On February 25, 2010, the Federal Minister of Finance released details regarding proposed amendments to the HST legislation concerning:
• the “place of supply” rules for determining when a supply is made in a participating (HST) province and subject to the additional provincial component of the HST,
• self-assessment requirements where consumption, use, or subsequent supply crosses provincial borders or constitutes an imported taxable supply, and
• rebates for goods and services moved from a province with a higher provincial component of HST to a province with a lower or zero provincial component.
The accompanying news release indicated that comments on these proposed amendments should be submitted to Finance by March 31, 2010.
On February 26, 2010, the Canada Revenue Agency released GST/HST Technical Information Bulletin B-103, Place of Supply Rules for Determining Whether a Supply is Made in a Province, to explain the “place of supply” rules (with the proposed amendments announced in the February 25, 2010 release by the Federal Minister of Finance).
It is important to note that, as these proposed amendments are pending comment, the final regulations may vary and, as a result, the information set out below may change. Once the additional materials are published (particularly the three TIBS mentioned below), and the regulations are released, we will provide additional commentary regarding the potential impact of these changes. In the interim, the purpose of this article is to provide general information on the proposed amendments to the “place of supply” rules, based on the current version of the Finance news release and the related TIB B-103.
These amendments are proposed to apply to any supply made on or after May 1, 2010, and any supply made after February 25, 2010 and before May 1, 2010, if the consideration for the supply has not become due, and has not been paid, before May 1, 2010.
Place of Supply
Real Property (RP)
The proposed amendments indicate that no changes are contemplated to the current place of supply rules in connection with supplies of real property, by way of sale or by lease, license, or similar arrangement.
Tangible Personal Property (TPP)
Supplies of TPP by way of sale will continue to be made based on the current rules that refer to the location where the property is delivered or made available. However, an exception to the rules is provided in the case of TPP supplied on board passenger conveyances in the course of Canadian transportation: in that case, the province of supply will be determined by reference to the origin of the passenger transportation leg. As a result, for example:
• where a flight begins in Ontario, New Brunswick, Nova Scotia, or Newfoundland and Labrador and ends within Canada, the supply of TPP by means of the flight will be taxed at the HST rate of 13%,
• where a flight begins in British Columbia and ends within Canada, the supply of TPP by means of the flight will be taxed at the HST rate of 12%,
• where a flight begins in the remaining non-participating provinces (Alberta, Saskatchewan, Manitoba, Quebec, and Prince Edward Island) and ends within Canada, GST at a rate of 5% will apply to the supply of TPP (and QST may apply).
TPP supplied on board an international flight or voyage will continue to be deemed to occur outside Canada. (See also “Services”, below.)
Supplies of TPP otherwise than by way of sale will continue to follow the existing rules, with one exception for certain Ontario and BC railway rolling stock delivered by July 1, 2010, HST will not be applied until the next successive lease renewal agreement.
Intangible Personal Property (IPP)
As indicated in the February 25th release, significant changes are proposed to the rules for determining the place of supply of IPP. The current rules regarding substantial use and place of negotiation will be replaced by rules that require a determination of:
(i) whether the supply of IPP is related to a supply of real property, tangible personal property, or services to be performed, in which case special rules must be applied (more below);
(ii) whether the use of the IPP is restricted to being “primarily used” within the participating provinces; and,
(iii) if (ii) applies, whether the greater proportion of the restricted use of the IPP is limited to any one participating province.
For IPP where (i) to (iii) can’t be established, an additional hierarchy of rules must be applied that considers:
• for supplies with a value of <= $300 that are made in the physical presence of an individual, the physical location of the supplier’s permanent establishment or vending machine;
• the location of the recipient’s home address, business address, and/or an address in Canada most closely connected with the supply; and,
• if the foregoing analysis does not result in a single-province determination, a “default rule” will deem the place of supply to be made at the highest rate among the participating provinces where the Canadian rights can be used.
