November 25, 2009

Tax harmonization

Contractors want HST transition issues addressed

RICHARD GILBERT

staff writer

British Columbia and Ontario are following a similar path as the provinces create a single combined sales tax, but contractors and customers of construction services in B.C. have serious concerns about how the new tax will be implemented.

“The transitional rules affecting the construction industry are virtually the same for Ontario and B.C., but Ontario is ahead of the game by a few months,” said sales tax advisor Carl Beck.

“The Ontario government is releasing bits and pieces of information about transitional rules a few months ahead of B.C.”

Both governments plan to harmonize their provincial sales tax (PST) with the federal Goods and Services Tax (GST) effective July 1, 2010. In B.C. the Harmonized Sales Tax (HST) will create a single combined sales tax rate of 12 per cent and in Ontario the HST will be 13 per cent.

“Ontario has signed a contract with the federal government that this will happen, while B.C. is not so far along in terms of finalizing its relationship with the federal government,” said Beck.

“B.C. is rolling out the HST in a similar manner. For hints of what is coming next in B.C., just look at Ontario.”

The non-residential construction sector in B.C. and Ontario are concerned about the impact of the HST during transition, or contracts that are underway when HST comes in.

“We are trying to collect issues from our members to see what types of things they are dealing with,” said Abigail Fulton vice president of the B.C. Construction Association (BCCA).

“Mostly these issues revolve around transition, unless you are a homebuilder. We are in touch with the Ministry of Finance to discuss clarification and understanding around inventory and transitional issues. The provincial government is forwarding questions from our industry to the federal government.”

For example, service contracts in general will not be subject to HST if the work is 90 per cent or more complete by June 30, 2010.

However, construction contracts appear to be excluded from this general rule.

So, members of the BCCA are asking for clarification for the treatment of construction services contracts in the transition period.

In particular, they want to know if construction contracts that are less than three months will be HST-free, if the work is more than 90 per cent complete by June 30.

They would also like to know if contracts in excess of three months will have HST applicable on the costs to complete at July 1, 2010, even if the service is more than 90 per cent completed at that time.

Members are interested to know why construction contractors have been singled out and required to collect HST on prepayments received after Oct. 14, 2009 when every other type of contractor and supplier in B.C. will not collect HST until May 1, 2010 (i.e., on prepaid services to be performed after June 30, 2010).

Beck said school boards will suffer significantly unless provincial governments implement a rebate.

Ontario already plans to have a 92 per cent rebate for the education sector, but B.C.’s plan isn’t known.

This construction industry is arguing that if this type of rebate is not extended to all construction contractors, including commercial and public sector projects, double-taxation (i.e., PST and HST) will occur on a great deal of construction in progress at June 30, 2010.

“In B.C., the non-residential sector has not been given any relief and there is the possibility of double taxation during the transition period,” said Beck.

“Contractors pay PST on material. Contractors will purchase and be holding a lot of material that they plan to use and install. In the long-run, there are also cost increases for the customers or buyers of non-residential construction services, who don’t receive an HST refund.”

For example, Beck said universities and schools in B.C. have committed to $2.2 billion worth of construction projects over the next five years, which will take the form of new schools, renovations and seismic upgrades.

He estimated that the HST will add $111 million in cost to these committed projects.

The same issue extends to the construction of municipal infrastructure, schools, hospitals and other seismic upgrades.

For this reason, universities, school boards and the health sector are asking the provincial government in B.C. to implement a rebate mechanism, so they don’t end up paying more tax under the new tax regime.

“The fear is that the HST will have a huge cost impact on the health, education and non-profit sector, or wherever there is a GST exempt service or an organization that would get a tax refund,” explained Beck.

Print | Email | Comment