February 18, 2010
by Rino Bellavia
The HST will allow manufacturers to claim the sales tax they pay on most inputs.
While addressing taxes likely isn’t high on the 2010 priority list for many of Canada’s manufacturers, those of you in BC and Ontario might want to start planning how to get the most value from your provincial sales taxes, soon to be harmonized with the federal goods and services tax (GST). As of July 1, the harmonized sales tax (HST) will be 12% in BC and 13% in Ontario.
Like the GST, this value-added tax ensures only the value contributed by each manufacturer is taxed by allowing the business to claim what it pays on most inputs. The tax will only be an added cost on the final sale of a manufacturer’s goods to a consumer who is not entitled to either an input tax credit (ITC) or rebate.
Since more than 130 countries have a value-added tax system similar to Canada’s HST, the competitiveness of manufacturers in these and the Atlantic provinces (except PEI) should strengthen many of their export markets.
The principal reason? Production materials and equipment are exempt from provincial sales tax, but manufacturers in the nonharmonized provinces pay for many non-manufacturing expenses they can’t recover. These include furniture, fixtures, office equipment, certain software and hardware, promotion materials, delivery vehicles and more. Although you’ll have to pay higher HST on these items, entitlement to ITCs should allow for the recovery of most, if not all tax payments, resulting in lower overall costs. And there are other benefits. Purchase exemption certificates will no longer be required, and you won’t have to file two sales tax returns: only the Canada Revenue Agency (CRA) will administer and collect the HST and audit taxpayers.
Of course, along with the added value of lower production costs and fewer compliance requirements, there will be new challenges. Here are some tips to help your company realize the most value from the transition to the new tax system.
1. Special planning considerations for mid-size to large manufacturers. Those with annual taxable sales above $10 million will not reap all of the benefits of ITCs for several years because of a temporary restriction on recovering the provincial component of the HST for certain expenditures. A five-year restriction followed by a three-year phase-in period covers energy not directly used in the manufacturing process, telecommunication services (other than internet and toll-free numbers), road vehicles less than 3,000 kilograms, vehicle parts and fuel.