FEATURE OntarioHarmonizedSalesTax: areyoureadyforthetransition?

by Lesley Tela KPMG

In the recent provincial budget, the government announced its intention to implement a new harmonized , effective July 1, 2010. The HST will combine the current federal Goods and Services Tax (5%), with the provincial Retail Sales Tax (8%), to produce a federally administered sales tax of 13%. The application of the HST will vary according to individual practice type. However, it is anticipated that the greatest finan- cial impact of the HST on physician practices will relate to practice expense components such as lease/rent costs and professional services such as accounting and legal services, which are currently taxed at the 5% GST rate. The OMA Board has undertaken a number of measures to investigate the potential impact of the HST on members, and to explore potential opportunities to offset or minimize increased expenses that may be incurred by members. This work is ongoing. Further, the Board hired KPMG Canada to prepare an independent report on the potential issues that members may encounter as a result of the harmonized sales tax. The report appears below.

hysicians practising in Ontario included below some general infor- and includes any supply other than will be affected by Ontario’s mation regarding the operation of an exempt supply. The term “taxable plan to harmonize its provin- the GST as it is currently structured. supply” includes a zero-rated supply. cial sales tax with the federal The GST applies at a rate of 5% to Zero-rated supplies (e.g., exported PGoods and Services Tax (GST), effec- most goods and services supplied in goods/services, medical devices, tive July 1, 2010. The following alert Canada. Generally, every person who basic groceries) are taxable supplies addresses the most common issues makes a taxable supply (including a to which a 0% rate of GST applies. to be faced by Ontario physicians as zero-rated supply — defined below) Suppliers who make zero-rated sup- a result of harmonization. in Canada in the course of a commer- plies are generally entitled to recover cial activity is required to register, all of the GST paid on expenditures Structure of the HST unless the person qualifies as a small incurred in order to make such sup- supplier (less than $30,000 annual plies. As announced in the March 26, 2009 taxable supplies). GST does not apply to certain sup- budget, Ontario plans to introduce a For the purposes of the GST, the plies deemed to be exempt from tax, single, harmonized federally adminis- term “supply” includes the provision such as health-care services and tered sales tax (HST), with a 13% rate, of property or services in any man- financial services. Unlike zero-rated effective July 1, 2010 (the implemen- ner, including a sale, transfer, rental, supplies, suppliers who make exempt tation date). The HST will generally lease, etc. supplies are not entitled to recover employ the same rules and tax base as Businesses that are registered for GST paid on expenditures incurred in the GST. There will be no separate GST purposes are required to collect order to make exempt supplies. requirement to register for the HST. and remit GST on taxable supplies Thus, physicians currently registered made in Canada and are entitled to HST and Health-Care Services for the GST will automatically be reg- claim an offsetting input tax credit istered for the purposes of the HST. (ITC) for GST paid on expenditures Once the HST comes into effect, acquired for use in commercial activ- physicians who are GST registered GST – The Basics ities (i.e. in the making of taxable will be required to charge and collect supplies). tax at a rate of 13% on any taxable As the upcoming HST is to be mod- A taxable supply is a supply made supplies (other than zero-rated sup- eled after the current GST, we have in the course of a commercial activity plies) of goods and services they sup-

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that must be met in order for a med- Table 1 ical device to qualify for zero-rating. For a detailed listing of the types of Services currently GST exempt. Services currently GST taxable goods that qualify for zero-rating and These services will remain at a rate of 5%. These services the conditions that may apply, please exempt from HST after imple- will attract HST at a rate of 13% refer to the mentation. after implementation. GST/HST Memoranda Series 4.2, entitled Medical and Assistive De- • Insured services for which the • Uninsured cosmetic surgery vices (http://www.cra-arc.gc.ca/E/ cost is reimbursable by OHIP. (other than procedures per- pub/gm/4-2/README.html). • Uninsured services provided formed for medical/recon- Medical/assistive devices that cur- by a physician that qualify as structive purposes). rently qualify for zero-rating will consultative, diagnostic, treat- • Uninsured consulting services remain zero-rated upon implementa- ment or other health-care provided by physicians (e.g., tion of the HST. services rendered to an indi- research services provided to vidual. pharmaceutical companies). Input tax credit entitlement • Expert witness fees for court Generally, ITCs can only be claimed appearances. by GST registrants who are engaged in commercial activities (i.e. in the making of taxable supplies, includ- ply in the province of Ontario. ical/surgical procedures that are per- ing zero-rated supplies). Persons Supplies that are currently exempt formed for cosmetic purposes and who are engaged exclusively in mak- from GST will remain exempt under not for medical or reconstructive pur- ing exempt supplies are not entitled HST so there will be no requirement poses are currently subject to GST at a to register, nor are they entitled to to collect HST on such supplies. rate of 5%. These services will attract claim ITCs. Physicians who are not currently HST at a rate of 13% post-implemen- Accordingly, physicians who only registered for GST purposes (such as tation where such services are per- supply exempt health-care services, GPs that make only exempt supplies) formed in Ontario. including both insured and unin- will not be affected by the HST with Table 1 (above) provides exam- sured services that qualify as consul- regards to the services they provide. ples of common services provided by tative, diagnostic, treatment or other As detailed below, all physicians, physicians that are currently exempt health-care services rendered to an whether registered or not, will be from GST and will remain exempt, as individual (such as GPs), are not affected by the fact that HST at a rate well as those services currently sub- entitled to register or claim ITCs in of 13% will apply to most of their ject to GST that will attract HST. respect of the GST paid on purchases costs other than labour, whereas the In addition to providing services, of materials, equipment, and/or ser- current provincial sales tax only physicians may also supply their vices acquired to provide their tax- applied to certain costs. patients with goods, some of which exempt services. This will remain may qualify for zero-rating as med- the case after the introduction of the Which services will attract HST? ical/assistive devices. As noted above, HST. Currently, the majority of health- supplies of zero-rated goods are con- Physicians who make both GST care services supplied by physicians sidered to be taxable supplies, but at taxable and GST exempt supplies are are exempt from GST. These services a rate of 0%. Some examples of goods entitled to register and claim ITCs for will remain exempt once the HST is that currently qualify for zero-rating the tax incurred on goods/services introduced. Specifically, all insured as medical and/or assistive devices acquired that directly relate to the services for which the cost is reim- are as follows: taxable supplies made by the physi- bursable by OHIP will remain exempt • Heart monitoring devices cian. ITCs for expenditures that are from HST. In addition, uninsured ser- • Hearing aids used in the making of both taxable vices provided by physicians that cur- • Insulin pumps, syringes and exempt supplies must be appor- rently qualify for exemption from • Orthotic and orthopedic devices tioned on a reasonable basis. GST will remain exempt from HST. In • Medical/surgical prosthesis For example, a physician who per- this regard, uninsured services pro- • Eyeglasses/contact lenses forms both exempt reconstructive vided by a physician are generally • Aerosol chambers, inhalers surgery and taxable cosmetic surgery exempt from GST where the service • Blood glucose monitors/test strips would be considered to be engaged in supplied is a consultative, diagnostic, • Specially designed footwear making a mixture of both taxable treatment or other health-care service • Canes and crutches (cosmetic) and exempt (reconstruc- rendered to an individual. It should be noted that in some tive) supplies. As such, the physician Uninsured services such as med- cases, there are specific conditions would be entitled to claim ITCs for

