A checklist for payroll professionals who will be processing tax in the province
Just when payroll professionals think they have the systems set up to pay the right amount of sales tax at the right time to the right governmental authority, the rules undergo another change. Effective April 1, 2013, the 12 per cent federal harmonized sales tax (HST) will no longer apply on taxable supplies made in British Columbia.
Starting April 1, 2013, the five per cent goods and services tax (GST) will apply on taxable supplies made in B.C. and will be remittable to the Receiver General of Canada.
In addition, B.C.’s provincial sales tax (PST) will be reimplemented effective April 1, 2013, at a general PST rate of seven per cent and will be remittable to the government of B.C.
Determine if changes are required to payroll systems
Employees: Every payroll department should review their payroll systems. If 100 per cent of the payments are made to employees, then 100 per cent of the payments will not be subject to either GST or PST. This is because supplies in the employer/employee context are not services for the purposes of the Excise Tax Act (ETA) and, therefore, are not taxable supplies.
The Canada Revenue Agency (CRA) has policies on when a person is considered to be an employee and when a person is considered to be a consultant or independent contractor. The key case is Wiebe Door Services Ltd. v. Canada, which established the following criteria to be used:
•the extent to which the employer controls how the work is done
•the risk of profit or loss
•the ownership of tools
•the extent to which the work performed is an integral part of the process in the employer’s business
Subsequent cases have elaborated upon these points and the facts relevant to each employee/consultant should be reviewed separately.
Non-employees/consultants: Many payroll departments manage the payments made to non-employee consultants. If any payments are made to consultants (non-employees) and the payroll department currently pays the consultant 12 per cent HST because the place of supply of the consulting services is in B.C., it will be necessary to ensure an adjustment is made so the consultant only receives five per cent GST and an analysis is conducted as to whether the consultant is required to collect PST.
If the payroll department continues to pay the consultant 12 per cent HST, the consultant will have to remit the amount, but the payor may not be entitled to recover the extra seven per cent by way of an input tax credit. The error may be an unrecoverable cost if the CRA takes the position the seven per cent represents additional consideration for the supply and not PVAT (B.C.’s HST).
Whether the consultant must charge, and the payroll department must pay, PST will depend on the type of service being performed and whether the consultant is required to be registered for PST purposes. Under the old B.C. PST regime, most services were not subject to PST. Only “taxable services” were subject to PST. Certain services were listed within the statutory definition of “taxable services” and were subject to PST. The statutory provisions have not been released and it is not possible to provide a complete list at the time of writing.
General HST to GST transitional rule:
A general transition/timing rule has not been announced relating to when GST/HST should be charged/paid and when GST should be charged/paid. What we do know is that pursuant to subsection 168(1) of the ETA, GST/HST generally becomes payable on the earlier of the day consideration is paid and the day consideration becomes due. The date consideration becomes due is generally the date indicated on an invoice. Where the tax is paid or payable before April 1, 2013, HST will apply (when applicable). Where the tax is paid or payable on or after April 1, 2013, GST will apply (when applicable). For example: If an amount is paid to a consultant on a monthly basis and the date of the payment is March 31, 2013, HST will apply regardless of whether the payment is for services performed in March or to be performed in April.
It is unknown if there will be transition rules that require the payment collection of HST where services are performed before April 1, 2013 and billed after April 1, 2013. When HST was implemented, there were special transition rules to prevent manipulation of tax consequences. It can be expected there will be similar rules with deharmonization.
Bundles of services: It has not been so long since harmonization that we forget the problems that arose under the old PST regime in respect of bundled goods and services. It is possible a consultant will supply PST-taxable and non-taxable/exempt supplies for a single consideration.
The general rule used to be that PST should only be charged and collected on the fair market value of the taxable items. However, if the price is bundled so a single consideration is charged and the supplies are not separately identified, tax avoidance can occur. There is a likelihood B.C. tax authorities will assess PST on the bundled price. A similar issue arises in GST where taxable and exempt or zero-rated supplies are bundled together. As a result, special care will be required if a consultant provides various services with different tax consequences.
Check to see if records of purchase exemption certificates need to be maintained
Under the old PST regime, companies maintained records of purchase exemption certificates when they purchased taxable goods and services for the purposes of resale. With respect to the PST, it may be the consulting services are supplied for the purposes of resupply (that is, the entity with the payroll department is reselling the services to one of their clients). In such situations, the consultant would not charge PST and would request a purchase exemption certificate to justify not charging PST.
Ensure input tax credits are not over-claimed
The payroll department also must make adjustments to ensure they do not over claim input tax credits on payments to consultants (non-employees). If the computerized system automatically calculates an input tax credit at the 12 per cent HST rate (that is by way of a formula applied to the sales price), it will be necessary to reduce the input tax credit rate from 12 per cent to five per cent. There are no input tax credits or recovery of PST amounts paid.
Ensure GST is collected on disbursements
Most disbursements charged by consultants are currently subject to HST. The applicable rate will decrease to five per cent GST. If the payroll accounting has separate ledger accounts for services and disbursements, adjustments will have to be made to the separate ledger accounts.
Check PST status of supplies of goods
Some invoices from consultants will include deliverables that are goods and computer programs. Some deliverables will be subject to PST.
Check transition rules for employee benefit plans
Employee benefit plans will be affected by the transition rules because many benefits (such as medical, dental and life insurance) are not subject to HST. Some of these benefits will be subject to PST. To prepare for the transition, the payroll department should make an itemized list of the employee benefits and the HST tax status of those benefits. Where benefits are currently subject to HST, they should be subject to GST. Where benefits are not currently subject to HST, they should not be subject to GST. An analysis will be required as to which benefits will be subject to PST.
Check transition rules for employee pension plans
The area of employee pension plans is complicated as a result of legislative proposals and changes that are unrelated to harmonization. If an employer with an employee pension plan is located in B.C. or has employees in B.C., they will need to look out for rules and administrative policies governing deharmonization. The same businesses may be addressing other changes to existing calculations as the result of Quebec’s and Prince Edward Island’s decisions to harmonize.
Many other action items will be added to the checklist as the legislation is published and the administrative policies are prepared. It can be anticipated the governmental authorities may release information with little time left before the April 1, 2013, date. It would be prudent to review one’s payroll systems and make a more detailed checklist and take steps now where possible in order to minimize complications and stress in early 2013.
For more information see:
Wiebe Door Services Ltd. v. Minister of National Revenue, [1986] 3 F.C. 553 (F.C.A.),
Cyndee Todgham Cherniak is a sales tax lawyer affiliated with McMillan LLP and publisher of www.thehstblog.com. She can be reached at (416) 389-8999.
