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The New OHST

OHST & Consumer Business

Wednesday November 4, 2009


Agenda

• Introduction
• Implementation Timeline
• OHST Impact - At-a-Glance
• Impact
• OHST Can Benefit Your Client
• The 3 C’s
• Resources

2 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Introduction – what is OHST?

• Effective July 1, 2010 Ontario Retail Sales Tax (“ORST”) will no longer apply in
most cases
• BC has made a similar announcement for the BC Social Services Tax

• The same day, the rate of GST applicable to goods and services supplied in
Ontario will increase from 5% to 13%
• Effective rates across Canada will be:
­ Ont, Nfld., NB, NS = 13%
­ BC = 12%
­ MB, Sask., Alb., Quebec & Territories = 5% (QST may apply at 7.5%)

• One single federal tax (OHST 13%), but two elements (5% federal and 8%
provincial)

3 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Introduction – why harmonize now?

• The economic impact – replacing non-recoverable ORST with a recoverable


tax will save Ontario business an estimated $5 billion

• The federal cash assistance – the federal government will pay the province
$4.3 billion to harmonize

• Agreement on point of sale rebates of the provincial portion for consumer items
(children’s clothing and footwear, children’s car/booster seats, diapers, books
and feminine hygiene products)

• Sales tax harmonization “packaged” as part of the overall economic stimulus


package

4 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
HST Can Benefit your Company!!

• There is an estimated $5 BILLION A YEAR of unrecoverable ORST paid by


businesses
• The elimination of the ORST and replacement with ITC-recoverable HST is
intended to remover this business cost
• WHAT IS YOUR SHARE OF THAT $5 BILLION PER YEAR SAVING?
• Opportunities
­ Reduce your costs
­ Give you a pricing advantage

5 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Introduction - how do OHST & ORST differ?

OHST ORST

• OHST = VAT @ 13% on supplies made in • ORST = Single stage tax on consumption in
Ontario Ontario (various rates, base rate is 8%)

• Tax at each stage of the sales chain with • Tax applies to the final consumer. If consumer is
ITC or rebates to registered purchasers a business, there is some cascading of tax
[BUT – THERE WILL BE SOME
RESTRICTIONS!]
• No exemptions on purchases, but full ITC • Exemptions for raw materials, machinery and
available on inputs equipment, CADCAMS, etc.

• All sales subject to tax, rate depends on


delivery location ost sales exempt through use of PEC’s

• Province does not pay GST (but will pay


OHST) ed’s do not pay ORST

6 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Restricted ITCs for the provincial component of OHST

• Restricted ITCs on the following expenses:


­ Energy, (e.g. electricity, natural gas, combustibles and steam) except where
purchased by farms or used in production/manufacturing of TPP
­ Telecommunication services, other than internet access or toll-free numbers
­ Road vehicles weighing less than 3,000 kilograms (parts and certain services) and fuel
to power these vehicles
­ Food, beverages and entertainment
• Affects:
­ Large businesses with taxable revenues over $10 million
­ All financial institutions
• Application:
­ First 5 years - full restrictions
­ Eligible ITCs phased back in over a 3 year period thereafter
• Compliance:
­ Claim upfront ITC, with offsetting recapture/repayment in same reporting period
­ Tracking and disclosure separately on GST return

© Deloitte & Touche LLP and affiliated entities


7 OHST & Consumer Business - November 4, 2009
Implementation timeline – what do we know so far?

Important dates
July 1, 2010
Implementation date
March 26, 2009
Announcement date?

Pre-implementation period Full implementation

Post implementation date –


likely end of August 2010
Release of draft legislation -
imminent

8 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
OHST Impact – at-a-glance

? Costs
Benefits
• Telecomm businesses
• Retail/wholesale
• New home • Professional services
• Health care professionals builders??? • Commercial real estate
• Residential rentals • Charities • Manufacturers
• Senior care residences • Non-Profits • Energy and Resources
• Banks • Hospitals • Freight services
• Insurers • Schools • Travel services
• Other financial • Universities
services providers • Municipalities
• Individual consumers

?
9 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Impact - how does OHST work vs. ORST?

• Consider the purchase of an office chair for $500 by a wholesaler

­ Under GST & ORST: Pay $500 + $25 GST + $40 ORST, less $25 ITC. Out of
pocket cost is $540
­ Under OHST: Pay $500 + $65 OHST, less $65 ITC. Out of pocket cost is $500
­ $40 less

• Consider the purchase of a legal service for $2,000 by a wholesaler

­ Under GST & ORST: Pay $2,000 + $100 GST, less $100 ITC. Out of pocket cost is
$2,000
­ Under OHST: Pay $2,000 + $260 OHST, less $260 ITC. Out of pocket cost is
$2,000
­ Same

10 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Impact - how does OHST work vs. ORST? (continued)

• Consider the purchase of a fixture by a supermarket

­ Under GST & ORST: Pay contractor $10,400 plus $520 GST, less ITC of $520. Out
of pocket cost is $10,400
­ Under OHST: Pay contractor $10,400 plus $1,352 OHST, less ITC of $1,352. Out of
pocket cost is $10,400
­ Same

• BUT! Assume the contractor’s charge was $5,000 labour and $5,400 ORST
included equipment

­ Under OHST – contractor recovers the $400 as an ITC! If the contractor passes on
this saving, pay contractor $10,000 plus $1,300 OHST, less ITC of $1,300. Out of
pocket cost is $10,000
­ $400 Saving!

