July 1, 2006 - Reduction in the Rate of the GST/HST

Info Sheets and Questions and Answers

Revised June 29, 2006

The Excise Tax Act (the ETA) imposes the goods and services tax/harmonized sales tax (GST/HST) on most goods and services consumed in Canada, at the rate of 7%, and in the participating provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador, at the rate of 15%. The legislative provisions announced in Budget 2006 (Bill C-13), which provide for the GST/HST rate reduction, have been enacted and are now law. These rates of tax will be reduced to 6% and 14%, effective July 1, 2006.

We are providing the following questions and answers to assist you in understanding how the reduction in these rates will apply.

GST/HST Rate Reduction - Info Sheets

• GI-013 Reduction in the Rate of the GST/HST
• GI-014 Applying the GST/HST Rate Reduction to Allowances and Reimbursements
• GI-015 GST/HST Rate Reduction and Purchasers of New Housing
• GI-016 Applying the GST/HST Rate Reduction to Prepaid Funeral and Cemetery Arrangements
• GI-017 GST/HST Rate Reduction - Streamlined Methods of Accounting for Small Businesses
• GI-018 GST/HST Rate Reduction - Application to Price Adjustments, Adjustments for GST/HST Overcharged, and Returned Goods

Note: Readers should note that the HST applies only to supplies made in or imported into the participating provinces of Nova Scotia, New Brunswick and Newfoundland and Labrador. The GST applies to supplies made in the rest of Canada. If you are uncertain as to whether a supply is made in a participating province, refer to Technical Information Bulletin B-078, Place of Supply Rules under the HST, available from any Canada Revenue Agency (CRA) tax services office.

GST/HST Rate Reduction - Questions and Answers

Since these questions and answers were first issued, seven new questions and answers have been added, 24.1 under Information for Business, 22.1 under Information for Consumers and 6.1, 6.2, 10.1, 10.2 and 16.1 under Real Property. In addition the answer to Question 40 under Information for Business has been revised.

Table of contents

• Information for Business
  • General
  • Sales of property
  • Services and intangibles
  • Leases
  • Imports
  • Coupons, price adjustments and returned goods
  • Tax accounting and invoicing
  • Rebates
  • Miscellaneous
• Information for Consumers
  • General
  • Purchases of goods
  • Services and intangibles
  • Leases
  • Imports
• Real Property
  • General
  • Exception - new housing
  • Transitional rebate
  • GST/HST new housing rebates
  • Leases
  • Services and real property
  • Public service bodies
• First Nations taxes

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Information for Business

General

1. What are the new rates of GST and HST?

The rate of the GST and the federal component of the HST is to be reduced from 7% to 6%. The provincial component of the HST will remain at 8%. This means that the rate of HST is to be reduced from 15% to 14%.

2. When are the new rates of GST and HST effective?

The new rates of GST and HST are effective July 1, 2006.

3. When do I apply the GST/HST at the new rates?

Generally, the new rates apply to the supply of taxable goods and services in the following manner:

If GST/HST becomes payable on or after July 1, 2006 without having been paid before that day, the 6% GST rate or the 14% HST rate will apply.

If GST/HST is paid on or after July 1, 2006 without having become payable before that day, the 6% GST rate, or the 14% HST rate will apply.

If GST/HST becomes payable or is paid before July 1, 2006, the 7% GST rate or the 15% HST rate will apply.

4. When is GST/HST payable?

GST/HST on the consideration for a supply is usually payable the earlier of the day payment is made and the day the supplier issues an invoice. If there is an undue delay in issuing an invoice, GST/HST becomes payable when 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 the invoice is issued, GST/HST becomes payable on the earlier date.

For a supply of property by way of lease, licence or similar arrangement under a written agreement, GST/HST becomes payable the earlier of the date the payment is made and the date it is required to be made under the agreement.

If GST/HST is not otherwise payable by the last day of the calendar month after the calendar month in which any of the following events takes place, it becomes payable on that day:

• in the case of a sale of tangible personal property, other than a sale referred to below, the buyer acquires ownership or possession of the property;
• in the case of a sale of tangible personal property on approval, consignment, sale-or-return basis or similar terms, the buyer acquires ownership of the property or re-supplies it to someone other than the seller; and
• in the case of a supply under a written agreement for construction, renovation, alteration or repair of real property, or of a ship or other marine vessel when the work is reasonably expected to last more than three months, the work is substantially completed.

The GST/HST will be payable at 6%, or 14% where it becomes payable under these rules on or after July 1, 2006.

Sales of property

5. I invoiced a customer before July 1, 2006 for the sale of tangible personal property. The customer paid the invoice after July 1, 2006. What rate of tax do I charge on this sale?

Since the GST/HST became payable on the date of the invoice and this was before July 1, 2006, you would charge the customer GST at the rate of 7%, or HST at the rate of 15%.

6. In January 2006, we had a sales promotion where our customers purchased furniture without having to make any payments until January 2007. What rate of tax should apply to these sales, where our customers received ownership and possession of this furniture in January 2006, but will not receive an invoice for payment until January 2007?

If the customers received possession and/or ownership of the furniture in January 2006, under a written agreement entered into at that time, the GST/HST is considered payable at the end of February 2006 (see the rule in Question 4 above). Since this date is before July 1, 2006, GST at the rate of 7%, or HST at the rate of 15% applies to the sale of this furniture.

7. In May 2006, a consumer buys a refrigerator under a layaway plan. Under the written agreement, the consumer must make six equal monthly payments from May 2006 to October 2006 (the payments became due during each of these months). Possession and ownership of the refrigerator will be transferred to the consumer after the final payment is made in October 2006. What rates of tax apply to these payments?

GST at the rate of 7%, or HST at the rate of 15% will apply to the monthly payments required to be made before July 1, 2006. Payments required to be made on or after July 1, 2006 will be subject to GST at the rate of 6%, or HST at the rate of 14%.

8. We sell property under a conditional sales contract where the customer receives possession of the property June 1, 2006, but does not receives ownership of the property until full payment of the purchase price. The customer agrees to make monthly payments for the property over a period of time, starting on June 1. How will the reduced rates of tax affect such a conditional sales contract?

In a conditional sales contract, the GST/HST on the consideration for the property is payable no later than the last day of the month following the month during which you transferred possession of the property to the customer. In this example, GST at 7% or HST at 15% will be payable on the payment made on June 1, since this is before July 1, 2006. GST of 6% or HST of 14% will be payable on the payment made July 1. Finally, on July 31 (i.e., the last day of the month following the month in which your customer took possession of the property), GST at 6% or HST of 14% will apply on the remainder of the consideration payable for the property.

9. How will the rules regarding the reduction in the GST and HST rates impact sales of goods from coin-operated devices, such as vending machines?

The prices of goods from a coin-operated device, such as a vending machine, include GST/HST. You are considered to have collected GST/HST at the time you remove the money from the coin-operated device. Consequently, if you remove the money from a vending machine on or after July 1, 2006, you will be deemed to have collected GST at the reduced rate of 6%, and if the vending machine is located in a participating province, HST at the reduced rate of 14%.

Exception: If the GST/HST equalled zero on supplies you made through vending machines before July 1, 2006, it will continue to be zero on or after July 1, 2006.

10. Are there any changes to the sale-leaseback provisions under the ETA as a result of the reduction in the GST/HST rates?

The sale-leaseback rules allow a credit of tax initially paid to preclude that property being subsequently taxed on lease payments a second time when the property is sold and leased back from the lessor. GST at the reduced rate of 6%, or HST at the reduced rate of 14%, will apply to the deemed consideration for the lease payments made and due on or after July 1, 2006.

11. After July 1, 2006, a registrant re-purchases containers (other than returnable beverage containers) that were initially taxed at 7% GST or 15% HST. Will there be a transitional rule to take into account that some containers returned after July 1, 2006 would have been taxed at 7% or 15%?

Currently, if a registrant is the recipient of a returnable container (other than a returnable beverage container), and no tax is payable on the supply, the registrant is deemed to have paid tax equivalent to 7/107 of the consideration for the supply, or 15/115 for a supply made in a participating province. This deeming provision removes embedded tax, since the registrant would have charged tax when the registrant initially sold the container.

There will be no transitional rule for these containers repurchased by the registrant on or after July 1, 2006. Consequently, the registrant who repurchases these containers on or after July 1, 2006 will be deemed to have paid tax equivalent to 6/106 or 14/114 of the consideration for the supply.

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Services and intangibles

12. I am an accountant issuing an invoice after July 1, 2006 for services performed before July 1, 2006. What rate of tax do I charge on these services?

Since the invoice was issued after July 1, 2006, you would charge GST at the rate of 6%, or HST at the rate of 14%.

