British Columbia and Ontario are replacing their provincial sales taxes and the federal Goods and Services Tax (GST) with a single Harmonized Sales Tax (HST) from July 1, 2010. The federal legislation amending the Excise Tax Act received Royal Assent on December 15, 2009.
As part of the implementation, British Columbia and Ontario will impose restrictions on input tax credits for HST incurred on energy and a limited range of other inputs.
These restricted input tax credits are to be known as “specified input tax credits” (Specified ITCs). Specified ITCS will eliminate recovery of the provincial component of the HST, i.e., 7 of the 12 per cent HST in British Columbia and 8 of the 13 per cent HST in Ontario.
The restrictions on recoverability for inputs of energy should have the most significant impact as energy inputs are currently fully exempt under the existing provincial sales tax regimes. In entering into long-term design, build and operate agreements, consideration should be given to structuring supply of energy in an HST efficient manner.
Scope of the Restrictions
The restrictions on Specified ITCs for energy will include electricity, gas, combustibles and steam energy. However, the restrictions will not extend to HST incurred on energy used in producing goods for sale, nor for designing or producing equipment for producing goods for sale. Nonetheless, energy used for air conditioning, lighting, heating or ventilation of a production site will generally be subject to the restrictions.
The restriction on Specified ITCs for energy will not extend to motive fuels acquired to power a propulsion engine. However, restrictions on Specified ITCs will extend to HST on non-diesel fuel to power a vehicle weighing less than 3,000 kg that is required to be registered for use on public highways, as well as such road vehicles, their parts and servicing.
Other restrictions will include Specified ITCs for certain telecommunications services (other than internet access or toll-free numbers), as well as any on food, beverages and entertainment.
“Temporary” Restrictions
For now, the restrictions are intended to be temporary. After the first 5 years following implementation, Specified ITCs relating to restricted items are to be phased out over a three-year period. Accordingly, in the sixth year, the restrictions would be limited to 75 per cent of the Specified ITCs; in the seventh year, the restrictions would be limited to 50 per cent of the Specified ITCs; and in the eighth year, the restrictions would be limited 25 per cent of the Specified ITCs before being eliminated in the ninth year.
Only time will tell if these restrictions, in fact, will be lifted by future governments.
Definition of “Large Business”
The restrictions are only to apply to “large businesses”, though the threshold is fairly low.
A person who is registered for GST/HST purposes would be considered to be a “large business” if the total consideration for GST/HST taxable supplies made in Canada by the person, or by associates of the person, that was paid or payable in the previous fiscal year exceeds $10 million.
In calculating the $10 million threshold, amounts attributable to consideration for supplies of zero-rated exports, supplies made outside Canada through a permanent establishment in Canada, and supplies deemed to have been made for nil consideration pursuant to a joint election made by specified members of a qualifying group will be included.
However, amounts attributable to consideration for supplies of financial services, exempt supplies, supplies of real property that is capital property, and supplies of the goodwill of a business in situations where GST/HST is not payable on those supplies need not be included.
Further Guidance
Many of the details of these changes are expected to be in Regulations to the Excise Tax Act that will be released at a later date, as well as in administrative policy to be issued soon by the Canada Revenue Agency. Since these restrictions are similar to the restrictions on the recoverability of the Quebec Sales Tax, the administrative policy is expected to be similar to that already issued by the Ministère du Revenu du Québec.