Ontario manufacturers could benefit from tax harmonization, says PricewaterhouseCoopers

Monday March 30, 2009
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TORONTO, Ont. - The Ontario government's move to "harmonize" its sales tax system with the GST could be a step towards improving the productivity and competitiveness of Ontario's manufacturing sector, according to PricewaterhouseCoopers' (PwC) recently released Tax Memo.

In the document, the company shares how the Harmonized Sales Tax (HST) may affect the manufacturing industry and provides ways to prepare for the transition.

Effective July 1, 2010, there will be a single 13 percent HST in Ontario, instead of a five percent federal GST and an eight percent Ontario Retail Sales Tax (RST). This system has been in operation in Newfoundland and Labrador, Nova Scotia and New Brunswick since 1997.  

Most economists will view this decision as a positive move for Ontario manufacturers, says PwC. Although manufacturers are permitted to buy materials and production equipment exempt from RST, numerous purchases by manufacturers, from office equipment to delivery vehicles, are subject to RST - a significant cost. Under the HST, manufacturers will pay more tax on their purchases but, like the GST, they will be able to recover the HST by claiming input tax credits on their GST/HST returns. Therefore, the removal of the non-recoverable RST will lower costs and improve the competitiveness of Ontario manufacturers, explains PwC.

What should manufacturers be doing before the new HST system is introduced? Many of the systems businesses now use to comply with the GST can be used to handle the HST, with appropriate modifications, explains PwC. In addition, the transition to the HST will give rise to many of the same issues that arose with the GST rate reductions on July 1, 2006, and on January 1, 2008.    

Although the HST in Ontario will substantially mirror the GST, there are certain differences that will require systems modifications, says PwC. In particular, during the first eight years of the tax, large businesses (annual taxable sales in excess of $10 million) will face restrictions in claiming input tax credits for certain categories of expenditures, such as energy (other than for producing goods for sale), telecommunications, food, beverages and entertainment, and road vehicles weighing under 3,000 kg (including repairs, parts and fuel).   

Manufacturers outside of Ontario may also have to modify their systems to apply HST, rather than GST, on sales to Ontario customers.

Apart from systems issues, Ontario manufacturers should plan for the removal of the RST from prices and make purchase decisions accordingly. In particular, it may be desirable to postpone certain major purchases until after the implementation of the new tax, advises PwC. For example, delaying the purchase of new computer hardware and non-custom software (unless used directly in the manufacturing process) until after the RST is removed may result in tax savings.  

For more information, visit www.pwc.com/ca.

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