13. I will be invoicing my client after July 1, 2006 for construction services that will be performed before and after July 1, 2006. What rate of tax will apply on this invoice for my services?

Since you will be issuing the invoice after July 1, 2006, GST at the rate of 6%, or HST at the rate of 14% will apply to the services billed on this invoice.

14. My customer made a partial payment of $100 before July 1, 2006 for services which were performed after July 1, 2006. The total consideration for the services is $500. The invoice for these services will be issued after July 1, 2006. What rates of tax apply?

GST at the rate of 7%, or HST at the rate of 15% will apply to the partial payment of $100 made before July 1, 2006. GST at the rate of 6%, or HST at the rate of 14%, will apply to the remaining $400 of consideration for these services invoiced after July 1, 2006.

15. If a person has an equal billing plan set up for a utility service which covers a period beginning before July 1, 2006, how will the supplier determine which of the payments made in 2006 should be subject to GST/HST at the reduced rates?

The supplier will collect GST 7% on payments made or becoming due before July 1, 2006, and GST at the reduced rate of 6% on payments made without becoming due on or after July 1, 2006, or as they become due on or after that date.

For utility services supplied in a participating province, the supplier will collect HST at 15% on payments made or becoming due before July 1, 2006, and HST at the reduced rate of 14% on payments made without becoming due on or after July 1, 2006, or as they become due on or after that date

16. A person has an equal billing plan set up for a utility service that covers a period beginning before July 1, 2006. The supplier reconciles the person’s actual consumption of the utility service and the consideration payable by the person against the amount of the consideration the person actually paid throughout the period. As a result of the reconciliation, the supplier issues an invoice on or after July 1, 2006 for the remaining consideration due on the utility services that the person had consumed during the period. What rate of tax applies on the amount of consideration charged on this invoice?

If, as a result of the reconciliation of the account, the supplier issues an invoice on or after July 1, 2006 for the remaining consideration payable on the utility service, the supplier will charge GST at the reduced rate of 6%, or HST at the rate of 14%.

17. A person has an equal billing plan set up for a utility service that covers a period beginning before July 1, 2006. The supplier reconciles the person’s actual consumption of the utility service and the consideration payable by the person for that consumption, against the amount of the consideration the person paid throughout the period. As a result of this reconciliation, the supplier issues the person a credit note on or after July 1, 2006 for the overpayment of consideration that the person has made. What rate of tax applies to the credit given to the person on or after July 1, 2006?

If, as a result of the reconciliation of the account, the supplier issues the person a credit note on or after July 1, 2006 for the amount of consideration that the recipient overpaid the supplier, the supplier may generally credit the recipient, using the rate of GST or HST to which the original supply to which the price adjustment relates was subject. For example, a price adjustment in relation to a supply that was originally subject to GST at the rate of 7% will be subject to GST at that same rate.

18. Before July 1, 2006, we entered into a long-term fixed-price contract for services, which includes tax. Will the reduced rates of tax affect the payments we make under this contract?

Any payments made under this contract before July 1, 2006 will include GST at the rate of 7%, or HST at the rate of 15% if the place of supply for the services is in a participating province. Payments made under this contract on or after July 1, 2006 will include GST at the reduced rate of 6%, or HST at the reduced rate of 14% if the place of supply for the services is in a participating province.

19. If I prepay an amount before July 1, 2006 for a transportation service that will be provided after that date, what rate of tax applies to the prepayment amount?

A payment made before July 1, 2006 will be taxable at 7%, or 15%, even if the transportation service will be provided after that date.

20. We are selling admissions to a concert that is to be held after July 1, 2006. If customers purchase tickets before July 1, 2006 to attend this concert, what rate of tax applies to the purchase of these tickets?

GST/HST at 7% or 15% will apply to tickets purchased before July 1, 2006 for admission to a concert held on or after that date.

21. What rate of tax applies to an amount paid before July 1, 2006 for a magazine subscription if the magazines will be delivered to the customer after that date?

A payment made before July 1, 2006 for a magazine subscription will be subject to GST at 7%, or HST at 15% even though the magazines will be provided after that date.

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Leases

22. How will the reduction in the rate of GST/HST apply to leases of property?

The 6% GST will apply to a lease payment due on or after July 1, 2006, unless it was paid before that date. If the supply of the leased property is made in a participating province, the 14% HST will apply to a lease payment due on or after July 1, 2006, unless it was paid before that date.

The 7% GST, or 15% HST will apply to a lease payment due before July 1, 2006, even if it is paid after July 1, 2006.

23. I pay the rent for my office space on the 15^th of every month. What rate of tax will apply to the payment made on June 15, 2006 that covers the rent for the month of June 15 to July 14, 2006?

Since the payment is due before July 1, 2006, the 7% rate of GST, or the 15% rate of HST will apply to the lease payment.

24. The lease payment for my passenger vehicle is due June 15. What rate of tax applies to this lease payment if I do not make it until after July 1, 2006?

Since the lease payment is due before July 1, 2006, GST/HST at the rate of 7% or 15% will apply to the lease payment even though you make the payment after July 1, 2006.

24.1 How will the GST rate reduction affect existing leases for vehicles?

GST/HST at the rate of 6% or 14% will apply to lease payments that become payable on or after July 1, 2006 without having been paid prior to that date, including those for leases that were in effect before the Budget announcement. As a result, all lessees of automobiles, RVs and boats should benefit from the GST reduction on the payments they make on or after July 1, 2006.

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Imports

25. What rate of tax will I pay when I import goods?

GST at the rate of 6% will apply to taxable importations of goods on or after July 1, 2006 or released from Customs control on or after that day.

In most cases, the 15% HST applies at the border to taxable importations of non-commercial goods imported by a resident of a participating province regardless of the point of entry into Canada or Customs clearance. If such non-commercial goods are imported on or after July 1, 2006, or released from Customs control on or after that day, the resident of a participating province will pay HST at the rate of 14%.

26. Will the reduced rate of tax apply to imported taxable supplies of services and intangible personal property?

GST on imported taxable supplies of services and intangible property is payable the earlier of when consideration is paid or when it becomes due. Therefore, if the earlier of the day the consideration is paid or becomes due is on or after July 1, 2006, GST at the rate of 6% will apply to the imported taxable services and intangible personal property.

Coupons, price adjustments and returned goods

27. I am a manufacturer who has been redeeming coupons from retailers in respect of taxable (other than zero-rated) supplies of property and services made by the retailers to consumers. Because the coupon entitles the consumer to a reduction of the price of the property or service equal to a fixed dollar amount and the coupon is not in respect of a zero-rated supply, I have been claiming an input tax credit (ITC) equal to the tax fraction (7/107) of the coupon value when I pay a retailer the redemption amount for the coupon. What tax fraction will I use to calculate an ITC when I redeem coupons from the retailers on or after July 1, 2006?

When a manufacturer redeems coupons that were accepted by a retailer on or after July 1, 2006, the rate of GST will be reduced from 7% to 6%, and therefore the tax fraction of the coupon value will be 6/106. Where the supply is made in a participating province on or after July 1, 2006, the tax rate will be reduced from 15% to 14% and the tax fraction will decrease from 15/115 to 14/114.

28. I am a retailer and I issue coupons that entitle a consumer to a reduction of the price on a taxable supply of property or services (other than zero-rated) equal to a fixed dollar or fixed percentage amount specified in the coupon. When I accept the coupon I treat the coupon as a partial cash payment (i.e. tax is calculated on the value of the consideration for the supply before the coupon discount). As a result I charge and collect GST at a rate of 7% of the consideration payable for the supply and then claim an ITC equal to 7/107 of the coupon value. I understand that after July 1, 2006 I will be charging and collecting GST at a rate of 6% instead of 7% and that I will be claiming an ITC equal to 6/106 of the coupon value. What happens if a reporting period straddles the July 1, 2006?

For that part of the reporting period prior to July 1, 2006, you will be required to charge and collect GST at a rate of 7% on the consideration for taxable supplies (other than zero-rated), and you will be entitled to an ITC equal to 7/107 of the coupon value for coupons that are accepted before July 1, 2006. For that part of the reporting period on or after July 1, 2006, you will be required to charge and collect GST at a rate of 6% on the consideration for taxable (other than zero-rated) supplies and you will be entitled to an ITC equal to 6/106 of the coupon value for coupons accepted on or after July 1, 2006.

If you are in a participating province, for the part of the reporting period that is prior to July 1, 2006, you will be required to charge and collect GST at a rate of 15% on the consideration for taxable (other than zero-rated) supplies, and you will be entitled to an ITC equal to 15/115 of the coupon value for coupons accepted before that date. For that part of the reporting period that is on or after July 1, 2006, you will be required to charge and collect GST at a rate of 14% on the consideration for taxable (other than zero-rated) supplies and you will be entitled to an ITC equal to 14/114 of the coupon value for coupons accepted on or after July 1, 2006.

