From the Editor's Pen is a monthly feature focusing on current issues in commodity taxation, edited by PricewaterhouseCoopers LLP, Brent F. Murray of Wilson & Partners LLP, and Sheila Wisner of CCH Canadian Limited. This article first appeared in CCH’s Canadian GST Monitor No. 250 dated July 2009.

This article is Part II of the CCH series of articles on Harmonization 2010, following Steven D'Arcy's article "Ontario Becomes a Participating Province" in the Canadian GST Monitor #247, April 2009. Ontario has released two Information Notices, as well as the Memorandum of Agreement between the Ontario and federal governments. For a discussion of both, please refer to CCH's Ontario Tax Reporter #566, July 2009.

In the Canada–Ontario Memorandum of Agreement, transitional relief has been suggested for individuals who are Ontario income tax filers. These benefits will be paid in June and December of 2010 and in June of 2011. The amount of the benefit is based on income levels in the previous year's tax return, and is contingent upon filing the returns. A periodic benefit of $100 is available to single individuals with an income up to $80,000, phased out up to an annual income of $82,000. For families, a periodic benefit of approximately $333 is available to families with income up to $160,000, phased out up to an annual income of $166,000.

Although we haven't yet seen proposed amendments to the Excise Tax Act ("ETA"), businesses need to start preparing to the greatest extent possible prior to July 2010. For the transitional rules, the best guidance available at this time are the ETA provisions applicable to harmonization in 1997 and that provided by Ontario.

The existing harmonization transitional rules are found in Division X of the ETA. Section 348 first defines the terms "announcement date", "implementation date", and "specified pre-implementation date". For example, as defined in section 348, "implementation date" for a participating province means April 1, 1997 in the cases of Nova Scotia, New Brunswick, or Newfoundland (as it was known at the time). The rules also refer to the date which is four months after implementation, referred to in this article as the "four-month date".

Following the definitions, the application rules in section 349 onward refer to the defined terms, and not specific dates. The legislation is written in such a fashion as to easily apply to other provinces as they harmonize, with minimal legislative amendments. Simple additions to the definitions, such as adding a reference to "July 1, 2010 in the case of Ontario", would make the transitional rules applicable to Ontario. Further, Ontario and its provincial rate of 8% could be simply added to the lists in Schedule VIII "Participating Provinces and Applicable Tax Rates". As already indicated by Ontario, we can expect to see some unique transitional and other rules. Readers are reminded that in the absence of proposed amendments to include Ontario in the ETA transitional provisions, we cannot be sure that the transitional rules will apply in the same manner as they did in 1997. However, the following discussion highlights some of the fundamental transitional rules provided in the ETA, described as if they apply to Ontario harmonization. For ease of discussion, the critical dates for Ontario harmonization are expected to be: announcement date-March 26, 2009; implementation date-July 1, 2010; specified pre-implementation date-May 1, 2010; and four-month date-November 1, 2010.

Services

In respect of services, the general rule would see the 13% HST rate apply to services performed with payment due on or after July 1, 2010. However, if 90% of the service is performed before July 2010, even if payment is due after implementation, the HST will not apply, and only the 5% GST will apply. If payment is due on or after November 1, 2010 (the four-month date), the amount will be subject to the 13% HST regardless of when the service was performed.

Where prepayments for services took place before the March 26, 2009 announcement date, HST will not apply regardless of when the services are performed. For services to be performed on or after July 1, 2010, with prepayment between March 26, 2009 and May 1, 2010 (the specified pre-implementation date), HST will apply to a prepayment from a "business" customer, but only the 5% GST will apply to prepayments from an individual (i.e., a consumer). For prepayments due from May 1 to July 1, 2010, the portion of the prepayment relating to services performed after July 1, 2010 will be subject to HST.

HST will not apply to freight transportation services where the service begins before July 1, 2010 and consideration is due or paid before November 2010.

Intangible Personal Property

The general rule for intangible personal property is based on when consideration is due-if before July 1, 2010, only the GST applies; but if after implementation, the HST will apply. The timing of transfer of the intangible property is irrelevant to this transitional rule. Special rules apply in respect of memberships, admissions, rents, royalties and similar payments.

Tangible Personal Property

The general rule for tangible personal property ("TPP") is based on the transfer of one of ownership or possession of the TPP-if before July 2010, HST will not apply; but if neither ownership or possession transfer until after implementation, HST will apply. Prepayments for TPP before March 26, 2009 are not subject to HST.

