Food manufacturers may benefit from Ontario’s plans to harmonize its 8% provincial sales tax (PST) with the 5% federal GST to create a 13% harmonized sales tax (HST), effective July 1, 2010.
The HST will generally employ the same rules and tax base as the GST. Thus, food products currently subject to 5% GST will be subject to 13% HST when sold in Ontario. Food products that are currently zero-rated (i.e., taxable at 0%) will retain their zero-rated status. Input tax credits (ITCs) at 13% will be available on expenses incurred in manufacturers commercial activities, with certain restrictions.
On the positive side, the HST system will:
• Eliminate unrecoverable PST relating to non-manufacturing expenses such as fixed assets, non-custom software, hardware and goods taken for the manufacturer’s own use.
• Ease the administrative burden of PST— no more purchase exemption certificates, one registration number, one tax return and no requirement to self–assess tax on goods brought into Ontario.
However, potential costs may arise:
• Large manufacturers (annual taxable sales exceeding $10 million) will be precluded from recovering the 8% provincial component of the HST on some inputs such as energy used in non-manufacturing activities, telecommunication services (other than internet and toll-free numbers), vehicles (less than 3,000 kg) and parts, vehicle fuel, and food, beverages and entertainment. Ontario says it will phase out this restriction after five years.
• Manufacturers’ cash flow may be reduced by the 8% tax increase on many purchases not currently subject to PST, though this effect may be mitigated by the 13% HST charged on sales of taxable food products.
• System changes will be required to administer HST and the ITC restrictions, where they apply.
To get ready for Ontario’s new HST, manufacturers need to think about these and other issues now as they plan their financial budgets, capital expenditures and human resource allocations for 2010.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.