11 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
IMPACT - How ORST builds into costs

S
E

CLIENT

E E

S
S

E “End-user” supplier E

S Supplier charging ORST

12 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
How Can OHST benefit your client!!

Where are the embedded ORST costs?

• Ontario vendors currently charge 8% ORST (or purchasers must self-assess


ORST)
• Ontario vendors (or their suppliers) pay ORST that is embedded in Ontario
vendors costs (e.g. supply-and-install example)
• In studies we have carried out to date, ORST can represent as much as 2% to
2.5% of certain expenses, such as supply and install contracts
I

13 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
How can OHST benefit your clients (or harm them)?

The Good
• A company passing on its OHST savings in enhanced pricing to its clients

The Bad
• The newly non-recoverable OHST expenses that were not subject to ORST -
such as energy costs. A supplier must decide whether or not to pass on these
increased costs to its clients.
• Suppliers who generally face restriction on ITC recovery, such as financial
institutions, not-for-profit agencies and small suppliers face a real additional
cost.

14 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
An Example of the OHST cost/benefit for a wholesaler

GST/ORST OHST
Taxable Expenses 25,000,000 25,000,000

Sales 40,000,000 40,000,000

Energy Cost* 400,000 400,000*

Telecom Cost 150,000 150,000

Tax Paid 1,250,000 3,250,000

ITC 1,250,000 3,206,000

ORST Paid (est. on 8% of costs**) 120,000 nil

Net sales tax cost 160,000** 44,000*

*If energy costs are higher, then the level of non-recoverable OHST will increase
** As the level of PST fluctuates, so does the net PST cost

15 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
What should your clients be aware of?

Compliance
Costs
Customers

16 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Compliance

• Transition rules – when to collect OHST on supplies that straddle July 1, 2010
‒ Services provided before July 1, 2010 but paid for after
‒ Pre-paid services delivered after June 2010
‒ Pre-paid goods delivered after June 2010, etc.
‒ Tax-in contracts, both sales and purchases – cost or windfall?

• Place of supply rules


‒ When should OHST be collected, failure to apply the correct rate could lead to
misstatement

• Systems
‒ Ensure correct tax rate is applied to supplies – need to collect tax on previously exempt
sales?
‒ Ensure correct ITC rates applied to purchases (allocation methods become much more
important), plus adjustments (credit notes, refunds, etc.) – TRACKING
‒ System and staff readiness – TRAINING?

17 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Compliance – Point of Sales Rebates

• Ontario customers will receive a point of sale rebate for


‒ Books
‒ Children’s clothing & footwear
‒ Children’s car seats and boosters
‒ Diapers
‒ Feminine hygiene products

• Ontario vendors collect 5% HST on these items

• Receipts must indicate that the item is subject to the rebate (i.e., 13% charged,
8% of the 13% is rebated, net tax collected 5%)

• Vendors must ensure their products qualify for the POS rebate (for example,
vendors must ensure sizing of clothing is accurate and supportable)

18 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Compliance – Credits and Refunds

• Vendors must ensure credits and refunds are handled correctly

• Issues include
‒ Credit notes – cash refund in July 2010 for purchase made in June 2010
‒ Store credit – credit for new product purchased in July 2010 using credit from
a product purchased in June 2009
‒ Returned items :
• For a full refund – GST and PST refunded
• Exchange for a more expensive item, 8% provincial component of HST applies to
the additional consideration
• Exchange for a cheaper item, purchaser can recover “overpaid” PST
• Vendors must ensure that their systems recognize that some sales are only subject
to 8% tax
‒ Coupons issued in June 2010 and redeemed in July 2010

19 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Cost

• Impact analysis
‒ Is OHST going to cost the organization or save it money – impact on
budgeting and forecasting on future needs
‒ Does OHST impact different areas of the organization uniformly or are
certain areas impacted more than others
‒ Bargaining with suppliers to receive suppliers’ cost savings

• Cash flow
‒ OHST applies to a much greater tax base, after June 2010, organizations
pay a much higher amount of tax to suppliers and must wait for a refund for 1
month to 1 year depending on filing regimes
‒ Special methods/quick methods may provide increased savings, but any
changes must be reviewed carefully

• ORST refunds/appeals disappear by 2012 not 2014?


‒ Ensure refund and recovery review is considered ASAP

20 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Customers

• Customers will want to negotiate ORST savings from your clients, as they will
from their suppliers.
• Be aware whether your customer is indifferent to OHST charge on sales
• Expect cash flow issues to be raised
• Make sure the right tax is charged and collected

21 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
How to take advantage of the OHST?

Increase market More aggressively price product by taking advantage of net


share ORST/OHST savings in underlying costs

Identify major suppliers from whom to extract harmonized


Decrease costs
sales tax savings from (on future spend)

Utilize tax cash flow “best practices” to optimize cash flow


Enhance cash flow
and enhance capital

Improve operational
Streamline tax process and controls
efficiency

Improve customer Avoid future relationship-damaging tax disputes


retention levels with customers

22 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
Resources

• People
‒ Carlos Lobo (905) 315-6775

• Reading Materials
‒ Search “Harmonized Sales Tax “ on the Deloitte.ca website

• Programs
‒ OHST Impact Analysis
• Brief questionnaire
• Financial impact analysis spreadsheet
• Minimal cost to client (circa $3,000)
• Report highlighting areas of concern
‒ Tailored Custom Review

23 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities
QUESTIONS?

24 OHST & Consumer Business - November 4, 2009 © Deloitte & Touche LLP and affiliated entities

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