29. I am a retailer and I issue coupons that entitle a consumer to a reduction of the price on a taxable supply (other than zero-rated) of property or services equal to a fixed dollar or fixed percentage amount specified in the coupon. When redeeming a coupon I treat the coupon as reducing the value of consideration for the supply. What happens on July 1, 2006?

In this transaction the GST/HST is calculated after the coupon value is deducted from the consideration for the supply. Before July 1, 2006 the applicable GST rate is 7% and the HST rate is 15%. If the transaction takes place on or after July 1, 2006 the GST rate will be 6% and the HST will be 14%. When you treat a non-reimbursable coupon as reducing the value of the consideration before the GST/HST is calculated, you do not have to deal with tax fractions.

If your reporting period straddles July 1, 2006, for that part of the reporting period prior to July 1, 2006, you will be required to charge and collect GST at a rate of 7% on the reduced consideration for taxable supplies (other than zero-rated), as you currently do. For retailers in participating provinces, the HST rate of 15% applies. For the portion of the reporting period which is on or after July 1, 2006 the GST rate of 6% or the HST rate of 14% applies.

30. I am a manufacturer who has been claiming ITCs equal to the tax fraction 7/107 of the amount of rebates I have paid to consumers who have purchased my product from retailers. After July 1, 2006, if I pay a rebate to a consumer who purchased my product before that date, what is the tax fraction that I will use to calculate an ITC in respect of the rebate?

In order to determine your ITC when you pay a rebate to a consumer, you will apply the tax fraction that reflects the rate of GST in effect at the time that tax became payable in respect of the supply of your product to the consumer. Generally, in respect of purchases occurring prior to July 1, 2006, the GST tax rate is 7% and the tax fraction is 7/107. In respect of purchases of your product by consumers occurring on and after July 1, 2006, the GST tax rate will be 6% and the tax fraction will be 6/106.

Where supplies are made in participating provinces before July 1, 2006, the HST tax rate is 15% and the tax fraction is 15/115. Where supplies are made on or after the July 1, 2006, the HST tax rate will be 14% and the HST tax fraction will be 14/114.

31. How will the reduced rates of GST and HST apply to a price adjustment, such as a volume rebate, paid on or after July 1, 2006, where the supply to which the price adjustment relates occurred before July 1, 2006?

If a supplier chooses to credit a recipient an amount of GST or HST on a price adjustment, the rate of the GST or HST that applies to the price adjustment will be the rate of tax to which the supply to which the price adjustment relates was subject. For example, a price adjustment in relation to a supply that was subject to GST at the rate of 7% will be subject to GST at that same rate.

32. A consumer purchases a good before July 1, 2006 and pays GST of 7%. After July 1, 2006, the consumer returns the good to the supplier because it is defective. The supplier gives the consumer a refund of the price of the good and the GST. What rate of GST will apply to the refund?

The supplier will refund the consumer the rate of GST that the consumer had originally paid, in this case 7%.

33. A consumer purchased a shirt in a participating province before July 1, 2006 and paid HST of 15% on the price of the shirt. After July 1, 2006, the consumer returns to the supplier and exchanges the shirt for another one. What rates of tax apply to the exchange of the shirts?

At the time of the exchange of the shirts there are two transactions occurring: the refund of the price of the shirt being returned and the purchase of the new shirt. The refund of the purchase price of the returned shirt will include the 15% HST that the consumer paid. The purchase of the new shirt will be subject to HST at the rate of 14%, since the HST is payable on the purchase price of the shirt after July 1, 2006.

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Tax accounting and invoicing

34. I use the Quick Method of Accounting to remit the GST/HST. Will the percentages that I use to remit the GST/HST change?

The Quick Method rates will be changed to reflect the reduced rates of GST and HST. The new percentages will apply for reporting periods beginning on or after July 1, 2006. For reporting periods beginning before July 1, 2006 and ending on or after that date, the existing percentages will apply for consideration that became due, or that was paid without having become due, before July 1, 2006 and the new percentages will apply for all other consideration.

The following tables reflect the current and new Quick Method remittance rates for small business.

Table 1

Remittance rates for businesses that purchase goods* for resale

*In order to use the rates in Table 1, the cost (including GST/HST) of goods(other than basic groceries and other goods for which you did not pay tax) purchased in the previous fiscal year for resale, or used in goods produced or manufactured for resale, must be at least 40% of total annual taxable supplies (including GST/HST) for that fiscal year. Businesses that have less than this percentage of taxable goods for resale use the remittance rates shown in Table 2.

Table 2

Remittance rates for businesses that provide services

35. What happens to GST-included pricing on goods such as gasoline?

Effective July 1, 2006, the tax-included pricing for goods such as gasoline, will reflect the new rate of GST at 6% and for sales of these goods made in the participating provinces, HST at 14%.

36. How do I calculate the new rates of tax on a tax-included invoice?

The invoice or receipt should show the rate of GST/HST that has been charged. The amount of the reduced rate of GST on a tax-included amount of consideration is 6/106 of the amount. To calculate the amount of consideration payable on the invoice before the GST, multiply the tax-included amount by 100/106.

The amount of the reduced rate of HST on a tax-included amount of consideration is 14/114 of the amount. To calculate the amount of consideration payable on the invoice before the HST, multiply the tax-included amount by 100/114.

37. How will I complete my GST/HST return to account for the reduced amount of GST/HST?

You will continue to report the total GST/HST collected or collectible in a reporting period, at the rates of 7%, 15%, 6%, or 14%, on line 103 of the GST/HST return. ITCs for the tax paid or payable will continue to be reported on line 106.

38. I am an annual filer for GST/HST reporting and I am required to make quarterly instalment payments. The amount required to be remitted as an instalment payment is the lesser of ¼ of the net tax for the current annual reporting period or ¼ of the net tax for the previous reporting period.

a) If I calculate my instalment payments based on the new rates and I underpay, will I be charged penalty and interest?

The provisions regarding penalty and interest will not be amended as a result of the reduction in the GST/HST rates. If the instalments as required under the ETA are underpaid, penalty and interest will be charged on the amount underpaid.

b) Is there any tolerance if I calculate my instalments incorrectly?

No, unless the reason why the instalments were underpaid falls under the CRA’s administrative guidelines under fairness for cancelling penalty and interest. The CRA may waive or cancel interest or penalties when they result from things that are beyond your control, such as illness, or from an inability to pay because of financial hardship.

39. What happens to the 7/107 or 15/115 calculations I use to calculate ITCs using the Simplified Method for Accounting for ITCs?

When you use the Simplified Method for Accounting for ITCs and you make purchases in both participating and non-participating provinces, you currently have to separate your purchases that are taxable at 7% from those taxable at 15%. To calculate your ITCs for each reporting period, you total your taxable purchases, including GST or HST, provincial sales tax (PST), tips, and penalty and interest charges on late payments, and:

• multiply by 7 and divide the result by 107 for GST purchases; or
• multiply by 15 and divide the result by 115 for HST purchases.

Effective on or after July 1, 2006, when you make purchases subject to 6% GST or 14% HST, to calculate your ITCs on these purchases, you will separate your purchases that are taxable at 6% from those taxable at 14% and:

• multiply by 6 and divide the result by 106 for GST purchases; or
• multiply by 14 and divide the result by 114 for HST purchases.

You can use the Simplified Method to calculate ITCs only for purchases you use to provide taxable goods and services. If you use your purchases for personal use, or to provide both taxable and exempt goods and services, only the portion used for providing taxable goods and services can be included in the ITC calculation. If you use a purchase at least 90% to provide taxable goods and services, you can include the total purchase price in your ITC calculation.

40. For calculating the tax deemed paid or payable on reimbursements paid to employees, pursuant to section 175 of the ETA, the CRA has allowed the use of a factor of 6/106 of the reimbursed expense amount, or 14/114 of the reimbursed amount for expenses incurred in participating provinces, rather than the factors of 7/107 or 15/115. These factors recognize the fact that the expenses may include tips, gratuities and provincial sales tax, which are not subject to the GST/HST. Will there be new factors that we may use when calculating the tax deemed paid on reimbursements to employees, given that the rates of GST and HST are being reduced to 6% and 14% respectively?

Effective for reimbursements paid on or after July 1, 2006, a person will be allowed the option of multiplying the total amount reimbursed for expenses by the factor of 5/105, if 90% or more of these expenses are taxable at 6% GST, or by 13/113 if 90% or more of these expenses are taxable at 14% HST.

The calculation method chosen must be used consistently within each category of reimbursed amounts (e.g., airfare, hotel accommodation, food, beverages and entertainment) throughout the fiscal year.

