Rescinded - Policy Notice - Reduction in the Rate of the GST/HST

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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):

 

Nova Scotia, New Brunswick and Newfoundland

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%)

5/105
(4.76%)

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:
 

Nova Scotia, New Brunswick and Newfoundland

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:

 

Federal Component of the HST (i.e. 6%)

Provincial Component of HST (i.e.8%)

  

NS

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