DATE: June 13, 2006
TO: Senior Financial Officers and Senior Full-time Financial Officers
SUBJECT: Reduction in the Rate of the GST/HST
On May 2, 2006, as part of Budget 2006, the Minister of Finance announced a
one-percentage point reduction to the Goods and Services Tax (GST) effective
July 1, 2006. The current 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%. Effective July 1,
2006, the rate of tax will be reduced by one-percentage point to 6% for GST and
14% for HST.
This information notice provides guidance to departments in understanding how
the reduction in these rates will apply to the policy and to Treasury Board
departmental operations.
Policy
As of July 1, 2006, all references in the Treasury Board Policy on the
Application of the GST/HST in the Departments and Agencies of the Government of
Canada to GST at 7% must now be read as 6% and references to HST at 15% must
now be read as 14%.
Purchases of Taxable Goods and Services
The new GST/HST rates apply to the purchase 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 rate of 6% GST or 14% HST will apply.
- If GST/HST is paid on or after July 1, 2006 without having
become payable before that day, the rate of 6% GST or 14% HST will apply.
- If GST/HST becomes payable or is paid before July 1, 2006, the rate of 7%
GST or 15% HST will apply.
GST/HST becomes payable either on the date on the invoice or on the payment
date under a written agreement, whichever is earlier.
Other considerations applicable on the purchase of taxable goods and
services:
1. Long-Term Fixed Price Contracts
Amounts paid or payable under a long-term fixed price contract before July 1, 2006
will include GST at the rate of 7%, or HST at the rate of 15%. Amounts paid or
payable 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%.
2. 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 deposit of $100 is made in April 2006, for a supply that is
made on or after July 1, 2006, the $100 will not be treated as
consideration for the supply until on or 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.
3. Prepayments, Partial Payments or Progress Payments
Partial payments before July 1, 2006 for services to be performed on or after
July 1, 2006, will be subject to GST at the rate of 7% or HST at the
rate of 15%.
For example, a service is to be performed after July 1, 2006 for which an
invoice will be issued after July 1, 2006. A partial payment of $100 is paid
before July 1, 2006. That partial payment will be subject to GST at
7%, or HST at 15%.
Note: If you are unsure as to whether for GST/HST purposes a payment
is a deposit, or a prepayment, contact your local GST Rulings Unit at Canada
Revenue Agency to clarify the status of the payments.
4. Leases
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.
Note: Lease payments are usually due and payable prior to the lease
period. If the lease period starts prior to July 1, 2006, for example June 15,
then the lease payment is payable prior to that date and would therefore be
subject to the 7% rate of GST, or the 15% rate of HST.
5. Employee Reimbursements and Allowances
GST and HST on expenses reimbursed to employees as outlined in Appendix C, in
the Policy on the Application of the Goods and Services Tax and the Harmonized
Sales Tax in the Departments and Agencies of the Government of Canada will
change as follows:
For those reimbursed expenses for which a department uses method 1 to
calculate the amount that may be charged to the Refundable Advance Account
(RAA):
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Nova Scotia, New Brunswick and Newfoundland
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Other Provinces
|
Reimbursements Paid or Payable on or before June 30,
2006 Current Policy
|
14/114
(12.28%)
|
6/106
(5.66%)
|
Reimbursements Paid or Payable on or after July 1, 2006* Policy
Revision
|
13/113
(11.50%)
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5/105
(4.76%)
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Where 90% or more of the expenses are incurred on or after July 1, 2006, the
5/105 or 13/113 should be used to calculate the amount to be charged to the RAA.
Note: Employees must be reimbursed for GST/HST incurred. The above
provides departments the basis to calculate the GST/HST amount chargeable to the
Refundable Advance Account on the total amounts (expenditure plus all applicable
taxes) incurred by the employee.
- (Method 2 will continue to be based on actual GST/HST incurred as set out
in the policy.)
- Allowances paid to employees for per diems, meals and incidental
allowances and kilometre rates as set out in the Travel Directive:
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Nova Scotia, New Brunswick and Newfoundland
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Other Provinces
|
Reimbursements Paid or Payable on or before June 30,
2006 Current Policy
|
15/115
(13.04%)
|
7/107
(6.54%)
|
Reimbursements Paid or Payable on or after
July 1, 2006* Policy Revision
|
14/114
(12.28%)
|
6/106
(5.66%)
|
In the case of reimbursements and allowances, paid or payable is based on the
date the reimbursement or allowance is paid to the employee by the department.
More detailed information is available in GST/HST Info Sheet GI-014,
Applying the GST/HST Rate Reduction to Allowances and Reimbursements.