More detailed information is available in GST/HST Info Sheet GI-014, Applying the GST/HST Rate Reduction to Allowances and Reimbursements.

41. I wrote off an amount as a bad debt for a supply that was subject to GST at the rate of 7%. How do I account for this bad debt deduction when remitting the GST after July 1, 2006, since the debt occurred before the GST rate reduction?

For purposes of deducting an amount from your net tax remittance for the GST/HST written off as a bad debt, subsection 231(1) of the ETA sets out a formula based on the tax that was payable in respect of the supply associated with the debt that is being written off. Therefore, if the amount you wrote off related to a supply subject to 7% GST, this amount of GST would be used in the formula to calculate the amount you may deduct from your net tax remittance.

42. After July 1, 2006, my client finally paid a debt that I had previously written off. I had already deducted an amount for the HST written off with respect to this debt from my net tax remittance. How do I recover this adjustment, since the debt written off included HST at the rate of 15%?

When you recover all or part of a bad debt, subsection 231(3) of the ETA requires you to add to your net tax remittance for the reporting period in which the bad debt or part is recovered, an amount determined by a formula that includes the actual tax payable in respect of the supply to which the bad debt relates. Therefore, you would use the amount of the HST originally charged on the supply to calculate the amount you must add to your net tax remittance.

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Rebates

43. I claim an Employee and Partner GST/HST Rebate for the GST/HST paid on expenses deducted from my employment income for income tax purposes. How do I calculate the rebate where I may be paying GST at the rate of 7% for some expenses and GST at the reduced rate of 6% for other expenses?

For any rebate for eligible expenses on which you paid GST in the 2006 calendar year, you may claim a rebate equal to 6.5/106.5 of the amount of those expenses and for those eligible expenses on which you paid HST, a rebate equal to 14.5/114.5 of the amount of those expenses.

For subsequent calendar years, the rebates will equal 6/106, and 14/114 respectively, of the amount of the eligible expenses.

44. How will the reduction in the GST rate affect the GST refund for business travellers?

A non-resident business traveller to Canada may claim a refund of the actual GST/HST paid on eligible short-term accommodation, regardless of whether the rate paid is 7%, 15%, 6% or 14%.

The non-resident business traveller may also use the quick calculation option to calculate the GST/HST refund for purchases of tour packages only. The non-resident business traveller can claim a flat rate of $5 per room per night, up to a maximum of $75 per individual. The non-resident business traveller can also use the quick calculation option to claim a refund of the GST/HST paid on camping accommodation that is part of a tour package. This is a flat rate of $1 for each night the campsite was made available to an individual, up to a maximum of $75 per individual. There are no changes to the flat rates of $5 and $1 per night.

45. Currently, a non-resident visitor to Canada may use a streamlined method for claiming a rebate for the GST/HST paid on short -term accommodation and camping accommodation. This streamlined method sets an amount of $5 per night for short-term accommodation and $1 per night for camping accommodation. Will these amounts change as a result of the reduction in the GST/HST rates?

No, these amounts will not change.

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Miscellaneous

46. What are the rules for determining what rate of tax will apply to deposits or holdbacks?

The rules that normally determine when GST/HST is payable will continue to apply to determine the appropriate rate of tax. A deposit is not treated as a payment for a supply until the supplier applies it against the consideration for the supply.

For example, if a person makes a deposit of $100 in April 2006, for a supply that is made after July 1, 2006, the $100 will not be treated as consideration for the supply until after July 1, 2006. GST/HST at the rate of 6% or 14% will apply to the consideration for that supply.

If a holdback amount is legislatively sanctioned or provided for in a written agreement for the construction, renovation or repair of real property or a marine vessel, GST/HST calculated on the holdback amount becomes payable on the earlier of the day on which the holdback is paid or the day on which the holdback period expires. Therefore, if both of these days occur on or after
July 1, 2006, GST/HST at the reduced rate of 6% or 14% will apply to the holdback amount.

47. The ETA has many provisions that deem supplies to be made, and GST/HST to be collected, or paid. How will the new rates apply to these deeming provisions?

The rates of 6% or 14% will be used to calculate GST/HST that is deemed under the ETA to have been paid or collected on or after July 1, 2006.

For example, if, on a day after July 1, 2006, a person pays an employee a reasonable allowance for the use in Canada of a motor vehicle in relation to the person’s activities, the person is deemed to have paid the tax on the date. Consequently, the person will be deemed to have paid tax at the 6% or the 14% rate.

48. Will the Government reimburse me the additional costs I incur in changing my cash registers and computer system to accommodate the proposed rate change?

No compensation will be provided to businesses for the costs of implementing the rate change.

49. What happens if I do not change my cash registers or computer systems in time to charge the new rates of tax on or after July 1, 2006?

The ETA requires that any amount collected, or charged, as or on account of tax must be remitted to the Receiver General. For example, if you collect or charge GST at the rate of 7%, when, in fact, GST at the rate of 6% should have been collected or charged, you must remit the 7% GST you collected or charged to the Receiver General.

However, if you refund or credit your customer the GST that you overcharged, and a credit note or debit note is issued containing the information required under the ETA to substantiate the refund or credit, you may deduct the amount of the refund or credit given to your customer from your net tax remittance. This refund or credit must be given within two years after the day the tax was paid, or charged.

50. Will there be any anti-avoidance legislation introduced to prevent tax benefits from related parties arranging transactions solely to take advantage of the reduced tax rates?

The legislative amendments include a provision to eliminate the tax saving to any party as a result of the rate reduction in circumstances where an agreement entered into on or before May 2, 2006 between related parties is amended primarily to obtain the benefit of the tax reduction. Another provision eliminates the tax saving to any party as a result of the rate reduction in circumstances where transactions between related parties are undertaken primarily to obtain the benefit of the tax reduction.

51. How do the rate changes impact on the change-in-use rules for capital property?

The change-in-use rules for capital property deem an amount of tax to be collected, or paid, equal to the basic tax content of the property. The basic tax content of a property generally means the amount of GST/HST payable on the acquisition of the property and on any improvements to the property, less any amounts that would be reimbursed to you (such as rebates or remissions, but not ITCs). You also have to consider the fair market value of the property at that time and the original cost (including any improvements).

Therefore, the rate changes will only impact on the change-in-use rules when these amounts that you pay or that are payable on the acquisition and improvements to capital property, or for which you receive a rebate, become part of the calculation for determining the basic tax content of the capital property.

52. I am deregistering for GST and therefore the ITCs I claimed on the property I have on hand at the time I deregister must be recaptured. If I deregister after July 1, 2006, how I do ensure that these ITCs are recaptured, since the GST rate has been reduced?

When you cease to be a registrant, any property on hand that you had purchased for consumption, use or supply in your commercial activity is considered to have changed to non-commercial use. As a result, you must ensure that the ITCs previously claimed on such property are recaptured. To do so, you are treated as having disposed of each property (other than capital property) at its fair market value immediately before ceasing to be a registrant and to have collected GST/HST on that amount. The GST/HST is then remittable on your last return as a registrant.

Since you will cease to be a registrant after July 1, 2006, you will be required to remit GST at the reduced rate of 6% on the fair market value of the property (other than capital property), and if this property is located in a participating province, HST at the reduced rate of 14%.

Where the property on hand is capital property, the change-in-use rules will generally apply to deem you to have paid tax equal to the basic tax content of the property. This will apply regardless of when you deregister. The basic tax content of a property is an amount calculated using a formula that takes into account all the GST/HST you paid when you acquired the property and on any improvements on the property.

53. What rate of tax applies to progress payments made after July 1, 2006 that relate to work performed, or property delivered, before that date?

When progress payments are made under a construction contract, GST/HST is payable on the value of each payment on the earlier of the day on which it is paid and the day on which it is due. The reduced GST/HST rates of 6% and 14%, will apply to progress payments made on or after July 1, 2006 (provided that they were not due before July 1, 2006), even though these payments may relate to work performed, or property delivered, before that date.

54. I am a sole proprietor who is using my passenger vehicle less than exclusively in commercial activities. I may only claim ITCs for the GST/HST I paid when I acquired my passenger vehicle based on the capital cost allowance that I claimed on my income tax return for that vehicle. How do I do this now that the GST/HST rate has been reduced?

At the end of each taxation year you are deemed to have acquired the passenger vehicle and to have paid on that day tax in respect of the vehicle equal to an amount determined by the formula

A × B

where “A” is the tax fraction (i.e., 7/107, 15/115 or 8/108) based on the rate of tax you paid when you acquired the vehicle, and “B” is generally the capital cost allowance deducted under the Income Tax Act for that taxation year in respect of the passenger vehicle.

