Harmonized sales tax to have wide-ranging impact

The looming deadline of July 1 marks the implementation of the harmonized sales tax in Ontario that will bring big changes for law practices, both internally and externally.

Not only will the change affect how firms bill clients since they’ll be adding the provincial sales tax as well as the goods and services tax but, depending on their gross incomes, it will also have an impact on how they account for those taxes, what they remit, and what they’re able to retain, says Beverly Gilbert, a chartered accountant and the national leader of the commodity tax group at Borden Ladner Gervais LLP in Calgary.

The move, she notes, will also send a ripple effect through many areas of a practice, from corporate law to contracts to billings.

“There’s been a lot of discussion around how some companies, especially mutual fund companies, are thinking they might just relocate their head offices to Alberta, for example. The thinking is that they’ll just avoid the HST issue altogether.”

It could be a similar situation to the 1976 election of René Lévesque and the Parti Québécois that triggered the so-called “401 exodus” of corporate headquarters and anglophones from Montreal to Toronto.

It’s not a prudent strategy yet, she says, since the governing federal legislation won’t be unveiled until March at the earliest and may in fact also include a series of anti-avoidance clauses with substantial penalties.

It’s an area she suspects auditors for both the province and the federal government will be looking at closely in the months and weeks just before and after the July 1 deadline.

However, she suggests the corporate practitioners of large national firms such as BLG will likely be busy advising clients on different strategies and working with accountants to review the impact of the HST and what options they might have.

If the legislation is anything like that of Atlantic Canada, where governments introduced the HST some time ago, there are going to be rules around where the tax must be paid.

However, the switch in Ontario is going to be much more problematic and challenging than it was out east because there are so many more businesses operating and there’s so much more money flowing here.

Further complicating the issue is the digital age we live in. Law firms, like many large enterprises, pride themselves on the expertise of their people and the ability to bring virtual teams together on the spot as needs dictate.

This starts to create issues around tax liabilities when a multi-disciplinary team spread across the country works on a file and then looks to bill the client.

“If you are a firm that does business only in Alberta, for example, you don’t have to worry,” Gilbert says. “But if you do business in Ontario, things change even if you just have an agent there.”

Mitigating the tax obligation, regardless of where the head office is, rests on the question of where the firm provided the service. If, for example, the service was provided in Ontario, the HST is payable regardless of where the client is.

Even if only part of the service was supplied in Ontario, the HST could apply. In fact, the tax could be payable on the entire billing even if as little as 10 per cent of the work took place in Ontario.
Other considerations are around where negotiations took place. If they happened in Ontario, the HST is payable.

This is going to create some headaches, adjustments, and a rethinking of some business models, Gilbert says.
For an Alberta company that does almost all of its business in its home province but has a sales agent in Ontario, until now it has billed only the GST. After July 1, it will also have to levy the eight-per-cent provincial portion of the HST. In some cases, that could be the entire margin of its business.

“They may decide to close their Ontario office and dispense with the agent,” Gilbert suggests.
Those dealing with contracts, especially in areas like construction, are going to have to pay careful attention to the wording to determine when to apply the HST and to ensure they don’t forget it.

In fact, there will be some work required to review existing contracts that bridge July 1 to determine which party will be responsible for paying the additional tax, if anyone.

The issue is particularly problematic for businesses where the PST doesn’t apply now and for which contracts span a period before and after the July 1 change.

For the sole practitioner and small boutique firms, the change may not be as onerous since there are simple provisions for those with revenues under $200,000 that make tax remittance calculations fairly easy.
However, with higher revenues come more responsibilities, and there will be a layer of accountability for provincial tax revenues collected.

“Businesses will not be able to retain as much of the taxes collected as they used to,” Gilbert says.
Compounding the challenge is the fact that many businesses, including law firms, need lead time to make adjustments to their computer software, especially if they have older billing systems that are much more complicated to change.

“Some of the businesses we’ve talked to need to make changes in January because they’ll need that much time to make sure it works,” Gilbert says. “But we won’t see the legislation until March or April.”

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