Trying to make sense of HST

by John Goddard, Executive Director

There has been a great deal of confusion over the introduction of Harmonized Sales Tax into Ontario, as well as a great deal of misinformation. I am going to try and clarify some of that for our members, but I also encourage each member organization to consult with their own accountant or auditor to consider their own specific situation.

I will start by saying that I have found that the best way to remove the confusion is to change your mind set—that is how I was able to get a much clearer picture and maybe it will work for you. If you try to understand HST by imagining that it is a combination of PST (Provincial Retail Sales Tax) and GST (Goods and Services Federal Tax) you will give yourself needless frustration. The best way to understand HST is to realize that PST has been abolished (hurrah!) and coincidentally, at the same time GST has been increased from 5% to 13% (boo!)

What has happened is that the provincial government has made a basic change in their approach to consumer taxation by eliminating the consumption tax (PST) and joining the federal government in their “value-added” tax system (GST). The difference is that under the consumption tax, the cost of an article includes a tax on the value of the article which keeps accumulating with each step along the delivery chain – supplier, manufacturer, deliverer, retailer; under a VAT (value-added tax) the cost of the article for re-sale includes only a tax on the difference between the purchaser’s cost price and their re-sale price. And the consumer pays the same tax amount either way.

As of July 1, 2010 the cost of articles is supposed to decrease, in theory, because at every step along the journey from raw material to finished consumer product, we will no longer be adding 8% PST. The consumer will still pay 13% tax at the end of the line (was 5% GST plus 8% PST, now 13% HST), but on a lower base cost. That at least is the theory.

Our community theatre groups will be largely unaffected by the change. Under the regulations of the GST, "Admissions are…exempt when supplied to spectators of a performance,… at which 90% or more of the performers…are not paid, directly or indirectly, for their participation other than by government grants, reasonable gifts, prizes, compensation for travel, and other incidental costs."  (See Revenue Canada's guidelines for Non-Profit Organizations and for Charities)  These same regulations will apply to HST.

N.B. There may be other transactions on which HST will have to be collected (i.e. bar sales) but the same regulations apply now with HST as did before with GST.

The situation is not, however, as happy for our professional members. Almost all professional theatre companies’ admission tickets were PST-exempt and only GST at 5% was charged. Now that PST has been abolished, so too has its exemptions, and professional theatres must now charge tax at 13% rather than 5% on their tickets effective July 1 (or tickets for events which happen after July 1).

On the expense side of the ledger, the situation is different for our industry than for manufacturers or retailers. Many of the elements bought by theatres were PST-exempt (professional fees, royalties, etc.) so there is no great savings on raw materials when the PST is abolished. There will, however, be the same opportunity to claim ITC (Input Tax credits) on the GST/HST spent as before, to off-set against tax collected and due.

In order to compensate for this inequity for not-for-profit companies, the government has introduced a rebate program for Charities (i.e. not all not-for-profits) whereby they can claim a refund of 82% of the increased tax they have been charged for goods and services purchased.  (Click here to download a PDF from the Theatre Ontario website showing how this would work for charities.)

Any charity should prepare now to separate their tax accounting programs/procedures so as not to mix GST and HST. Keep them in separate Balance Sheet accounts, particularly in this year of transition, in order to claim your refund. The actual procedures and policies have not as yet been published. We will keep our eyes and ears open and advise you as soon as we have the information.

And, as a last caveat: this is intended as a general overview only and you should always check with your own accountant who is familiar with the particulars of your own situation. His/Her advice will always take precedence over this general overview.

Good luck!