These tax fractions will now be 6/106, 14/114, or 8/108 in respect of a passenger vehicle acquired in a taxation year that ends on or after July 1, 2006. However, if the taxation year includes that day (July 1, 2006) these tax fractions will be 6.5/106.5, 14.5/114.5, or 8/108.

55. Will the GST rate reduction affect how the security requirement for non-resident registrants is calculated?

Where the rates of tax are reduced, your net tax calculation may be affected which may, in turn, impact on your non-resident security requirements.

56. Taxi businesses that have their fares regulated by law are required to include GST/HST in their fares. Will these tax-included fares be subject to the GST/HST rate reduction?

An amount paid as a taxi fare on or after July 1, 2006 will be a tax-included amount that includes GST equal to 6/106 of the amount, or HST equal to 14/114 of the amount if the transportation is in a participating province.

57. The ETA requires registrants to pay GST/HST on certain taxable benefits provided to individuals who are employees or shareholders. For most taxable benefits, the registrant is deemed to have collected GST equal to 6/106, or HST equal to 14/114, of the value of the taxable benefit reported for income tax purposes, and if the taxable benefit is for a standby charge, on the amount of any reimbursement. For taxable benefits relating to the operating costs of a passenger vehicle, the registrant is deemed to have collected GST at a rate equal to 5%, or HST at a rate of 11%, on the value of the benefit reported for income tax purposes and on any reimbursements. Will these rates of tax change as a result of the reductions in the GST and HST rates?

Registrants will be required to pay GST/HST on certain taxable benefits provided to employees and shareholders at the following rates:

1) For the 2006 taxation year of individuals, if the taxable benefit relates to the operating cost of an automobile, the registrant will be deemed to have collected GST equal to 4.5%, or HST equal to 10.5%, on the value of the benefit reported for income tax purposes and on any reimbursements. For subsequent taxation years, the rates of tax are 4% and 10%, respectively.

2) For the 2006 taxation year of individuals, if the taxable benefit relates to the standby charge of an automobile, or other taxable benefits, the registrant will be deemed to have collected GST equal to 5.5/105.5, or HST equal to 13.5/113.5, of the amount of the value of the taxable benefit reported for income tax purposes, and if the taxable benefit is for a standby charge, on the amount of any reimbursement. For subsequent taxation years, the rates of tax are 5/105 or 13/113, respectively.

58. I am an independent sales contractor selling taxable goods for a direct seller who uses the alternate collection method to account for GST/HST. What rate of tax applies when I sell these goods to consumers on or after July 1, 2006?

GST at the reduced rate of 6%, or HST at the reduced rate of 14% will apply to the goods you sell to consumers on or after July 1, 2006.

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Information for Consumers

General

1. What are the new rates of GST and HST?

The rate of the GST and the federal component of the HST will be reduced from 7% to 6%. The rate of HST will be reduced from 15% to 14%.

2. When are the new rates of GST and HST effective?

The new rates of GST and HST are effective July 1, 2006.

3. When do I pay GST/HST at the new rates?

Generally, you will pay GST/HST at the new 6% and 14% rates for purchases of taxable goods and services in the following circumstances:

• If GST/HST becomes payable on or after July 1, 2006, without having been paid before that day, or
• If you pay GST/HST after July 1, 2006, without it having been payable before that day.

If you pay GST/HST before July 1, 2006, or if the GST/HST becomes payable before July 1, 2006, the rate of 7% GST, or 15% HST will apply.

4. When is GST/HST payable?

GST/HST on the amount payable for the purchase of a good or service is usually payable the earlier of the day payment is made and the day the supplier issues an invoice.

If there is an undue delay in issuing an invoice, GST/HST becomes payable when 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 the invoice is issued, GST/HST becomes payable on the earlier date.

If property is supplied by way of lease, licence or similar arrangement under a written agreement, GST/HST becomes payable the earlier of the day payment is made and the day it is required to be made under the agreement.

If GST/HST is not otherwise payable by the last day of the calendar month following the calendar month in which any of the following events takes place, the GST/HST becomes payable on that day:

• In the case of a sale of tangible personal property, other than a sale referred to below, the buyer acquires ownership or possession of the property;
• In the case of a sale of tangible personal property on approval, consignment, sale-or-return basis or similar terms, the buyer acquires ownership of the property or re-supplies it to someone other than the seller; and
• In the case of a supply under a written agreement for construction, renovation, alteration or repair or real property, or of a ship or other marine vessel when the work is reasonably expected to last more than three months, the work is substantially completed.

5. How do I calculate the new rates of tax on a tax-included price?

The invoice or receipt should show the rate of GST/HST has been charged. The amount of the reduced rate of GST on a tax-included price is 6/106 of the price. To calculate the price of an item before the GST, multiply the price by 100/106.

The amount of the reduced rate of HST on a tax-included price is 14/114 of the price. To calculate the price of the item before the HST, multiply the tax-included price by 100/114.

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Purchases of goods

6. In January 2006, I purchased furniture from a store that had a sales promotion where I do not have to make any payments until January 2007. What rate of tax should apply to this purchase, since I will not receive an invoice for payment until January 2007?

If you received ownership or possession of the furniture in January 2006, the GST was considered payable at the end of February 2006. Since this date is before July 1, 2006, you would have been required to pay GST at the rate of 7%, or HST at the rate of 15% at the end of February 2006.

7. What happens if I purchase an item on or after July 1, 2006 and the supplier charged me GST at the rate of 7% instead of the 6% rate?

You may seek a refund of the overpaid tax directly from your supplier.

As an alternative, you may file for a rebate for the tax paid in error with the CRA, using form GST/HST 189, General Application for Rebate of GST/HST.

8. I am purchasing a refrigerator under a layaway plan. Under the written agreement, I am required to make six equal monthly payments from May 2006 to October 2006 (the payments became due during each of these months). I will only receive possession and ownership of the refrigerator after the final payment is made. What rates of tax apply to these payments?

GST at the rate of 7%, or HST at the rate of 15% will apply to the monthly payments required to be made before July 1, 2006. Payments that are required to be made on or after July 1, 2006 will be subject to GST at the rate of 6% or HST at the rate of 14%.

9. If I renew my magazine subscription before July 1, 2006 for magazines that will be delivered to me in the next year, what rate of tax applies to the amount I will pay for this subscription, if I pay it before July 1, 2006?

Payments made before July 1, 2006 for subscriptions will be subject to GST/HST at 7% or 15%, even though the magazines are to be provided after that date.

10. What happens to GST-included pricing on goods such as gasoline?

Effective July 1, 2006, the tax-included pricing for goods, such as gasoline, will reflect the new GST rate of 6% or the new HST rate of 14%.

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Services and intangibles

11. If I receive my electricity bill in a month that includes the day the GST rate changes, what rate of tax will apply?

If the date of the invoice is on or after July 1, 2006, GST at the rate of 6%, or HST at the rate of 14% will be charged on that invoice.

12. If I have an equal billing plan set up for a utility service which covers a period beginning before July 1, 2006, how will the supplier determine which of the payments made in 2006 should be subject to GST at the reduced rates?

The supplier will collect GST at 7% or HST at 15% on payments made or becoming due before July 1, 2006, and GST at the reduced rate of 6% or HST at the reduced rate of 14% on payments made without becoming due on or after July 1, 2006, or as they become due on or after that date.

13. I have an equal billing plan set up for a utility service that covers a period beginning before July 1, 2006. The supplier reconciles my actual consumption of the utility service and the amount that would have been payable on that consumption against the amount I actually paid throughout the period. As a result of the reconciliation, the supplier issues an invoice on or after July 1, 2006 for the remaining amount due on the utility services that I had consumed during the period. What rate of tax applies on the amount of consideration charged on this invoice?

If, as a result of the reconciliation of the account, the supplier issues an invoice after July 1, 2006, for the remaining amount payable on the utility service, the supplier will charge GST at the reduced rate of 6%, or HST at the rate of 14% on the amount owing.

14. I have an equal billing plan set up for a utility service that covers a period beginning before July 1, 2006. The supplier reconciles my actual consumption of the utility service and the amount that would have been payable on that consumption against the amount I paid throughout the period. As a result of this reconciliation, the supplier issues me a credit note on or after July 1, 2006 for the overpayment that I made. What rate of tax applies to the credit amount given to me?

If, as a result of the reconciliation of the account, the supplier issues a credit note on or after July 1, 2006, for the amount that you overpaid the supplier, the supplier may generally credit you, using the rate of GST or HST to which the original supply to which the price adjustment relates was subject. For example, a price adjustment in relation to a supply that was originally subject to GST at the rate of 7% will be subject to GST at that same rate.

15. If the contractor I hired to renovate my kitchen finishes the renovation work before July 1, 2006, but invoices me on or after that date, what rate of tax will he charge me on these services?

