1. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. British Columbia Harmonized Sales Tax Update BC Building Envelope Council Presented by Darren Taylor, CA Vancouver May 2010

2. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Agenda Implementation of HST Real property transactions Transitional rules Recaptured Input Tax Credits (RITCs) Mandatory e-filing Compliance issues Wrap-up Residential property transactions 01 02 03 04 05 06 07 08 2

3. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. 01 Implementation of HST 3

4. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Overview Implementation of HST BC HST legislation passed April 29, 2010 –Transitional rules become effective May 1, 2010 As of July 1, 2010, 5% GST and 7% PST will be replaced with the 12% HST –Realignment of PST to the existing GST rules, with new 12% rate applying Provincial Sales Tax ("PST") legislation effectively winds down as of June 30, 2010 –Some carry over issues for returns/exchanges/bad debt adjustments, etc. 4

5. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Overview Implementation of HST Generally: no re-characterization of any supplies for GST purposes –GST-taxable supplies remain HST-taxable Most goods and services Commercial real property New residential real property –GST-zero-rated supplies remain HST-zero-rated Exports, basic groceries, prescription drugs, etc. –GST-exempt supplies remain HST-exempt Medical, education, health care, most public services 5

6. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Administration Administration—status quo items GST/HST registrants still subject to same GST rules for most compliance issues –Registration requirements –Remittance procedures –Filing frequency/thresholds –ITC documentation rules –Audit and inspection provisions –Place-of-supply rules 6

7. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Administration Key implications for BC CEC businesses With HST, the 7% BC component paid on materials incorporated into real property contracts / construction services becomes refundable. –Cheaper materials costs –Impacts cost structure of in-force fixed price contracts Most real property contractors are not PST-registered and purchase materials on a PST tax-paid basis –Rebate for PST tax-paid inventory on hand at June 30 th 2010, if subsequently incorporated into HST-taxable residential real property contract. 7

8. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Administration PST refund for June 30 th inventory of construction materials Refund of PST available to HST-registered contractors for PST paid on construction materials inventory on hand as at June 30 th. –Used to repair or improve residential real property under a contract to which HST applies –Does not apply if BC transitional rebate is available –Does not apply if PST is otherwise recoverable by the contractor or any other party –Refund return must be filed on or before December 31, 2010 8

9. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. 02 Real property transactions 9

10. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Real property Typical GST/HST taxable real property transactions General rule: the supply (sale/lease) of real property is taxable, unless an exemption otherwise applies. –Real property construction services / progress payments –Sales of new residential construction –Sales of new/used commercial construction –REALTOR® commissions –Sales of undeveloped land (some exemptions for individuals/trusts) –Real property improvement / repair services 10

11. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Commercial real property Timing of GST/HST for taxable supplies of commercial real property General rule: sales of commercial property are always taxable –Sales of commercial and residential real property follows transfer of ownership/possession 5% GST applies where ownership or possession is transferred on or before June 30, 2010 12% HST applies where ownership and possession is transferred on or after July 1, 2010 11

12. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Commercial Real Property – Delayed Contract Contract negotiated assuming PST would be embedded in materials costs, but sourced when ITC on materials claimed. 12

13. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. 03 Transitional rules 13

14. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Transitional rules Transitional rules –Only apply to GST/HST-taxable supplies –Determine which tax applies to transactions that straddle July 1, 2010 GST and/or PST vs. HST –Characterize the treatment of various supplies for GST/HST purposes Important dates –October 14, 2009 (Certain pre-payments may attract HST) –May 1, 2010 – June 30, 2010 (Pre-payments will attract HST) –July 1, 2010 (HST applies) 14

15. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Review of transitional rules Supply of goods Supply of goods by way of sale General rule: goods delivered/ownership transferred On or before June 30, 2010:GST and/or PST apply On or after July 1, 2010:HST applies –Consideration billed May 1 – June 30, 2010 Supplier bills HST on pre-payments received May 1, 2010 to June 30, 2010 for goods delivered on or after July 1, 2010 –Supplier:7% BC HST not remitted until July 2010 reporting period –Recipient:7% BC HST ITC not claimed in July 2010 reporting period 15

16. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Review of transitional rules Supply of goods – examples Supply of goods by way of sale In April 2010, a person pays for furniture that will not be delivered until July 2010 Result:GST and PST apply Consideration paid before May 1 – transitional rules do not apply In May 2010, a person pays for furniture that will not be delivered until July 2010 Result:HST applies Consideration paid May 1 – June 30 – transitional rules apply In May 2010, a person enters into an agreement to purchase furniture. Under the agreement, the person takes delivery of the furniture in July 2010 and makes 12 monthly payments from July 2010 to June 2011. The person receives ownership of the furniture once all the payments have been made Result: HST applies Delivery and ownership transferred on or after July 1, 2010 16

17. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Review of transitional rules Services Supply of services General rule: services rendered On or before June 30, 2010GST and/or PST apply On or after July 1, 2010HST applies 90% or more complete at June 30GST and/or PST apply –Consideration billed May 1 – June 30, 2010 Supplier bills HST on pre-payments received May 1, 2010 to June 30, 2010 for services rendered on or after July 1, 2010. –Supplier: 7% BC HST not remitted until July 2010 reporting period –Recipient: 7% BC HST ITC not claimed in July 2010 reporting period 17

18. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Review of transitional rules Services – examples Supply of services On January 15, 2009, a contractor entered into a contract to construct a six storey building. Construction began on July 1, 2009 and is expected to be completed on August 15, 2010. A progress payment is due on July 5, 2010 for the work completed up until the end of June 2010. Result:Only 5% GST applies because the payment is attributable to property delivered and services performed before July 2010. A person pays for a 12-month photocopier maintenance contract in January 2010 Result:GST and PST apply because the payment has been made before the May 1 – June 30 transitional rules apply Potential self-assessment requirement for 7% BC component of HST on consideration that relates to July – December service 18

19. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Review of transitional rules Leases of property Supply of property by way of lease Goods, intangibles, personal property, commercial and non-residential real property On or before June 30, 2010GST and/or PST apply On or after July 1, 2010HST applies Exception: lease interval begins before July 1, 2010 and ends before July 31, 2010 –Prepayments May 1 – June 30, 2010 Supplier bills HST on lease pre-payments received May 1, 2010 to June 30, 2010 for lease interval that begins on or after July 1, 2010 –Supplier: 7% BC HST not remitted until July 2010 reporting period –Recipient: 7% BC HST ITC not claimed until July 2010 reporting period 19

20. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Commercial real property Progress payments and holdbacks HST applies to progress payments that can reasonably be attributed to property delivered and services performed on or after July 1, 2010 Holdbacks are considered to be part of the progress payments from which they were held back –5% GST taxable progress payment – holdback relating to that progress payment subject to 5% GST (even if released after July 1, 2010) –12% HST taxable progress payment – holdback relating to that progress payment subject to 12% HST when released 20

21. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Progress payments and holdbacks Assume unit is 50% complete as at June 30, 2010. Therefore, 50% of August progress payment relates to goods/services delivered before June 30 and 50% of goods/services delivered after June 30 Application of GST or HST will generally follow the treatment of the progress payment to which the holdback relates Does not apply to sales of newly constructed or substantially renovated homes (other transitional rules apply) Special rules for property substantially complete before June 2010 21

22. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST In-progress contracts Pre-HST contracts with PST-included pricing Contracts bid/quoted/signed with expectation of PST cost being borne by contractor –Factored in to price /mark-up/ profit –With HST, materials procured July 1, 2010 or later, will not bear the cost of PST –What to do? Price adjustment: customer-initiated? Contract wording? Do nothing? Negotiate? 22

23. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. 04 Recaptured Input Tax Credits (RITCs) 23

24. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Recaptured 7% provincial component ITCs General Input Tax Credit (ITC) Rules –Commercial business are usually entitled to claim a full ITC for GST/HST paid in the course of making GST/HST- taxable supplies –With HST, 7% BC provincial component of the HST becomes refundable as an ITC (whereas PST previously was not) Recaptured ITCs –Effect: limits from 12% to 5% the full ITC that should have been available on "specified" expenditures –Specified expenditures are PST-taxable expenditures that should have become 7% cheaper, but will remain the same cost until restriction phased-out 24

25. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Recaptured 7% provincial component ITCs Large businesses Businesses with associated group revenues > $10 million –Includes GST/HST taxable revenues –Zero-rated revenues Financial institutions and related persons (no revenue threshold) Specified property or service –Specified food, beverages and entertainment –Specified energy excluding Energy used by farmers Energy used to produces goods for sale (manufacturers) –Specified telecommunications (other than internet access and toll-free numbers) –Specified road vehicles (less than 3,000 kg), parts and most services for them Watch for employer-provided vehicles (leased or owned) 25

26. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Recaptured 7% BC component ITCs Proposed phase-out Phase-out rules –100% restriction: July 1, 2010 to June 30, 2015 –75% restriction:July 1, 2015 to June 30, 2016 –50% restriction: July 1, 2016 to June 30, 2017 –25% restriction: July 1, 2017 to June 30, 2018 –0% restriction: July 1, 2018 and after RITC rules will impact real estate development and commercial leasing businesses with associated group revenues over $10 million –Specified vehicle restrictions may be significant cost to business –Specified energy (developers not producing goods for sale) –Specified meals and entertainment and telecommunication expenses 26

27. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Recaptured 7% provincial component ITCs Example Recaptured ITCs 27

28. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. 28 05 Mandatory e-filing

29. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Electronic filing Mandatory electronic GST/HST return filing (except charities) CRA announced mandatory e-filing of GST/HST returns where: –$1.5 million of taxable supplies made in Canada, –Subject to recaptured ITC rules or –Builders who report: Grand-parented transactions Transitional tax adjustments Transitional housing rebates Reporting periods ending on or after July 1, 2010 Penalties proposed for not complying Must use NetFile if subject to RITC rules 29

30. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. 30 06 Implementation issues

31. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Implementation issues Internal accounting issues Businesses will have to update their procedures on: –Returns of goods –Tax/price adjustments and credit notes –Volume rebates and coupons –Deposits and partial payments –Bad-debt adjustments –Employee reimbursements and allowances –Taxable benefits Mid-large businesses will need more sophisticated implementation plans 31

32. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. 32 07 Wrap-up

33. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Grant Thornton LLP as a resource to your business Sales and indirect tax services –"Controllers update" –Adhoc queries on GST/HST/PST transactions –Property transfer tax and fuel tax –Technical opinions and CRA/CTB ruling requests –Transaction planning Real property development Agreement reviews Partnerships, joint ventures and other business structures Dealing with non-residents (inbound/outbound) –Tax authority audit assistance 33

34. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Clients should be considering: Complete risk management/implementation review –Review GST/HST status of goods/services –Impact assessment of transitional rules –Evaluate potential system changes –Recaptured ITCs –Consider overall risk management and GST/HST/PST recovery reviews Game Plan –Mitigate financial risks of harmonization –Understand cash flow/budget impact of HST on the business –IT resourcing –Staff training 34

35. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. Fin Great sales tax people you should get to know: Darren Taylor, CASenior Manager(604) 443-2106 Sales and Indirect Taxdtaylor@grantthornton.ca Gurmit Sangha, CGAManager (604) 687-2711 ext 2369 Sales and Indirect Taxgsangha@grantthornton.caGrant Thornton LLP 1600 Grant Thornton Place3 rd Floor – 888 Fort Street 333 Seymour StreetVictoria, BC Vancouver, BC V6B 0A4V8W 1H8 35

36. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. 36 08 New construction – residential real property

37. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST Disclaimer The information and examples contained within these presentation materials has been prepared by Grant Thornton LLP for information only and is not intended to be relied upon, a complete description of any tax issue or the opinion of our firm. Changes in tax laws or other company specific factors could affect, on a prospective or retroactive basis, the information contained within these presentation materials. You should consult your Grant Thornton LLP adviser to obtain additional details, to discuss whether the information in this presentation applies to your specific situation or to obtain specific tax advice and/or a tax opinion.

38. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST New Residential Real Property BC Transitional Rules / Rebates BC New Housing Rebate –5% of selling price to max. of $26,250 for new residential units –No phase-out, like 5% GST New Housing Rebate which grinds from $6,300 to $nil from $350,000 to $450,000 BC New Housing Transitional Rebate –Generally: 2% of selling price or $60/sq. meter –Estimated PST embedded in cost of unit based on the extent of completion as at June 30, 2010 (based on schedule) BC Builder Transitional Tax Adjustment –Generally: 2% of selling price based on extent of completion as at June 30, 2010 (based on schedule) –Approximates the PST claimed as an input tax credit (ITC) on materials consumed on or after July 1, 2010 to completion of unit 38

39. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST New Residential Real Property BC Transitional Rules / Rebates BC PST Rebate for Residential Inventory for Residential Real Property Contracts –Effective July 1, 2010, refund of PST available to HST-registered contractors –PST-paid inventory held on hand as at June 30, 2010 –Inventory must be used to repair or improve residential real property under an HST-taxable contract –Does not apply if 2% BC Transitional Rebate also applies (i.e. new HST- taxable residential property partially complete as at June 30, 2010) –Rebate return due on or before December 31, 2010 –No mention of commercial builders with PST-paid inventory 39

40. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST New Residential Real Property BC Transitional Rules / Rebates Impact of HST on New Residential Real Property –In BC, unless the new residential unit qualifies for a new home buyers or landlord rebate and/or transitional rebates, new residential real property will cost 7% more with HST (net of any cost savings for embedded PST passed on by the builder) 40

41. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST New Residential Real Property Example 1 41

42. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST New Residential Real Property Example 2 - $525,000 selling price 42

43. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST New Residential Real Property Example 3 Not factored in: price reduction due to passed-on ITCs 43 12% HST-taxable sale of residential unit on or after July 1, 2010 (Unit completed and available for sale before June 30, 2010) (Ignore property transfer tax and fees) Selling price 12% HST GST New Housing Rebate 5% BC New Housing Rebate 2% BC Trans. Rebate Net Cost to Purchaser $ Increase% 350,000 42,000 (6,300) (17,500) (7,000) 361,200 - 0.00% 400,000 48,000 (3,150) (20,000) (8,000) 416,850 - 0.00% 450,000 54,000 - (22,500) (9,000) 472,500 - 0.00% 525,000 63,000 - (26,250) (10,500) 551,250 - 0.00% 750,000 90,000 - (26,250) (15,000) 798,750 11,250 1.50% 1,000,000 120,000 - (26,250) (20,000) 1,073,750 23,750 2.38%

44. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST New Residential Real Property Example 4 - $525,000 selling price Builder transitional tax based on selling price adjustment No GST rebate, because $nil as at $450,000 No BC new housing rebate, because no BC component of the HST was paid (grandparented) No BC transitional rebate (grandparented) 44

45. © 2010 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved. BC HST New Residential Real Property Example 5 - $350,000 selling price 45