As mentioned above, special rules must be applied to determine the place of supply where the IPP is related to a supply of real property, tangible personal property, or services to be performed. Under the proposed rules:
• the province where IPP is related to a supply of real property will be determined based on the location of the real property or will default to the highest HST rate among the participating provinces connected with the supply;
• the province where IPP is related to a supply of tangible personal property will be determined based on the location of the TPP or will default to the highest HST rate for the participating provinces connected with the supply;
• the province where IPP is related to services to be performed will be determined based on the province where the services are to be performed and, if no single province is involved, the general rules for services must be applied (more below).
Services
The current rules regarding “substantial use” and “place of negotiation” will no longer apply to determine the province where services are deemed to be supplied. A new “general rule” is proposed that determines place of supply by reference first to the recipient’s address(es) obtained or connected with the supply, then to the extent to which the service is performed in the underlying provinces, and, if the former cannot be applied, defaulting to the province with the highest rate of HST involved. The proposed amendments contain a number of special rules for determining the place of supply which must be applied before using the general rule.
The proposed special rules relate to supplies of:
• personal services: generally, takes place where the individual is located, when 90% or more of the service is performed in the presence of the individual;
• “location-specific” events: determined based on where primarily performed;
• repairs/maintenance to TPP: no change from current rules: place of supply follows the delivery location of the goods after the services are performed;
• photo-related goods: deemed supplied in the province where the photo-related goods are delivered;
• litigation: once litigation has commenced, the services are deemed performed in the province of litigation; otherwise, general rules for services apply;
• telecommunications: new rule for 1-900 and 1-976 services based on location where call originates, remaining telecommunication place of supply rules stay the same;
• certain trustee services: based on address of annuitant;
• computer-related services and internet access: current rules regarding services locations and/or mailing address(es) of final recipient(s) will continue to apply;
• passenger transportation services:
o current rules will continue to apply to the passenger transportation service, as well as baggage services, child supervision services, and services related to the ticket, voucher or reservation;
o services wholly performed on board a conveyance will follow the rule mentioned above for TPP, i.e., when supplied on international flights, HST will not apply, and when supplied on Canadian flights, will be taxed based on the origin of the transportation leg;
• air navigation services: for transportation within Canada, are deemed to be made in the province where the transportation leg originates;
• customs brokerage services
o related to commercial goods are supplied in the province of release,
o related to non-commercial goods are taxed based on the delivery address of the related goods.
There are further special rules for:
• services related to real property: determined by reference to the primary location of the real property and, if in the participating provinces, to the province with the greatest proportion of the real property; and,
• services related to tangible personal property: determined by reference to the location of the TPP while the services are being performed and, if in the participating provinces, to the province where the greatest proportion of services are performed.
As mentioned above, the proposed new general rule for services applies only after all of the foregoing “special rules” have been considered. Under the proposed new general rule for services, use the following sequence of general rules to establish the deemed place of supply:
• Where the supplier obtains an address for the recipient, or an address closely related to the supply, place of supply is determined based on the address;
• If no address is obtained, and the Canadian element of the services is performed more than 50% in the participating provinces, the place of supply is the participating province where the greater proportion is performed;
• If neither participating province has a greater proportion, or all have equal proportions, or it’s not possible to determine proportions, apply HST at the highest rate of all relevant participating provinces.
Additional details can be found in Finance News Release 2010-14 and related documents located on the Ministry of Finance website at http://www.fin.gc.ca/n10/10-014-eng.asp . The related CRA technical information bulletin B-103 “Place of supply rules for determining whether a supply is made in a province” can be found on the CRA’s website at http://www.cra-arc.gc.ca/E/pub/gm/b-103/b-103-e.pdf
We expect that further details regarding the proposed HST transition will continue to be released by the Ministry of Finance and CRA as well as the provinces of British Columbia and Ontario over the coming weeks. In particular, the CRA has indicated that we can anticipate release of the following technical information bulletins in due course:
• Harmonized Sales Tax – Self-Assessment of the Provincial component of the HST
• Harmonized Sales Tax – Rebates of the Provincial component of the HST
• Harmonized Sales Tax – Imported Taxable Supplies.
Please continue to monitor our website at http://definitiveconsultingservices.com/newshub/ for further information as those publications become available.