Since the contractor issues the invoice on or after July 1, 2006, the contractor will charge you GST at the rate of 6% or HST at the rate of 14%.

16. A contractor whom I hired to renovate my home, will be invoicing me after July 1, 2006 for construction services that will be performed both before and after July 1, 2006. What rate of tax will apply on this invoice for his services?

Since the contractor will be issuing the invoice after July 1, 2006, GST at the rate of 6%, or HST at the rate of 14% will apply to the services billed on this invoice.

17. I was required to make a down payment of $100 before July 1, 2006 for services that are to be performed after July 1, 2006. The total amount that I will be required to pay for these services is $500. The invoice for these services will be issued after July 1, 2006. What rate of tax applies to these payments?

GST at the rate of 7%, or HST at the rate of 15% will apply to the down payment of $100 made before July 1, 2006. GST at the rate of 6%, or HST at the rate of 14%, will apply to the remaining $400 due for these services invoiced after July 1, 2006.

18. If I make a deposit of $100 in April 2006, for a service that is to be provided after July 1, 2006, what rate of tax applies to this deposit?

A deposit is not treated as a payment for a supply of goods or services until such time as the supplier applies it against the consideration payable for the supply. Where you make a deposit of $100 in April 2006, for a service that is to be provided after July 1, 2006, the $100 will not be treated as payment for that service until after July 1, 2006. GST at the rate of 6%, or HST at the rate of 14% will apply to the payment for that supply.

19. Taxi businesses that have their fares regulated by law are required to include GST/HST in their fares. Will these tax-included fares be subject to the GST/HST rate reduction?

An amount paid as a taxi fare on or after July 1, 2006 will be a tax-included amount that includes GST of 6/106 of the amount, or HST of 14/114 of the amount.

20. I received an invoice from my fitness club before July 1, 2006 for renewal of my membership for the next 12 months. If I do not pay the invoice until after July 1, 2006, will the reduced rate of tax apply?

If the GST/HST becomes payable before July 1, 2006, the rate of 7% GST, or 15% HST will apply. Since the invoice was issued before July 1, 2006, the GST/HST became payable at that time at the rate of 7% or 15%. You will still be required to pay tax at the 7% rate, or the 15% rate, if you pay the invoice after July 1, 2006.

21. If I purchase tickets before July 1, 2006 to attend a concert that is to be held after July 1, 2006, what rate of tax will apply to the purchase of these tickets?

GST/HST at 7% or 15% will apply to tickets purchased before July 1, 2006 for admission to a concert held on or after that date.

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Leases

22. The lease payment for my car is due June 15, but I do not pay it until after July 1, 2006. What rate of tax applies to this lease payment?

Since the lease payment is due before July 1, 2006, GST at the rate of 7% or HST at the rate of 15% will apply to the lease payment, even though you make the payment after July 1, 2006.

22.1 How will the GST rate reduction affect existing leases for vehicles?

GST/HST at the rate of 6% or 14% will apply to lease payments that become payable on or after July 1, 2006 without having been paid prior to that date, including those for leases that were in effect before the Budget announcement. As a result, all lessees of automobiles, RVs and boats should benefit from the GST reduction on the payments they make on or after July 1, 2006.

Imports

23. What rate of tax will I pay when I import goods?

GST at the rate of 6% will apply to taxable importations of goods imported on or after July 1, 2006 or released from customs control on or after that day.

In most cases, the 15% HST applies at the border to taxable importations of non-commercial goods imported by a resident of a participating province regardless of the point of entry into Canada or customs clearance. If these non-commercial goods are imported on or after July 1, 2006, or released from customs control on or after that day, the resident of a participating province will pay HST at the rate of 14%.

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Real Property

General

1. Does the new rate of tax (GST at 6% or HST at 14%) apply to real property purchased before July 1, 2006?

The new rate of tax (GST at 6% or HST at 14%) applies to a taxable purchase of real property where both ownership and possession are transferred on or after July 1, 2006. There is an exception to this general rule for the purchase of a new or substantially renovated residential complex. If either ownership or possession of the real property is transferred before July 1, 2006, GST at 7% or HST at 15% will apply.

2. Does the GST rate change affect the rate of HST payable in respect of a supply of real property made in a participating province?

The federal portion of the HST will be reduced from 7% to 6%. The 8% rate for the provincial component of the HST will not be affected. As such, a taxable supply of real property (other than a new residential complex where a written agreement of purchase and sale was entered into on or before May 2, 2006) made in a participating province, where ownership and possession of the property are transferred on or after July 1, 2006, will be subject to HST at a rate of 14%.

3. A GST/HST registrant purchases a commercial building that is fully leased to retail tenants. The registrant entered into the agreement of purchase and sale prior to May 2, 2006, and will receive ownership and possession after July 1, 2006. At what tax rate is the registrant required to report and pay the tax payable on the acquisition?

The taxable supply of the commercial building is subject to GST at 6% (or HST at 14%) where ownership and possession are transferred after July 1, 2006. The exception to the general rule is only applicable to the purchase of a new or substantially renovated residential complex and not to commercial real property.

4. A GST/HST registrant purchases a residential apartment building that is already fully occupied and leased to tenants on a long-term basis. Is the registrant required to pay GST/HST if they take possession and ownership of the property after July 1, 2006?

No, the supply of the residential apartment building is exempt pursuant to Part I of Schedule V to the ETA. There are no changes where the supply of the real property is exempt.

5. A GST/HST registrant paid the GST that was payable at the rate of 7% on the purchase of a commercial building. If the return for the reporting period in which tax becomes payable is due after July 1, 2006, can the registrant still claim an ITC at the 7% rate or are they restricted to 6%?

Since tax was payable at the rate of 7%, the registrant may claim an ITC for the GST paid provided that the conditions for claiming the ITC are met. If the commercial building was located in a participating province and HST was payable at 15%, the registrant would claim an ITC for the tax payable at 15%.

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Exception – new housing

6. Does the new rate of tax (GST at 6% or HST at 14%) apply to a new or substantially renovated residential complex purchased before May 2, 2006?

Where a written agreement of purchase and sale was entered into on or before May 2, 2006, and both ownership and possession are transferred on or after July 1, 2006, the GST at 7% or HST at 15% will apply. However, in these circumstances, a Transitional Rebate will be available to the purchaser to account for the rate reduction. If either ownership or possession is transferred before July 1, 2006, regardless of when the written agreement of purchase and sale was entered into, the GST at 7% or HST at 15% will apply and the purchaser will not be entitled to claim a Transitional Rebate.

6.1. After entering into a written agreement of purchase and sale before May 2, 2006, for a residential complex, the purchaser requests that additional upgrades be made to the complex. Does the new rate of tax (GST at 6% or HST at 14%) apply to the additional amount payable for the upgrades?

Upgrades to a residential complex will generally result in modifications to the existing agreement such that the upgrades form part of the agreement for the purchase and sale of the complex. In such a case, the tax rate applicable to the purchase of the complex will prevail. Since a written agreement of purchase and sale was entered into on or before May 2, 2006, the GST at 7% or HST at 15% will apply on the total amount payable for the complex, including the amount payable for the upgrades. However, if both ownership and possession of the complex are transferred on or after July 1, 2006, a Transitional Rebate will be available to the purchaser to account for the rate reduction based on the total amount payable for the complex, including the amount payable for the upgrades. If either ownership or possession is transferred before July 1, 2006, regardless of when the agreement was entered into, the GST at 7% or HST at 15% will apply and the purchaser will not be entitled to claim a Transitional Rebate.

6.2. A written purchase and sale agreement entered into on April 10, 2006, for a new residential complex, provides for standard kitchen cabinets and the purchaser negotiates with the builder for an upgrade to deluxe cabinets on May 16, 2006. Does the new rate of tax apply to the additional amount payable for the upgrade?

The additional amount that the builder charges for the upgrade will be an additional amount payable for the residential complex. The purchaser is not considered to have entered into a new agreement as a result of the upgrade and there is no impact on the application of the transitional rules. Since the agreement was entered into on or before May 2, 2006, if both ownership and possession are transferred on or after July 1, 2006, GST/HST will apply at the rate of 7% or 15% on the total amount payable for the residential complex, including the upgrade. In this case, the purchaser may claim a GST/HST Transitional Rebate. When determining the amount of the rebate, the total amount paid for the complex includes the additional amount paid for the upgrade. A GST/HST Transitional Rebate is not available if ownership or possession is transferred on or before July 1, 2006 and GST/HST will apply at the rate of 7% or 15%.

7. Does the new rate of tax (GST at 6% or HST at 14%) apply to new or substantially renovated housing purchased after May 2, 2006?