6. Specified Purpose Accounts
When purchasing taxable supplies using specified purpose account (SPA) funds,
the SPA will be charged GST/ HST on such purchases in the following manner:
- If GST/HST becomes payable on or after July 1, 2006 without having been
paid before that day, the rate of 6% GST or 14% HST will apply.
- If GST/HST is paid on or after July 1, 2006 without having
become payable before that day, the rate of 6% GST, or 14% HST will apply.
- If GST/HST becomes payable or is paid before July 1, 2006, the rate of 7%
GST or 15% HST will apply.
Transfer payments
Where under a transfer payment program eligible amounts include the unrebated
GST/HST incurred by the recipient of a transfer payment, the amount should
include the GST/HST as incurred and claimed by the recipient of the funding.
For example, in a claim made on or after July 1, 2006, the recipient of funding
under a contribution agreement seeks reimbursement for GST incurred both before
and after July 1, 2006. The recipient should be reimbursed for the actual cost
of GST that may include amounts at both 7% and 6%.
As set out in the policy, these amounts may not be charged to the RAA.
GST Exemption for Federal Government in providing Water, Sewerage and
Drainage Supplies
In the Policy on the Application of the GST/HST in the Departments and
Agencies of the Government of Canada Appendix F provides the GST exemption for
Federal Government in providing water, sewerage and drainage supplies
Where under a transfer payment program eligible amounts include the unrebated
GST/HST incurred by the recipient of a transfer payment, the amount should
include the GST/HST as incurred and claimed by the recipient of the funding. For
example, in a claim made on or after July 1, 2006, the recipient of
funding under a contribution agreement seeks reimbursement for GST incurred both
before and after July 1, 2006. The recipient should be reimbursed for the actual
cost of GST that may include amounts at both 7% and 6%.
As of July 1, 2006, the table must now be read as:
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Federal Component of the HST (i.e. 6%)
|
Provincial Component of HST (i.e.8%)
|
|
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NS
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NB
|
NFLD/LAB
|
Municipality
|
57.14%
|
57.14%
|
57.14%
|
0%
|
Provision of Taxable Products and Services
When an invoice is issued, by a Federal Department for the provision of
taxable goods and services, on or after July 1, 2006, GST is to be
charged at the rate of 6%, or HST charged at the rate of 14%, even if the
service was rendered prior to July 1, 2006.
Note: The issuance of invoices must not be delayed in order to attract
a reduced rate of GST/HST.
Other considerations applicable to the provision of taxable goods and
services:
1. Prepayments
If the customer has prepaid for goods or services, that will be performed or
received on or after July 1, 2006. GST/HST rates are applicable as follows:
- GST at the rate of 7%, or HST at the rate of 15% will apply to the
pre-payments as the good or service was either invoiced or paid prior to
July 1, 2006.
- GST at the rate of 6%, or HST at the rate of 14%, will be applicable to
the remaining consideration for those goods or services invoiced on or after
July 1, 2006.
The same principles are applicable in the case of a long-term contract.
2. Price Adjustments and Returned Goods
When a price adjustment is made or goods are returned on or after July 1,
2006, the rate of GST/HST that applies to the adjustment or return will be the
rate of tax that applied to the original supply. For example, a price adjustment
in relation to a supply taxed at 7% or 15% will be subject to the GST/HST at the
same rate.
3. Leases
The 6% GST will apply to a lease payment that is receivable on or after July
1, 2006, unless it was received 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 receivable before July 1, 2006.
Note: Lease payments are usually due and receivable prior to the lease
period. If the lease period starts prior to July 1, 2006, then the lease payment
is receivable prior to that date and would, therefore, be subject to the 7% rate
of GST, or the 15% rate of HST.
Financial Information Strategy Accounting Manual
A number of GST / HST references and examples in the FIS Accounting Manual
use GST at 7%, which as of July 1, 2006 should be read as 6%, and use HST at
15%, which as of July 1, 2006 should be read as 14%. The sections impacted by
the change in GST/HST are:
- 3.3 Inventories
- 4 Accounts Payable
- 6 Revenue
- 9.1 Specified Purpose Accounts
- 9.3 Sales Tax
It is very important to note that the actual accounting treatment remains the
same. It is solely the rate reduction and its resulting impact on calculations
used in examples that is subject to change.
Additional Considerations by Departments
Departments must also consider the timing of implementation of the changes
above and incorporate these into:
1. Financial Systems
2. GST/HST Rate References on documentation, such as invoices,
contracts, etc.
3. Departmental Polices
4. Internal Departmental Communications
Should you require additional information on this subject please do not
hesitate to contact Gail McLellan, Financial Management Policy Application
Division (FMPAD), at 613-941-7200 or by e-mail at McLellan.Gail@tbs-sct.gc.ca.
John Morgan
Acting Assistant Comptroller General
Financial Management and Analysis Sector
Office of the Comptroller General
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