Ohst And Consumer Business

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

6

ORST

• OHST = VAT @ 13% on supplies made in Ontario

• ORST = Single stage tax on consumption in Ontario (various rates, base rate is 8%)

• Tax at each stage of the sales chain with ITC or rebates to registered purchasers [BUT – THERE WILL BE SOME RESTRICTIONS!]

• Tax applies to the final consumer. If consumer is a business, there is some cascading of tax

• No exemptions on purchases, but full ITC available on inputs

• Exemptions for raw materials, machinery and 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

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

7

OHST & Consumer Business - November 4, 2009

© Deloitte & Touche LLP and affiliated entities

Implementation timeline – what do we know so far? Important dates July 1, 2010 Implementation date March 26, 2009 Announcement date?

Pre-implementation period

Release of draft legislation imminent

8

OHST & Consumer Business - November 4, 2009

Full implementation

Post implementation date – likely end of August 2010

© Deloitte & Touche LLP and affiliated entities

OHST Impact – at-a-glance

? Costs

Benefits

• Telecomm businesses • Retail/wholesale • Professional services

• Residential rentals

• New home builders??? • Charities

• Senior care residences

• Non-Profits

• Banks

• Hospitals

• Energy and Resources

• Insurers

• Schools

• Other financial services providers • Individual consumers

• Universities

• Health care professionals

• Commercial real estate • Manufacturers • Freight services • Travel services

• Municipalities

? 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

E S

E S CLIENT E S

E

S S

12

E

“End-user” supplier

S

Supplier charging ORST

OHST & Consumer Business - November 4, 2009

E

© 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 Taxable Expenses

25,000,000

Sales

40,000,000

OHST 25,000,000 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**) Net sales tax cost

120,000 160,000**

nil 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?

22

Increase market share

More aggressively price product by taking advantage of net ORST/OHST savings in underlying costs

Decrease costs

Identify major suppliers from whom to extract harmonized sales tax savings from (on future spend)

Enhance cash flow

Utilize tax cash flow “best practices” to optimize cash flow and enhance capital

Improve operational efficiency

Streamline tax process and controls

Improve customer retention levels

Avoid future relationship-damaging tax disputes with customers

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