Where an agreement of purchase and sale is entered into after May 2, 2006, the new rate of tax (GST at 6% or HST at 14%) will apply provided both ownership and possession are transferred on or after July 1, 2006. If either ownership or possession is transferred before July 1, 2006, the GST at 7% or HST at 15% will apply and the purchaser will not be entitled to claim a Transitional Rebate.

8. A purchaser entered into a written agreement of purchase and sale in November 2005, to purchase a new residential complex, but does not take possession and title of the complex until after July 1, 2006. What rate of tax is applicable?

The purchase of a new residential complex under a written agreement of purchase and sale entered into on or before May 2, 2006 is subject to the GST at 7% or HST at 15% if both ownership and possession of the complex are transferred on or after July 1, 2006. However, in these circumstances, the purchaser of the residential complex will be entitled to claim a Transitional Rebate to account for the rate reduction.

9. A purchaser of a new residential complex will receive title to the complex before July 1, 2006, but will not have possession until after July 1, 2006. What rate of GST/HST is applicable?

GST at 7% (or HST at 15%) applies since ownership of the residential complex will be transferred before July 1, 2006, even though possession will be transferred after July 1, 2006. In this case, the purchaser will not be entitled to claim a Transitional Rebate since ownership will be transferred before July 1, 2006.

10. A person will obtain possession, under an agreement of purchase and sale, of a new condominium unit before July 1, 2006, but the closing date of the sale will not occur until after July 1, 2006. What rate of GST/HST is applicable?

GST at 7% (or HST at 15%) applies since possession of the residential complex will be transferred before July 1, 2006, even though title will be transferred after July 1, 2006. In this case, the purchaser will not be entitled to claim a Transitional Rebate since possession will be transferred before July 1, 2006.

10.1. What happens if the purchaser of a new residential complex replaces a previous purchaser in the agreement of purchase and sale?

It must be determined whether the agreement has been modified, varied or otherwise materially altered to the extent that a new agreement is entered into and, as a result, whether novation has occurred. If novation has occurred, the application of the transitional rule for sales of new housing will be based on the date the new agreement is entered into, as well as the dates that possession and ownership are transferred under that new agreement. Reference should be made to the draft policy statement released on June 27, 2005, entitled Agreements and Novation. If novation has not occurred, the application of the transitional rule will be based on the date that the agreement was entered into as well as the dates that ownership and possession are transferred under that agreement. Generally, however, a change in the purchaser (i.e., the person liable to pay for the supply) would result in a novation, i.e., a new agreement.

10.2. A written purchase and sale agreement is entered into on April 19, 2006 for a new residential complex where possession and ownership will be transferred on June 25, 2006. The purchaser and builder renegotiate the terms of the agreement and enter into a new agreement on May 5, 2006. Ownership and possession under the new agreement will be transferred on July 5, 2006. Does the new rate of tax (GST at 6% or HST at 14%) apply to this transaction?

Where the builder and purchaser renegotiate the terms of agreement to purchase a new residential complex and enter into a new agreement of purchase and sale, the transitional rule will apply to the new agreement. Since the new agreement is entered into after May 2, 2006, and possession and ownership, under the new agreement, are transferred on or after July 1, 2006, the GST will apply at 6% (or the HST at 14%). The purchaser is not entitled to claim a GST/HST Transitional Rebate in this situation.

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Transitional rebate

11. How does a person claim a Transitional Rebate?

To claim a Transitional Rebate, a person must complete an application form and file it with the CRA. If a new housing rebate is available in respect of the purchase, the individual who claimed the new housing rebate is the individual who claims the Transitional Rebate.

When the application form becomes available you will be able to obtain it on the CRA Web site or by calling 1-800-959-2221.

12. An individual is not entitled to claim a new housing rebate for their house because the purchase price of the house is $500,000. Can the individual claim a Transitional Rebate?

Yes. The Transitional Rebate is not conditional on receiving a new housing rebate, nor is it subject to any maximum purchase or fair market value amount.

13. Are there any restrictions on the type of property for which a Transitional Rebate may be claimed?

The Transitional Rebate may only be claimed in respect of a taxable purchase of a new or substantially renovated residential complex, and may include a deemed supply under section 191 of the ETA. A Transitional Rebate is not available in respect of an owner-built house.

14. An individual and their spouse purchase a new residential complex under a written agreement signed before May 2, 2006 and ownership and possession are transferred after July 1, 2006. The total consideration payable for the complex is $300,000. The individual claimed the new housing rebate. Are they entitled to the Transitional Rebate and if so can the spouse file the claim?

Yes, the Transitional Rebate is available for the purchase of a new residential complex under a written agreement entered into on or before May 2, 2006, where both the transfer of ownership and possession of the complex occur on or after July 1, 2006.

Where a Transitional Rebate is available and a new housing rebate is also available, the individual claiming the new housing rebate claims the Transitional Rebate.

15. An individual claimed a new housing rebate of $8,750 for a new residential complex that they purchased for $350,000. They are entitled to a Transitional Rebate as the complex was purchased under a written agreement signed before May 2, 2006, and ownership and possession will be transferred after July 1, 2006. What effect will the new housing rebate claim of $8,750 have on their Transitional Rebate?

The Transitional Rebate reflects the reduction in the tax rate (GST to 6% and HST to 14%) net of any adjustments for any corresponding rebate (e.g., a new housing rebate).

Where a new housing rebate is also available, the following formula will apply to determine the Transitional Rebate:

16. Is the Transitional Rebate only available to individuals?

No, any person purchasing a new or substantially renovated residential complex may be eligible to claim a Transitional Rebate unless the person was entitled to claim an ITC in respect of the purchase. The amount of the Transitional Rebate takes into account any rebate that the person may be entitled to claim (e.g., a new housing rebate or public service bodies rebate).

16.1 Can the transitional rebates available for purchasers of new housing be assigned or transferred to a builder?

No, there is no provision to assign, to the builder or to any other person, the transitional rebate available to purchasers of new housing. The purchaser must complete a separate application for the transitional rebate and submit it to the Summerside Tax Centre. Where the purchaser qualifies for a transitional rebate, payment of the transitional rebate will be made by the CRA to the purchaser only.

It should be noted that, while new housing rebates also cannot be assigned to the builder or any other person, the Excise Tax Act includes mechanisms to allow builders to pay or credit the amount of certain new housing rebates to a purchaser and to deduct the amount paid or credited in determining the builder's net tax, where certain conditions are met such as when the duly completed rebate application signed by the purchaser has been transmitted to the Minister of National Revenue. However, such mechanisms are not available for the transitional rebate. As a result, it is not possible for a builder to pay or credit an amount for the transitional rebate to the purchaser.

17. A person claimed a full ITC on the purchase of a new residential complex as it is used exclusively in commercial activities. Is the person able to claim a Transitional Rebate?

No, where an ITC is available in respect of the purchase of a residential complex, a Transitional Rebate is not available.

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GST/HST new housing rebates

18. Will there be any changes to the rules for claiming a new housing rebate for builder-built housing?

There will be a reduction of the maximum rebate amount from $8,750 to $7,560 to account for the reduction in the GST rate.

19. An individual purchases a newly constructed house from a builder for use as the individual’s primary place of residence. The purchase price is $320,000 plus GST, and the new housing rebate is not paid or credited to the individual by the builder. Is the purchaser eligible for a GST new housing rebate? If so, what is the amount of the rebate?

Individuals who purchase a house for use as their primary place of residence will continue to be entitled to a new housing rebate for part of the GST (or the federal component of the HST) that they pay on their purchase. Where the GST is payable at 7%, the maximum rebate amount is equal to the lesser of 36% of the GST paid and $8,750. Where GST is payable at 6%, the maximum rebate amount is equal to the lesser of 36% of the GST paid and $7,560.

Therefore, in this example, if ownership or possession of the house is transferred before July 1, 2006, such that GST is payable at the rate of 7%, the amount of the rebate would be equal to $8,064 (i.e., the lesser of $8,750 and 36% of the tax payable on the purchase of the house).

If ownership and possession are transferred on or after July 1, 2006, and GST is payable at the rate of 6%, the amount of the rebate would be $6,912 (i.e., the lesser of $7,560 and 36% of the 6% tax payable on the purchase price of $320,000).

20. Will the GST/HST rate reduction have any effect on the new housing rebate in respect of the provincial component of the HST available for a residential complex that is for use in Nova Scotia?

There will be no changes to the housing rebate in respect of the provincial component of the HST for a residential complex that is for use in Nova Scotia.

