In the Prince Edward Island Budget tabled on April 18, 2012, the province announced that it intended to enter into negotiations with the federal government to harmonize its provincial sales tax with the GST, effective April 1, 2013. Under a harmonized sales tax (“HST”) regime, the HST rate in the province is proposed to be 14%, compared to the 15.5% effective sales tax rate currently applicable in the province. This will be achieved by setting the provincial component of the HST at 9%, representing a 1% reduction to the current Revenue Tax rate (and a 1.5% reduction to the effective sales tax rate, since Prince Edward Island’s 10% Revenue Tax is applied to the GST-included cost of taxable goods and services). Businesses registered for GST will automatically be registered for the HST.
On November 8, 2012, Prince Edward Island released two guides outlining the proposed general transitional rules that will govern the implementation of the HST and providing details on the temporary recapture of input tax credits requirements (“RITCs”) that will apply to certain supplies used in the province by large businesses. Included in the transitional rules guide is information on the winding down of the Revenue Tax. For the most part, the proposed transitional rules issued by Prince Edward Island mirror the transitional rules used by Ontario and British Columbia when each of those provinces eliminated their retail sales tax on July 1, 2010.
Proposed HST Transitional Rules
The proposed transitional rules will be based on the general timing of liability rules found in the Excise Tax Act (“ETA”). Under these rules, HST on the consideration for a supply is payable on the earlier of the day payment is made and the day the supplier issues an invoice in respect of that supply. The payment terms on an invoice are irrelevant. However, if there is an undue delay in issuing an invoice, HST becomes payable on the day the invoice would have been issued if there had been no delay. In addition, if either the date of an invoice or the payment date under a written agreement is earlier than the date on which the invoice is issued, HST becomes payable on the earlier date.
The Prince Edward Island transitional rules document also identifies a number of key dates for the transition to the HST in the province. These dates and their relevance to the transition are summarized below:
November 8, 2012 – Announcement Date
The day Prince Edward Island “officially” announced the proposed transitional rules for the implementation of HST in the province. Consideration for a supply made in the province that is paid or becomes due on or before this date will not generally be subject to HST. Self-assessment of the provincial component of the HST may be required by a public service body and certain other organizations on consideration that is paid or becomes due after November 8, 2012 and before February 1, 2013, where the actual supply is made on or after the implementation date.
February 1, 2013 – Pre-implementation Date
Consideration for a taxable supply made in the province that is paid or becomes due on or after this date will generally be subject to HST where the actual supply is made on or after the implementation date.
April 1, 2013 – Implementation Date
This is the date on which most supplies of goods and services made in Prince Edward Island will become subject to HST.
The proposed general transitional rules for the HST in Prince Edward Island for supplies of tangible personal property by way of sale, services and intangible personal property are outlined below.
Tangible Personal Property
HST will not apply to tangible personal property supplied by way of sale where the consideration is paid or has become payable prior to April 1, 2013, and the property is delivered and ownership has transferred prior to that date. Revenue Tax will apply to taxable tangible personal property supplied by way of sale, where the property is delivered and ownership has transferred on or before March 31, 2013.
Where the transfer of ownership and the delivery of tangible personal property takes place on or after April 1, 2013, HST will generally apply to the supply. This includes situations in which the consideration for the supply becomes due, or is paid without having become due, on or after February 1, 2013 and before April 1, 2013.
The potential application of HST on any prepayments made for tangible personal property is determined by the pre-implementation date, and not the implementation date. Payments made on or after February 1, 2013, where the delivery and transfer of ownership of the goods takes place on or after April 1, 2013, will be subject to HST.
Generally, the HST will apply to services supplied on or after April 1, 2013. However, the HST will not apply if all or substantially all (90% or more) of the service is completed before April 1, 2013. Conversely, Revenue Tax will apply to taxable services if all or substantially all of the service is completed prior to April 1, 2013.
Services performed on or after April 1, 2013, for which the consideration becomes due, or is paid, on or after February 1, 2013 and before April 1, 2013, would also be subject to HST. The HST paid on these services must be filed with the GST/HST return for the reporting period that includes April 1, 2013.
Where more than 10% of a service will be performed on or after April 1, 2013, and the consideration for that service becomes due or is paid after November 8, 2012, but before February 1, 2013, the supplier should charge GST. However, certain purchasers (e.g., financial institutions, charities and public service bodies) may have to self-assess the provincial component of the HST.