Parallel to the transitional provisions for services, if the TPP is transferred on or after July 1, 2010, with prepayment between March 26, 2009 and May 1, 2010, HST will apply to a prepayment from a "business" customer, but only the 5% GST will apply to prepayments from a consumer. Prepayments from May 1 to July 1, 2010, with transfer of the TPP on or after July 1, 2010 will be subject to HST. Special rules apply to subscriptions for newspapers and periodicals, continuous supplies through a pipeline or other conduit, and to budget purchase arrangements.

Under instalment contracts for the sale of TPP, if ownership or possession transfers before July 2010, HST will not apply regardless of the timing of the instalment payment. If the transfer is after implementation, any instalment payments after implementation will be subject to HST, and the prepayment transitional rules will apply to instalment payments before July 2010. For instalment payments between March 26, 2009 and May 1, 2010 HST will apply to "business" customers, but only the 5% GST will apply to instalment payments from a consumer. Instalment payments from May 1 to July 1, 2010, with transfer of the TPP on or after July 1, 2010, will be subject to HST.

In respect of a lease or licence of TPP, HST does not apply to consideration attributable to a lease period before July 2010, as long as the amount is due or paid by November 1, 2010. If the amount is due or paid after November 1, 2010, it will be subject to HST. For consideration attributable to a lease period after implementation, HST will apply regardless of the timing of the lease or licence payment. Slight differences to the rules may apply if the lease or licence is with a consumer, as opposed to a business.

In the case of the transitional rules as they were originally designed for the participating provinces of New Brunswick, Nova Scotia, and Newfoundland and Labrador, the short lead times between announcement, draft legislation, and implementation necessitated that with some sales the purchaser was required to self-assess the tax, while with others the supplier had sufficient notice to collect the tax. It is unknown whether the Ontario 2010 transitional rules will include such collection or self-assessment rules for the transitional period. Hence, the identity of who is to remit the tax is not commented upon here.

In respect of TPP, readers are cautioned to consider when the provincial sales tax ("PST") to be repealed July 1, 2010 in Ontario will apply. These rules have yet to be released by the province. It is expected that they will mirror the ETA rules, so that there will not be duplication of taxes on a supply of TPP during the transitional period.

Real Property

Where either ownership or possession of real property transfers before July 2010, HST will not apply. Hence, only one form of transfer need take place before implementation to avoid the full 13% rate. If both ownership and possession transfer after implementation, HST will apply. This includes the sale of new or substantially renovated homes.

Additional special rules apply in respect of the sale or rental of residential property. In this case, Ontario has provided proposed enhancements in respect of the provincial component of the ETA's new housing

rebate. Note1.The rebate is intended to ensure that new homes will not be subject to a higher tax compared to the PST currently embedded in the price of a new home. Therefore, the transitional rules must also address the transition to the rebate mechanism.

Another important transitional date has been provided by Ontario in Information Notice No. 2, released June 18, 2009. Where written agreements of sale have been struck on or before this date, the sale will be grandparented and not subject to HST if both possession and ownership transfer on or after July 1, 2010. Builders of such homes subject to the grandparenting rules will be required to pay a transitional tax adjustment ("TTA"), to account for the fact that the home will not attract HST and to an extent will also not have embedded PST. The TTA will be necessary where the grandparenting provisions apply and the builder's completion of the home straddles the July 1 implementation date. The TTA varies based on the extent of completion of the home before July 2010, ranging from 100% of the TTA (where the home is less than 10% complete before July 2010), through to zero (where the home is 90% or more complete at July 1, 2010). Similar transitional and grandparenting rules exist for rental homes, condominiums, and substantially renovated homes.

In recognition that homes constructed in full or part before July 2010 will have Ontario PST embedded in the cost, a PST transitional housing rebate will be available where the new home is also subject to the provincial component of HST. Two methods are available to estimate the embedded PST-based on the area of floor space (square metres) or the selling price. The rebate is calculated as a proportion of the estimated embedded PST in the home, based on the degree of completion of the home at July 1, 2010. This ranges from 100% of the embedded PST (where the home is 90% complete on July 1, 2010), through to zero (where the home is less than 10% complete at implementation). Since the rebates are part of the transitional rules, there are limited time frames in which rebates are available, generally limited to applications filed before July 1, 2014. Eligibility for the PST rebate does not restrict eligibility for the HST new housing rebate.

Readers are also referred to the 1997 article on HST transitional rules in the Canadian GST Monitor #100, January 1997. It is emphasized that the author by no means suggests that the dates and rules used herein will necessarily be the dates and rules finally enacted in respect of Ontario harmonization, but instead writes this article as a review of the fundamental transitional rules under the ETA.

Notes:

1.Ontario Ministry of Revenue Information Notice No. 2, June 2009, "Helping Homebuyers and the Housing Industry with an Enhanced New Housing Rebate, a New Rental Housing Rebate and Transitional Rules".