21. Will there be any changes to the rules for claiming a rebate for owner-built housing?

There will be a reduction of the maximum rebate amount from $8,750 to $7,560. In the case of owner-built homes where the owner incurs eligible expenses that are subject to GST at 7% and 6% (or HST at 15% and 14%), the claimant will be required to determine the extent to which tax was paid at 7% (or 15%) to determine the maximum rebate amount that is available. If all or substantially all of the tax was paid at the lower rate (6% GST or 14% HST), the maximum rebate amount will be $7,560.

22. An individual is building a new house. Do they have to keep track of the invoices for which they pay 7% GST (or 15% HST) and those for which they pay 6% GST (or 14% HST)? How do they calculate the maximum new housing rebate for which they are eligible?

Yes, they must keep track of all invoices for purchases that are taxed at the higher rate (7% GST or 15% HST) and the lower rate (6% GST or 14% HST). The maximum new housing rebate will be determined on a proportional basis. The maximum rebate amount is equal to $7,560 plus the extent (expressed as a percentage) to which tax was paid at 7% multiplied by $1,260. If all or substantially all of the tax was paid at the lower rate (6% GST or 14% HST), the maximum rebate amount will be $7,560.

For example if 60% of the individual’s tax paid was at the rate of 7%, the maximum rebate amount will be:

23. What effect will the GST rate reduction have on the cooperative housing rebate?

The maximum amount of a cooperative housing rebate will be reduced from the lesser of $8,750 and 2.34% of the total consideration payable to the lesser of $7,560 and 2.04% of the total consideration payable for a share of or interest in the corporation, complex or unit. The thresholds for the total consideration will be reduced from $481,500 to $477,000 and the amount at which the phase-out applies will be reduced from $374,500 to $371,000.

24. Will the GST/HST rate reduction have any effect on the new residential rental property rebate?

As with the new housing rebate, there will be a reduction of the maximum rebate amount from $8,750 to $7,560.

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Leases

25. A person enters into a commercial lease with their landlord on March 1, 2006. The lease payments are subject to tax and are due on the first of each month. What effect will the GST/HST rate reduction have on the monthly rental payments?

GST/HST becomes payable on a supply of real property by way of lease, licence or similar arrangement on the earlier of when the payment is made and when the payment is required to be made under the agreement for the supply. Therefore, where lease payments are due on the first of each month, GST at 6% (or HST at 14%) will apply to a lease payment due on or after July 1, 2006, unless the payment was made earlier. The GST at 7% (or HST at 15%) will apply to lease payments that become due before July 1, 2006, or that are paid before July 1, 2006 without having become due.

26. Before July 1, 2006, a corporation makes prepaid lease payments for their Halifax offices until the end of 2006. At what rate is HST applicable to the lease payments?

HST becomes payable on a supply of real property by way of lease on the earlier of the day the payment is made and the day the payment is required to be made under the agreement. Since the pre-payments for the lease were made before July 1, 2006, HST at the rate of 15% applies to these payments.

27. What rate of GST/HST will apply to lease payments due before July 1, 2006, which are paid after July 1, 2006?

Even if paid after July 1, 2006, 7% GST (or 15% HST) will apply to all lease payments that become due before July 1, 2006.

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Services and real property

28. An individual purchases a parcel of land prior to May 2, 2006. After May 2, 2006, the individual enters into an agreement for the construction of a house that is to be used as that individual's primary place of residence once it is completed. The individual makes progress payments to the company constructing the house. The house is completed after July 1, 2006. What rate of tax applies to the progress payments? What effect will the change in the GST/HST rate have for payments made after July 1, 2006 in respect of services performed before that date?

For progress payments made under a construction contract, the tax is payable on the value of each payment on the earlier of the day on which the payment is made and the day on which the payment becomes due. Therefore, all progress payments that are payable on or after July 1, 2006, and that are not paid before July 1, 2006, are subject to tax at the new rate (GST at 6% or HST at 14%). Progress payments that are made or that become payable before July 1, 2006 are subject to GST at 7% or HST at 15%. The rate of tax is dependent on when the tax is paid or becomes payable rather than when the services are performed.

29. Before July 1, 2006, a corporation enters into a long-term fixed price contract, including GST/HST, with a registrant for the maintenance and renovation of several buildings owned by the corporation before July 1, 2006. What effect will the GST/HST rate change have on these contracts?

All payments made or that become due before July 1, 2006 would be subject to GST at 7% (or HST at 15% for a supply in a participating province), whereas all payments that become due on or after July 1, 2006, and that are not paid before July 1, 2006, would be subject to GST at 6% (or HST at 14%).

30. What rate of GST/HST applies to services, such as legal services, or sales commissions, that are in respect of supplies of real property?

The rate of tax in respect of a supply of a service in relation to real property is dependent on when the tax becomes payable or is paid. Where tax becomes payable, or is paid without having become payable, before July 1, 2006, GST at 7% or HST at 15% will apply. Where tax becomes payable or is paid on or after July 1, 2006 without having been payable before that date, tax at the new rate (GST at 6% or HST at 14%) will apply.

Generally, tax payable in respect of a supply of a service is payable on the earlier of when payment is made and when the consideration for the supply becomes due. The consideration for a supply generally becomes due when the supplier issues an invoice in respect of the supply. If there is an undue delay in issuing an invoice, tax becomes payable on the day the invoice would have been issued had their been no delay.

31. An individual purchases a residential complex and takes ownership and possession of the complex before July 1, 2006. The individual’s lawyer issues an invoice to the individual for services rendered in relation to the purchase of the complex after July 1, 2006. What rate of tax applies to the legal services provided?

In the absence of any other factors (e.g., an undue delay in issuing the invoice), the tax becomes payable when the lawyer issues the invoice or at the time payment was made if that time is earlier than the time of issuing the invoice. Given that the invoice was issued after July 1, 2006, the lawyer will charge tax at the new rate (GST at 6% or HST at 14%).

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Public service bodies

32. How will the change affect public service bodies that are deemed to have made and received a supply of real property as a result of the revocation of an election made under section 211 of the ETA?

Public service bodies that are deemed to have made and received a supply of real property as a result of revoking an election made under section 211 will be deemed to have paid and collected tax equal to the basic tax content of the property, rather than tax calculated on its fair market value. The deemed tax collected upon revocation of the election will no longer qualify for the public service bodies rebate since the basic tax content is an amount that takes rebates into account.

This change will apply in respect of GST/HST deemed to have been paid and collected on or after May 2, 2006.

First Nations taxes

1. I am an Indian residing on an Indian reserve where I own and operate a gas station as a proprietor. I charge my customers the community improvement fee imposed by the Indian band, which is a First Nation Tax (FNT) that replaces the GST on sales of fuel on the reserve. Will the rate of tax that I charge to my customers be affected by the reduction of the rate of GST?

Yes, since the rate of the FNT follows the rate of GST, the rate of FNT on the three products to which it applies (fuel, alcoholic beverages and tobacco products) will be reduced to 6%. As a result, on or after July 1, 2006, you will charge 6% FNT to all of your customers purchasing fuel on reserve, and your suppliers who deliver fuel to you on reserve will charge 6% FNT to you. You will continue to complete the form GST499.

2. I am a First Nations individual residing on an Indian reserve where FNT is imposed by my Indian band on certain products. Will the reduction of the rate of GST mean that the rate of FNT we pay will be reduced as well?

Yes, the rate of FNT will be reduced to 6%.

3. I am a First Nations person residing on Settlement Lands of a self-governing First Nation in the Yukon that imposes a First Nation Goods and Services Tax (FNGST) on supplies acquired on its lands. I own and operate a convenience store that is located on these lands. Will the rate of tax that I charge to my customers be affected by the reduction of the rate of GST?

Yes, the rate for the FNT follows the rate of GST. As a result, on July 1, 2006, the rate of FNGST will be reduced to 6%. You will charge 6% FNGST to your customers, and your suppliers delivering to you on the Settlement Lands will charge 6% FNGST to you.

4. I reside on the Settlement Lands of a self-governing First Nation in the Yukon that has imposed FNGST on its lands. Will the reduction of the rate of GST mean that I will pay a reduced rate of FNGST?

Yes, on July 1, 2006, the rate of FNGST will be reduced to 6%, for everyone acquiring taxable property and services on the Settlement Lands.

5. I am the comptroller for a large automotive fuel refiner and supplier. We deliver fuel to gas stations on Indian reserves and, in the Yukon, on Settlement Lands of self-governing First Nations. FNT has been imposed on a number of the Indian reserves that we deliver fuel to. In Yukon, there are gas stations that we deliver to that collect FNGST for the First Nation. Will the reduction of the rate of GST affect our administration of the FNT and the FNGST?

Yes, since the rate of the FNT and FNGST follows the rate of GST, the rate of both FNT and FNGST will be reduced to 6% on July 1, 2006.

As a result, the only change will be that you will charge 6% FNT or FNGST to your clients as applicable on or after July 1, 2006.