Some Ontario HST Transition Rules for Lawyers, Accountants & Other Service Providers
Ontario is merging the Ontario retail sales tax ("ORST") with Canada's federal goods and services tax (GST) on July 1, 2010, creating the harmonized sales tax (OHST). Many service providers in Ontario (such as lawyers and accountants), who do not currently charge, collect and remit ORST, have been asking me if their are any guidelines so that they can know when it is appropriate to collect OHST. Unfortunately, the answer is there isn't any good guidance provided by the Government of Ontario.
I am providing some general rules in this blog posting. However, a service provider's specific facts may be outside one of the situations I have considered anyone may need more specific guidance - for this I apologize in advance.
General Rule #1
Generally speaking, OHST will apply when services to be provided on or after July 1, 2010 are (1) billed or (2) the consideration is due or is paid after July 1, 2010.
Note: Timing of bills/payment and due date for consideration is important!
Tip 1: This means that June 30, 2010 bills for services should be rendered/mailed BEFORE July 1, 2010 and should be stated to be due "IMMEDIATELY". This will help avoid confusion with an auditor.
Exception to General Rule #1
If all or substantially all (that is 90% or more) of the services are performed BEFORE July 1, 2010, but the bill is sent after July 1, 2010, OHST should not apply.
Tip # 2: Accountants who are working on tax filings for June 30, 2010 may not have to charge OHST if 90% of the work is completed before July 1, 2010 and the filing in made in early July 2010 and is invoiced after the filing.
General Rule #2
If a contract for services is entered into BEFORE May 1, 2010 AND consideration for the services is made BEFORE May 1, 2010, then OHST will not apply even if the services are provided after July 1, 2010.
Tip#3: There are special GST/OHST rules for deposits, which are not considered to be a payment of consideration until the deposit monies are allocated to the services provided. As a result, collecting a large retainer prior to May 1, 2010 will not remove the obligation to charge, collect and remit OHST.
General Rule #3
If you enter into a contract to provide services BEFORE May 1, 2010 AND are paid AFTER MAY 1, 2010 and provide the services AFTER July 1, 2010, then HST would apply.
Tip #4: Long-standing clients dating back before the turn of the century will have to start paying OHST with respect to services provided after July 1, 2010 even if they overpay in May/June 2010.
General Rule #4:
If a service provider enters into a flat fee contract with a client AFTER May 1, 2010 AND if some services are performed BEFORE July 1, 2010 and some services are performed AFTER July 1, 2010, the service provider would have to allocate/prorate and account for the OHST of the consideration payable in respect of the services provided AFTER July 1, 2010.
Example: If a client pays for services in May 2010 and 50% of the services are provided before July 1, 2010 and 50% of the services are provided after July 1, 2010, then the client would pay OHST on the 50% of the consideration payable after July 1, 2010.
Tip: Send out bills for work-in-progress as of June 30, 2010 so that documentation that will eventually be viewed by a OHST auditor will show a clear billing date before July 1, 2010. A clean slate as at July 1, 2010 should make the audit less painful. As indicated above, "IMMEDIATE" payment terms solves statutory language issues.
Tip: Lawyers and accountants are used to maintaining detailed records of the amount of time spend by each employee who work's on a client file. Other service providers should consider maintaining such records because the maintenance of verifiable evidence will be critical in any OHST audit.
More Exceptions to General Rules or Nuances
1) Special transition rules apply to funeral and cemetery services, passenger transportation and freight transportation services.
2) If services relate to real property (e.g., construction of a home), the real property transition rules will likely apply. As a result, it may be important to ensure closings occur prior to July 1, 2010. Lawyers involved in the transfer of real property (e.g., a newly built home) where the documents are prepared and searches performed before July 1, 2010 may be able to rely on Rule 2 above, but would have to keep detailed records.
3) Certain businesses who are clients (e.g., listed financial institutions, charities engaged in exempt activities, schools, hospitals, municipalities and businesses using simplified accounting methods) may be required to self-assess and remit the OHST portion in respect of certain service contracted after October 14, 2009, but provided after July 1, 2010, such as (1) services are performed on or after July 1, 2010, or (ii) the services relate to goods that are delivered after July 1, 2010. Please be careful in advising clients that they will not need to pay OHST as their specific circumstances may just mean they do not have to pay the OHST to the service provider.
If you have any questions, please contact Cyndee Todgham Cherniak at 416-307-4168. We will be accepting credit card information to open OHST advisory files and answer OHST billing questions.
