Rescinded - Policy Notice - Reduction in the Rate of the GST/HST

Date: December 21, 2007

To: Senior Financial Officers and Senior Full-time Financial Officers

Subject: Reduction in the Rate of the GST/HST

On October 30, 2007, the Government of Canada proposed a one-percentage point reduction to the Goods and Services Tax/Harmonized Sales Tax (GST/HST) effective January 1, 2008. The current Excise Tax Act (the ETA) imposes GST/HST on most goods and services consumed in Canada, at the rate of 6%, and in the participating provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador, at the rate of 14%. Effective January 1, 2008, the rate of tax will be reduced by one-percentage point to 5% for GST and 13% for HST.

This information notice provides guidance to departments in understanding how the reduction in these rates will apply to Treasury Board policy and to departmental operations.

Policy

As of January 1, 2008, 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 a GST rate of 7% must now be read as 5% and references to an HST rate of 15% must now be read as 13%.

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 January 1, 2008 without having been paid before that day, the rate of 5% GST or 13% HST will apply.
• If GST/HST is paid on or after January 1, 2008 without having become payable before that day, the rate of 5% GST or 13% HST will apply.
• If GST/HST becomes payable or is paid before January 1, 2008, the rate of 6% GST or 14% 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 January 1, 2008 will include GST at the rate of 6%, or HST at the rate of 14%. Amounts paid or payable under this contract on or after January 1, 2008 will include GST at the reduced rate of 5%, or HST at the reduced rate of 13%.

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 December 2007, for a supply that is made on or after January 1, 2008, the $100 will not be treated as consideration for the supply until on or after January 1, 2008. Therefore, GST/HST at the rate of 5% or 13% 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 January 1, 2008, GST/HST at the reduced rate of 5% or 13% will apply to the holdback amount.

3.  Prepayments, Partial Payments or Progress Payments

Partial payments before January 1, 2008 for services to be performed on or after January 1, 2008, will be subject to GST at the rate of 6% or HST at the rate of 14%.

For example, a service is to be performed after January 1, 2008 for which an invoice will be issued after January 1, 2008. A partial payment of $100 is paid before January 1, 2008. That partial payment will be subject to GST at 6% or HST at 14%.

Note: If you are unsure as to whether a payment is a deposit, or a prepayment for the purpose of applying GST/HST, contact your local GST/HST Rulings Centre at the Canada Revenue Agency to clarify the status of the payments.

4.  Leases

The 5% GST will apply to a lease payment due on or after January 1, 2008, unless it is paid before that date. If the supply of the leased property is made in a participating province, the 13% HST will apply to a lease payment due on or after January 1, 2008, unless it is paid before that date.

The 6% GST or 14% HST will apply to a lease payment due before January 1, 2008, even if it is paid after January 1, 2008.

Note: Lease payments are usually due and payable prior to the lease period. If the lease period starts before January 1, 2008, for example December 15, then the lease payment is payable before that date and would therefore be subject to GST at 6% or HST at 14%.

5.   GST and HST – Charged/Collected and Paid

The examples of accounting transactions outlined in the Procedural Requirements 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 should be read as follows:

• The amounts that are accounted for in accounts receivable, accounts payable, bank and cash accounts should be $105.00 instead of $107.00.
• The amounts that are accounted for in GST/HST payable to CRA, GST/HST Refundable to CRA, IS (credit control) and IS (debit control) accounts should be $5.00 instead of $7.00.   

6.   Employee Reimbursements and Allowances

There are two methods available to calculate the GST and HST on expenses reimbursed to employees. These methods are 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. These methods will change as follows:

Method 1: The amount that may be charged to the Refundable Advance Account (RAA) is calculated using the following applicable factors:

Where the expenses are paid on or after January 1, 2008, and 90% of these expenses are subject to GST at the rate of 5%, the 4/104 factor should be used to calculate the amount to charge the RAA. If 90% of these expenses are subject to HST at the rate of 13%, the factor 12/112 should be used.

Method 2: The amount that may be charged to the RAA is based on a combination of actual GST/HST incurred plus GST/HST on allowances that were paid to the employee. Allowances paid to employees include meals and incidental allowances and kilometre rates as set out in the Travel Directive. The GST/HST on allowances is calculated using the following factors:

In the case of reimbursements and allowances, the rate is determined based on the date the reimbursement or allowance is paid by the department to the employee.

More detailed information is available in GST/HST Info Sheet GI-039, Applying the GST/HST Rate Reduction to Allowances and Reimbursements.

7.   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 January 1, 2008 without having been paid before that day, the rate of 5% GST or 13% HST will apply.
• If GST/HST is paid on or after January 1, 2008 without having become payable before that day, the rate of 5% GST, or 13% HST will apply.
• If GST/HST becomes payable or is paid before January 1, 2008, the rate of 6% GST or 14% HST will apply.

Transfer payments

Under a transfer payment program, when eligible amounts include the un-rebated 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 January 1, 2008, the recipient of funding under a contribution agreement seeks reimbursement for GST incurred both before and after January 1, 2008. The recipient should be reimbursed for the actual cost of GST that may include amounts at both 6% and 5%.

As set out in the policy, these amounts must 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.

As of January 1, 2008, the rebates in section (c) are calculated as follows for designated municipalities (i.e. NS, NB, NFLD/LAB):

Federal departments and agencies located outside of the HST participating provinces of Newfoundland and Labrador, Nova Scotia, and New Brunswick, may claim the municipal rebate of 100%.

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 January 1, 2008, GST is to be charged at the rate of 5%, or HST charged at the rate of 13%, even if the service was rendered prior to January 1, 2008.

Note: The issuance of invoices must not be delayed in order to attract a reduced rate of GST/HST.

The following are other considerations that apply 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 January 1, 2008. GST/HST rates are applicable as follows:

• GST at the rate of 6% or HST at the rate of 14% will apply to the pre-payments as the good or service was either invoiced or paid prior to January 1, 2008.
• GST at the rate of 5% or HST at the rate of 13% will apply to the remaining consideration for those goods or services invoiced on or after January 1, 2008.

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 January 1, 2008, 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 6% or 14% will be subject to the GST/HST at the same rate.

3.  Leases

The 5% GST will apply to a lease payment that is receivable on or after January 1, 2008, unless it was received before that date. If the supply of the leased property is made in a participating province, the 13% HST will apply to a lease payment due on or after January 1, 2008, unless it was paid before that date.

The 6% GST or 14% HST will apply to a lease payment that is receivable before January 1, 2008.

Note: Lease payments are usually due and receivable prior to the lease period. If the lease period starts prior to January 1, 2008, then the lease payment is receivable prior to that date and would therefore be subject to the 6% rate of GST or the 14% rate of HST.

Financial Information Strategy (FIS)Accounting Manual

A number of GST / HST references and examples in the FIS Accounting Manual use GST at 7%, which as of January 1, 2008 should be read as 5%, and use HST at 15%, which as of January 1, 2008 should be read as 13%. 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

Enquiries

Should you require additional information on this subject please do not hesitate to contact Stephen Cole, Financial Management Policy Division (FMPD), at  613-941-7200 or by e-mail at  Cole.Stephen@tbs-sct.gc.ca.

Should you have technical questions about the tax rate reduction, please contact the Canada Revenue Agency GST/HST Technical Enquiries toll-free:

• 1-800-959-8287 (Service in English)
• 1-800-959-8296 (Service in French).

Original signed by John Morgan

 Assistant Comptroller General
Financial Management and Analysis Sector
Office of the Comptroller General