Posted on 28 March 2013.
April 1, 2013 is fast approaching for BC’s transition back to the Provincial Sales Tax (PST) and PEI’s transition to HST harmonization. Both BC and PEI have recently released further information regarding these major tax changes.
On February 28, 2013, BC issued two regulations with respect to the new Provincial Sales Tax (PST) Act, namely, the Provincial Sales Tax Regulation and the Provincial Sales Tax Exemptions and Refunds Regulation. BC has divided the former Social Services Tax (SST) Regulations into two separate regulations, with one regulation addressing exemptions and refunds and the other regulation addressing more administrative rules.
The PST Exemption and Refund Regulation brings back into effect all the permanent PST exemptions that were in place under the SST. However, the exemptions are now more structured and organized than under the SST Regulations. Some of the PST exemptions that have been introduced in the PST Exemption and Refund Regulation are noted below, followed with a brief overview of some of the more significant exemptions and refunds provided in the Regulation.
- Production machinery and equipment;
- Tangible personal property (TPP) purchased for resale or lease;
- Custom software or custom-modified software;
- Services to TPP;
- Related party asset transfers;
- Children’s clothing and footwear;
- School supplies;
- Magazines, newspapers and books;
- Fuel, energy and energy conservation; and
- Gifts, prizes, draws and awards;
Production machinery and equipment (PME)
Purchases of PME are generally exempt if they are acquired by a qualifying person (includes a manufacturer, a software developer, an oil and gas producer, or a mine operator under certain conditions) and used primarily (more than 50%) and directly in the “qualifying part” of a manufacturing site. The qualifying part of a manufacturing site will generally include the point the raw material is received to the point at which the finished product is first stored or transported from the site.
Certain PME, such as pollution control and waste management equipment must meet a higher percentage of use to be PST exempt, by being used substantially (defined in the Regulation as meaning more than 90%) and directly by the qualifying person in a prescribed activity.
TPP purchased for resale or lease
If TPP is purchased for the purpose of resale or lease, there is a requirement for the vendor to show the purchaser’s PST registration number on the purchase document, e.g., invoice (pursuant to section 86 of the PST Regulation). However, if the purchaser is not registered for the BC PST, the purchaser must provide and the vendor must retain a declaration in a form that is acceptable to the Ministry.
Custom software or custom modified software
Most software, such as packaged or prewritten software programs, or the right to use such programs, is taxable. As BC PST is applied on the use of taxable software in BC, there is the potential for double taxation where there is proportional use of software in BC, as was the case under the SST regime.
The exemption for custom and custom modified software is generally the same as in the former SST. To qualify as exempt custom modified software, the cost of modifications must be at least double the price of the software in unmodified form and modifications must involve changes to source code. This requirement for exempt custom modified software has not changed under the new PST.
Services to TPP
“Related services” are defined in the PST Act, and are generally considered to be taxable services in respect of TPP, such as repair, adjustment, restoration, reconditioning, refinishing and maintenance services, and services provided to install goods. However, related services do not include services to install TPP that becomes an improvement to real property, employee services and most manufacturing services.
The Regulation provides several PST exemptions in respect of related services. Examples include services in respect of TPP purchased for resale or lease, motor vehicle modifications for individuals with disabilities, certain software services, services in relation to certain farming and fishing equipment purchased by qualifying purchasers, and many more.
Related Party Asset Transfers
These particular provisions generally refer to related parties as a corporation and its wholly owned subsidiaries (95% or more ownership). TPP, including software, may be transferred PST-free between related corporations, provided that either the PST or SST was previously paid on the TPP. The rules apply to both purchases and leases of TPP. In addition, there is a new exemption that would allow TPP to be transferred to a new corporation in exchange for shares, regardless of whether the new corporation is wholly owned.
Gifts, prizes, draws and awards
This is a new area of exemption as the new legislation includes specific provisions for the imposition and exemption of PST on gifts. In general, gifts between family members and gifts to charities are exempt, as long as non-recoverable PST has been paid, unless a specific exemption applies.
In addition to exemptions, the Regulation includes several refund provisions. There is a PST refund for charity-funded purchases of medical equipment by a health facility, e.g., a hospital. The refund provisions also include a refund or deduction for PST on bad debts and a refund of PST for a change of use where vehicles cease to be multijurisdictional vehicles.