The HST will generally apply to consideration that becomes due, or is paid without having become due, on or after April 1, 2013 for supplies of intangible personal property by way of sale. For example, if a person purchases the right to reproduce certain portions of a book in 2013, and the consideration for those rights is due on April 15, 2013, HST will apply to the transaction.
On the other hand, HST will not apply where the consideration for a supply of intangible personal property by way of sale is paid or becomes due before April 1, 2013. To extend the above example, the same book rights paid for in March 2013 would not be subject to HST. Special rules will apply to memberships, admissions and passenger transportation passes.
Ryan will be releasing further details on the proposed HST transitional rules in the upcoming weeks. In the meantime, additional information about these rules may be obtained through the Ryan TaxDirect® line at 1-800-667-1600. Further information on Prince Edward Island’s proposed HST transitional rules can be found at:
PEI Guide - Proposed HST Transitional Rules
Temporary Recapture of Input Tax Credits Requirements
Prince Edward Island has also issued a guide to provide details on the temporary RITC requirements that will apply to certain supplies used by large businesses, including certain financial institutions. As in Ontario, these RITC requirements will be temporary and will only apply to the input tax credits (“ITCs”) claimed in respect of the Prince Edward Island portion (9%) of the HST.
Please note that, for purposes of the RITC requirements in Prince Edward Island, the recapture period will be July 1 to June 30 of a given year, which is identical to the recapture period currently being used in Ontario and British Columbia. However, the RITC requirements in Prince Edward Island will commence on the implementation date of April 1, 2013, meaning that recapture will only be required for three months in the initial recapture period (from July 1, 2012 to June 30, 2013).
In addition, organizations will be required to determine their status as a large business based on a calculation of the threshold amount (i.e., $10 million in taxable sales) for the last fiscal year that ended prior to July 1, 2012. It should be noted that there is a potential for error in the calculation of Prince Edward Island RITC requirements when these requirements are phased out starting in April 2018, due to the fact that the phase out periods do not match the recapture periods.The RITC requirements will generally apply to the following goods and services acquired for use in Prince Edward Island by a large business:
- road vehicles weighing less than 3,000 kilograms registered for use on public highways;
- motive fuel for specified road vehicles (other than diesel fuel);
- energy, other than energy used in the production of tangible personal property for sale or in qualified farming activities;
- telecommunication services, with the exception of internet access, web-hosting and toll-free services; and
- meal and entertainment expenses currently subject to the 50% Income Tax Act restrictions.
A large business is required to report the gross ITCs, which represent any ITCs and adjustments to be claimed, before taking into account any recapture, in a separate information field on Schedule B, “Calculation of Input Tax Credits” to the GST/HST NETFILE return. In addition, the amount of any RITCs must be reported in the appropriate information field – an additional field for Prince Edward Island RITCs will be added to line 1401 of Schedule B. The recapture must generally be reported in the period in which the ITCs first became available, and any failure to report RITCs must be corrected through an amended return.
In order to simplify compliance, certain proxies have been established to determine what portion of a specified supply acquired for use in an RITC province (i.e., Ontario or Prince Edward Island) is not subject to the recapture requirements in situations where it is difficult to determine, or the supplier has not provided sufficient information to determine, the RITC amount.
The following proxies will be available for large businesses:
- a production proxy to determine the portion of specified energy considered to be used in the production of tangible personal property for sale; and
- a specified telecommunications services proxy, for use where an invoice includes both specified telecommunication services and other services and/or goods.
Manufacturers wishing to use the production proxy in Prince Edward Island must file an election with the Canada Revenue Agency (“CRA”) before the due date of their GST/HST return for the first reporting period of a particular recapture period. It would appear that manufacturers intending to use a production proxy as of the implementation date must file the election with CRA before the due date for their GST/HST return that includes the month of April, 2013 (i.e., by May 31, 2013). The guide provides details on how to determine the factor applicable for the proxy calculation.
An option is also available for large businesses to help simplify compliance with the RITC requirements. A large business may generally make an election to use the estimation, installment and reconciliation approach to account for RITCs. This election must be filed with the CRA after the end of the registrant’s fiscal year, and would apply for at least one year. For more details on the Prince Edward Island RITC requirements, please refer to the guide below:
PEI Guide - RITC Requirements