST Transitional Rules.

The present Schedule IX of the GST legislation is to be replaced by significantly revised Regulations that change the focus from primarily an “origin” based test (for example, Alberta service providers would not charge HST) to the more modern OECD “Destination” approach — that is, where the goods or services are consumed or utilized as opposed to where they are generated.

The Place of Supply (“POS”) Rules are the most important, complex and long term aspect of the HST. By contrast, the much talked about Transitional Rules are, essentially, functus this fall.  As the economic model for the HST is based on assumed consumption, not the actual tax collected, the POS Rules are of primary importance for suppliers and recipients – both clients and professionals.  It is necessary to understand the POS Rules in order to collect the proper amount of HST (if not, you will be subject to assessment) or determine if you owe the HST (self assessment or otherwise).  It is also important to determine where and what HST was paid for purposes of the input tax credit (“ITC”) recapture rules. Even businesses receiving 100% GST ITCs will be denied or, more accurately, must repay, HST ITCs for certain purchases (e.g., energy, road vehicles, telecommunication, etc.).

For exported services or goods, there is nothing new in terms of the POS Rules (if one exports out of the country, there is no GST or HST).  However, a non-universal HST domestically, with participating and non-participating provinces, means intra-country imports/exports are important.

The “General Services Rule” has changed from Origin to Destination based.  The Origin-based Rule involved a three-part test (applied in hierarchical order) :

1. Were at least 90% of the services performed in a province (and, for these purposes, what does “performed” mean; for example, is it purely where the WIP is?);
2. If not, where the place of negotiation is in a province, and more than 10% of the services are performed in that province, the place of supply was that province; or
3. If not, were the services primarily performed in a participating province; The place of supply is in the province where the greatest element was performed.

Fortunately, this test was rarely applied, as it was only an issue when one or more of the three Atlantic provinces was or were involved.

However, the new General Services POS Rule is based on the location (address) of the recipient.  If the recipient has more than one address (business or personal, depending on the nature of the service), then the address “most closely connected” to the recipient’s business applies.  The question is what does this phrase mean?  Is it the old “place of negotiation” rule? Presumably not. Is it the place where the instructions emanate from, or is it the place that benefits most from the services (and what if that is more than one location)?  It is understood that the Department of Finance is looking at this POS rule more closely and there may be changes.  If there is no address in Canada, then the place is where the greatest proportion of the services is performed.  Alternatively, if none of the above apply or if you cannot determine the status, the Rule defaults to the highest tax rate (Nova Scotia’s rate in currently the highest at 15%).

There are new financial services POS Rules, with more to come on the Financial Institution front in terms of making changes to the SAM (Special Attribution Method) for investment funds.  For services provided by trustees for certain types of fund such as RRSPs, RRIFs, RESPs or TFSAs, the place of supply is deemed to be where the service is utilized, that is, the address of the recipient.

The tangible goods POS Rules are already destination based for the most part —  that is, based on the place of delivery.  In other words, the existing QST rule applies: if it is delivered to or put on a common carrier for delivery to the recipient, then the place of supply is the address of the recipient.  The leases POS Rule is the ordinary location of the recipient (cars are where they are registered for more than 3 months).

For services related to tangible personal property (« TPP »), the POS Rule is the address of the recipient.  If there are two or more addresses, then the place where the greatest proportion of services are performed or the “Default” rule (the place with the highest combined HST rate, which currently is Nova Scotia or with the new proposed rate of 9.5%, Quebec, if it opts in to the Federal POS Rules) governs.

For intangible personal property (« IPP ») generally, the POS rule is where it can be used (primary use).  For IPP related to Real Property Services or TPP, the rule is where it is primarily situated.  There is a new default rule if equally based in 2 or more provinces.  Then it is where the services are supplied.

For real property, the POS Rule is where the property is situated.  For services related to real property, the POS Rule is where the property is situated.  If it is situated equally in two provinces, then you default to the highest tax rate at the time.

Telecommunication services POS Rules still use the 2 out of 3 rule, but for telecommunication facilities, if you are in a province or partly in a province and the invoice is sent there, then that province is the place of supply.

There is a new rule for services related to an event.  If the event is a location-specific event, then that is where the services are performed.

There is also a new customs brokerage POS Rule, which is where the recipient is located.  Presumably, this means where the recipient’s office or home address to which the goods are delivered, if there is more than one address.

Place of Supply: General Services Example

Consider a client based in Toronto.  Under the old rules, the place of negotiation is in Ontario.  The services are performed 80% in B.C., out of the B.C. office of a law firm, for example.  The old POS rule would look to who is included in the WIP (an allocation of WIP may be necessary).  Query if WIP is even relevant, or is the issue where the lawyer who performed the services is located when performing the services, and not where he or she is normally located?

The new POS rule looks to where the recipient uses the services —  where is the recipient located; where is the firm engaged?  As the client is in Ontario and the address of the client is Ontario, 13% HST applies, even though 80% of the services are performed in B.C.  The result would be same if it was an Alberta firm providing the services.  It can become complicated if the law firm has multiple offices and a national client; for example, the Toronto office is retained by an Ontario-based client, the work is carried out mainly in B.C. and partly in Alberta, and contact is made with the client in all 3 locations.  Which client office is “most closely connected” is an interesting question.

Place of Supply: Imported Taxable Supplies

If a person is not entitled to full ITCs, then imported supplies of services and IPP are subject to tax under the self-assessment rules.  However, the rate is now 12% or 13% (not just the 5% GST).  This may come as a surprise to charities and other non-profits as well as some financial service providers.

Inter-Provincial Imports

There is both a self-assessment requirement and a rebate for entities engaged in non-commercial activities for inter-provincial supplies.  Basically, for supplies made in non-HST provinces and imported into Ontario, self-assessment is applied at 8%. For supplies made in Ontario imported into non-HST provinces, the rebate is applied at 8%.

International Imports of Goods

The Canada Border Services Agency will not collect the provincial portion of the HST on commercial importations of goods into Canada (except for travellers, i.e., non-business importation).  However, for imported commercial goods acquired from an unregistered non-resident that are not acquired for use exclusively in commercial activities, a self-assessment of 8% is required (again, charities and non-profits beware).  Therefore, imported taxable supplies not acquired for use exclusively in commercial activities must be self-assessed (at 13%) by the recipient.