Nova Scotia HST Rate Reduction – Gear Up for the Transition

Nova Scotia HST Rate Reduction – Gear Up for the Transition

The Government of Nova Scotia will lower its Harmonized Sales Tax (HST) by 1%, effective April 1, 2025. Currently, Nova Scotia’s HST rate is 15%, comprised of a 5% federal component and a 10% provincial component. With this change, the provincial component will be reduced from 10% to 9%. This move is part of Nova Scotia’s broader efforts to reduce the tax burden on its residents and make life more affordable.

While a tax rate reduction is generally welcomed by consumers, it introduces complexity for businesses, which must adjust their accounting systems and navigate the transition to the new rate. Transitional rules have been put in place to determine the correct sales tax rate for taxable supplies in Nova Scotia that might straddle the implementation date. These provisions are also designed to address other complexities, such as handling ongoing contracts and timing issues associated with various types of supplies. A thorough understanding of these rules is essential to avoid creating sales tax liability exposure.

General Transitional Rule 

The general transitional rule is simple and intuitive, as it is based on the general timing of liability rules in the Excise Tax Act (ETA). In most instances, the HST rate will be determined based on when the tax on the consideration for a taxable supply becomes payable. Under these rules, HST on the consideration for a supply is generally payable on the earlier of the day payment is made or the day the consideration becomes due. Consequently, HST at 15% will apply where the tax is paid or becomes payable on or before March 31, 2025, and the new 14% rate will apply where HST becomes payable on or after April 1, 2025.

Under the ETA, the consideration for a taxable supply (or any part of that consideration) generally becomes due on the earliest of the following:

  • Date an invoice is first issued for the supply
  • Invoice date
  • Date the invoice would have been issued, had there been no undue delay
  • Date that the recipient of the supply is required to pay the consideration under a written agreement

Organizations should also be aware that, for GST/HST purposes, payment terms offered to a purchaser and the accounting treatment of a transaction typically do not affect when the consideration becomes due. In practice, GST/HST generally becomes payable on the earlier of the day payment is made or the date an invoice is issued. 

Tangible Personal Property 

The general transitional rule, as noted above, applies to supplies of tangible personal property, and the applicable tax rate is typically determined based on when the consideration is paid or becomes payable. The 14% HST rate will apply where the consideration becomes due after March 31, 2025, provided it is not paid before April 1, 2025. Conversely, if the consideration becomes due or is paid on or before March 31, 2025, HST at the current rate of 15% will apply.

For example, if an invoice is issued for the sale of tumblers on March 20, 2025, and delivery of the tumblers is completed on April 5, 2025, HST at 15% should be charged since the consideration becomes due when the invoice is issued (i.e., March 20), irrespective of the April delivery date.

Services or Intangible Personal Property 

The general transitional rule also applies to supplies of services and intangible personal property, and HST at the reduced rate of 14% will apply to the extent the consideration becomes due and is paid on or after the effective date of the rate change (i.e., April 1, 2025).

For example, if engineering services in Halifax are provided in May 2025 but billed to a customer in March, HST at 15% would apply since the consideration becomes due in March, even though the work will be performed in May.

In a similar scenario, if the engineering company receives a partial payment for its services in March, with the remaining consideration paid in May for services to be performed and billed in May, 15% HST would apply to the consideration paid in March, and 14% HST would apply to the consideration due in May, despite the fact that all the services will be performed and billed in May.

Real Property

A taxable supply of real property generally includes the sale of real estate, excluding used residential property and certain personal-use property sold by individuals. Unlike leases, licenses, or similar arrangements, GST/HST on the sale of taxable real property is typically self-assessed and remitted by the recipient of the supply, rather than collected by the seller. This applies when the purchaser is registered for GST/HST or the seller is a non-resident of Canada.

Under the transitional rules for this HST rate change, only sales of taxable real property for which both ownership and possession are transferred on or after April 1, 2025, will benefit from the reduced rate. Taxable sales of real property where either ownership or possession is transferred before the effective date of the rate change will be subject to 15% HST.

To highlight how this transitional rule operates, consider the construction of a commercial building to be sold, which is completed in March 2025, but ownership and possession of the building do not transfer to the purchaser until April. In this case, HST at the new rate of 14% would apply. However, if either possession or ownership is transferred before April 1, 2025, HST at the old rate of 15% would apply.

For leases of real property, HST at 14% will apply to the consideration for a lease interval that becomes due after March 31, 2025, and is not paid before April 1, 2025.

Under the ETA, special self-supply rules may apply to residential real property builders, deeming a supply of the property to have taken place at a certain time, such as where a real estate developer constructs a residential property and later rents out units. For a deemed taxable supply of real property by way of sale occurring before April 1, 2025, HST at 15% will apply, whereas deemed supplies on or after that date will be subject to HST at 14%.

Financial Institutions 

Selected Listed Financial Institutions (SLFIs) are required to use a prescribed formula called the Special Attribution Method (SAM) to calculate their HST liability. Special transitional rules have been put in place to require most SLFIs to determine the number of days in the reporting period falling before and after the effective date of the HST rate change. They must also determine the GST or federal part of the HST that is payable or paid before becoming payable in the reporting period before and after the effective date of the rate change to calculate their HST liability under the SAM.   

Pension Plans 

The ETA has special provisions for pension plans that deem a participating employer to have made a taxable supply to the pension plan if the employer either acquires property or services to be supplied to the pension plan or uses employer resources during pension activities.