The separate PST Regulation includes provisions that are more administrative in nature and include the following:
- Details on the determination of purchase price, particularly when property is bundled or brought into BC;
- Prescribed dates and manner for payment of the PST (which is generally the last day of the following month), the requirement for registrants with annual revenue exceeding $1.5 million to file their PST returns electronically, and vendor compensation for collecting the PST to a maximum of $198 per month;
- Tax collection, remittance, filing and documentation requirements, including the requirement for the purchaser’s PST registration number to be shown on the receipt, bill, invoice or written agreement (as previously noted);
- Records, including the types of records that must be retained and the retention period for these records; and
- Penalties and interest that can be levied for providing incorrect information or failure to remit or pay the PST.
Link to the BC PST Act and Regulations (scroll down to bottom of web page), as well as recently released forms, bulletins and notices:
BC PST Act, Regulations, Forms, Bulletins and Notices
Effective April 1, 2013, PEI will be a harmonized province with an HST rate of 14%. The PEI HST will have a common tax base with the current GST/HST, except for items eligible for point of sale rebates, and will include the recaptured input tax credit requirement on certain specified property and services. The following covers some transitional issues to assist you with winding down the PEI PST and implementing the PEI HST:
Winding down the PEI Revenue Tax (PST)
- Final PST return due on or before April 20, 2013.
- Refunds and rebates of PST will continue to be available until the existing legislated time limits for claiming them have expired or March 31, 2017, whichever is earlier.
- Assessment, objection, appeal and enforcement provisions will apply to transactions where the applicable limitation periods have not expired. Businesses will continue to be subject to PST audits for a period of 60 months after March 31, 2013.
- Vendors must obtain written permission from the Provincial Tax Commissioner before any records can be destroyed.
- All current PST vendor accounts will be closed on March 31, 2013 by the Taxation and Property Record Division. Vendors should not destroy their vendor registration certificates.
Returns and exchanges of goods
Where goods that were acquired prior to April 1, 2013, on which the PEI PST was paid, are returned after March 31, 2013 for goods of the same value, no adjustment to the tax is required.
- Where goods that were acquired prior to April 1, 2013, on which PEI PST was paid, are returned after March 31, 2013 for goods of a lesser value, the customer is entitled to a refund of the related PST.
- However, if the recipient exchanges the returned item for an item with a higher value after March 31, 2013, HST at 14% will apply to the additional consideration paid.
- All PEI government departments, agencies, boards, commissions and Crown Corporations will pay HST on their purchases of taxable property and services as of April 1, 2013.
- PEI has introduced a public services body rebate for the provincial component of the PEI HST. However, in general, only charities and qualifying non-profit organizations resident in PEI will be entitled to claim the 35% rebate on the PEI provincial component of the HST.
- A rebate is available for PST paid on construction materials that are held in inventory immediately prior to April 1, 2013 and, under a contract to repair or make an improvement to a residential complex on or after April 1, 2013.
Links to PEI harmonization information:
PEI Harmonization Information
GST/HST Notice 278: HST for PEI – General Transitional Rules for Personal Property and Services
GST/HST Notice 279: HST for PEI – Transitional Rules for Housing and Other Real Property
Effectively managing the change
The best way to effectively manage sales tax implementation changes is with a strong and well-executed plan, which includes thorough systems and transactions testing prior to and after the sales tax implementation change date. As part of the BC and PEI tax change process, organizations will need to consider the following issues:
- Registration with BC Ministry of Finance to collect the PST;
- Impact on sales and purchasing systems to incorporate sales tax rate changes taking into account the respective provincial transitional rules (and related issuance of credit notes), and changes to the tax status of supplies;
- Changes required to employee expense reporting systems to accommodate rate changes, reimbursements straddling the transitional period and changes to input tax credit calculations;
- IT and other internal resource requirements to make system changes on a timely basis, including training and communication to internal and external customers; and
- Review of document and contract wording and tax disclosure to incorporate the changes, including:
- Sales invoices, purchase orders, expense reports, purchase invoices, etc.
- Review new and existing contracts that straddle the implementation dates.
Effectively managing the BC and PEI tax changes on April 1, 2013, will help organizations ensure ongoing sales tax compliance and minimize potential exposures on audit.
For additional information, please contact our client support team at email@example.com or at 905 829-8877.