Where an employer is deemed to make a taxable supply to a pension entity or a master pension entity on the last day of the fiscal year that includes April 1, 2025, as a result of the acquisition or importation of property or a service to be supplied to that entity, the HST rate will be determined based on when the supply is intended to be made. On the other hand, where the deemed supply results from employer resources used in pension activities, the applicable HST rate will be determined using apportionment based on the number of days in the employer’s fiscal year that fall before and after April 1, 2025.

Similarly, pension entities will calculate the Nova Scotia portion of any pension entity rebate for a claim period that includes the effective date of the HST rate change, based on the number of days in the claim period before and after that date.

Taxable Benefits 

The ETA has provisions that deem a supply to have taken place in various situations involving taxable benefits, employee allowances, and reimbursements. For example, an employer is deemed to have collected GST/HST on the provision of certain taxable benefits to employees and shareholders. Prescribed remittance rates and factors are used to determine the tax deemed collected, which must be remitted annually on an employer’s GST/HST return.

Because of the Nova Scotia HST rate reduction, changes to the taxable benefit GST/HST remittance rates and factors will be phased in over two taxation years as follows:

  • For automobile operating expense benefits, the current Nova Scotia HST remittance rate of 11% will be reduced to 10.25% for the 2025 tax year and to 10% for subsequent years.
  • For other employee and shareholder benefits, the current Nova Scotia HST remittance factor of 14/114 will be reduced to 13.25/113.25 for the 2025 tax year and to 13/113 for subsequent years.

Employee Allowances and Reimbursements 

Where a payment in the form of a reimbursement is made by an employer to an employee for amounts spent by the employee on behalf of the employer’s business, the ETA deems the employer to have paid the tax paid by the employee. Accordingly, the employer may be eligible to recover the GST/HST paid by the employee, subject to meeting documentary requirements, unless it has opted to use a prescribed simplified factor to recover the tax.

Where input tax credits (ITCs) are claimed on employee expense reimbursements using the actual method, the actual HST charged on the invoice should be claimed. However, where simplified factors are used by an organization to claim ITCs on employee reimbursements, the current factor of 14/114 (subject to a 50% reduction for meals and entertainment expenses) may be used if all or substantially all (90% or more) of the supplies for which the reimbursement is made are taxable supplies acquired in Nova Scotia, and the reimbursement is paid before April 1, 2025. For reimbursements paid on or after April 1, 2025, the new factor will be 13/113.

Unlike an employee reimbursement, an allowance is a payment an employee receives without having to account for its use to the employer. Under the legislation, an employer is deemed to have paid tax on the underlying expense for a reasonable allowance paid to an employee, provided 90% or more of the allowance relates to taxable supplies. Factors (different from the simplified factors noted above) are used to determine the amount of GST/HST deemed included in an eligible allowance.

Currently, an employer is deemed to have paid tax equal to 15/115 of an allowance paid to an employee, where 90% or more of the allowance relates to taxable supplies made in Nova Scotia. This factor may be used to claim ITCs on eligible allowances paid before April 1, 2025. For allowances paid on or after that date, the factor will be 14/114. Note that allowances for meals and entertainment expenses may also be subject to a 50% ITC restriction.

Accounting Areas Requiring Attention

In addition to understanding the transitional rules for an HST rate change, businesses must identify and make any required changes to their accounting systems and processes. Key areas of focus should include billing systems, accounts receivable and payable, purchase orders, taxable benefits, and employee expense reimbursements and allowances. 

Updating billing or invoicing systems (including point-of-sale terminals) before the effective date of the rate change is critical to ensure that the correct rate of HST is charged and collected. Retailers and businesses selling to organizations that are not eligible for ITCs should take extra care to avoid overcharging customers after April 1, 2025.

Modifying tax tables and tax codes in accounts receivable and payable systems is another critical consideration. Ignoring or missing required tax code or table updates can result in the accumulation of sales tax liability exposure, especially if ITCs or rebates are claimed based on the previous tax rate. If this situation goes unnoticed, it could lead to significant tax liability when discovered under audit.

Organizations may also need to review purchase orders, particularly where these documents drive the tax status of transactions throughout the accounting system. In such cases, the organization should update the tax rate used on purchase orders for transactions after the effective date of the rate change according to the transitional rules. Temporary procedures for manual adjustments, reissuing purchase orders, or special approvals may also be necessary to address potential issues after the HST rate change takes effect.

As mentioned earlier, certain prescribed rates and factors will change because of the HST rate reduction, and organizations should ensure systems or processes dealing with employee expense reimbursements, allowances, or taxable benefits are adjusted to avoid incorrect ITC claims or tax remittances related to these transactions. 

Final Thoughts

Nova Scotia announced this HST rate reduction well in advance of the implementation date, allowing ample time for businesses to prepare. However, in Ryan’s experience, there is rarely enough time to fully assess and address every potential implication of a GST/HST rate change because of competing priorities for an organization’s resources. 

It will be interesting to see whether other Atlantic provinces will follow suit and reduce their provincial HST rates or maintain the status quo. There is certainly precedence for this, as New Brunswick, Prince Edward Island, and Newfoundland and Labrador all raised their HST rates to 15% following Nova Scotia’s lead. It will not be surprising if the other Atlantic provinces join the rate reduction initiative. Fortunately, recent experience in successfully navigating the Nova Scotia HST rate reduction should give your organization an advantage in managing any future HST rate changes.

Manpreet Kaur
Senior Tax Advisor, Client Support Services
manpreet.kaur@ryan.com