26 Ontario Medical Review • May 2009 Ontario Medical Review • May 2009 2 Ontario Harmonized Sales Tax those expenditures incurred that directly relate to making taxable sup- Table 2 plies of cosmetic procedures, while ITCs for expenditures directly in- Tangible goods currently ORST Other property/services currently curred in order to make exempt sup- exempt that will attract 13% ORST exempt that will attract plies of reconstructive procedures HST post-implementation. 13% HST post-implementation. would not be available. Expenditures incurred that do not directly relate to • Injectable and topical anes- • Management company fees the making of taxable or exempt sup- thetics containing ephedrine paid for administrative ser- plies would need to be apportioned as secondary ingredient. vices. on a reasonable basis. • Certain non-reusable supplies • Certain professional fees and Physicians who make exclusively (e.g., needles, tubes, bags and membership dues. (90% or more) taxable supplies other blood collection sup- • Certain educational courses/ (e.g., physicians who are only plies). seminars. engaged in providing taxable cos- • Orthopedic appliances and • Commercial real estate rentals, metic procedures) are entitled to repair parts (e.g., splints, slings, leases, sales. register and claim full ITCs on pur- braces) that do not otherwise • Other services/intangibles, chases of goods/services acquired qualify as zero-rated medical including: for use in making those supplies. devices. - Janitorial services • Custom computer programs - Dry cleaning services Impact of HST on Purchases Made designed/developed to meet - Accounting services specific requirements of ini- - Legal services by a Medical Practice tial purchaser. - Advertising services Upon the introduction of the HST, • Disposable products that are - Staffing services provided by many goods and services purchased used up or expended during a placement agency by physicians that are currently patient treatment, including: - Monitoring and security ser- exempt from Ontario Retail Sales Tax - Patient examination gowns vices (ORST) will become subject to HST - Table paper/covers - Interior decorating and design at a rate of 13%. These goods and ser- - Paper towels and tissues services vices are currently subject to GST at a - Cotton balls/swabs - Magazine subscriptions rate of 5%, such that the application - Tongue depressors of HST will, all other things being - Disposable face masks equal, result in an incremental 8% - Iodine and alcohol swabs/wipes cost to the physician. - Sterile surgical gauze and The impact of this change will adhesives mainly be felt by physicians engaged - Sutures or other skin closures exclusively in making exempt sup- - Casting materials plies, as they will not be entitled to - Latex/vinyl gloves claim ITCs for the HST payable on - Medicated soaps such expenditures. Table 2 (above) lists some of the most frequently pur- chased goods and services currently claim ITCs on the purchases of 5% on the purchase of the pro- exempt from ORST that will attract goods/services for use in your activi- gram as opposed to HST at a rate of HST post-implementation. ties. Thus, consideration should be 13% if the program were to be pur- given to the following: chased post-June 30, 2010. Planning Points • Accelerate purchases of goods/ser- • Review your current contractual vices currently exempt from ORST and billing arrangements in order Is there any way to reduce the impact of that will become subject to HST to ensure that you are satisfied with the HST on my practice? upon implementation. The table the tax status of such, and consider There are certain planning opportu- above should be able to assist in restructuring in order to reduce the nities to consider in order to mini- this regard. For example, if you are amount of unrecoverable HST that mize the initial impact that the considering the purchase of a cus- will be payable. For example, if introduction of the HST will have on tom computer program that would you are a physician in a group your particular practice. If you are a qualify for exemption from ORST, medical practice that pays a man- physician who is engaged exclusively you should purchase that program agement company for administra- in providing GST-exempt health-care prior to July 1, 2010. By doing so, tive services, those services will services, you will not be entitled to you will only incur GST at a rate of attract HST at a rate of 13% post-

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implementation. As this HST will example, if you are considering zero-rated supplies as opposed to not be recoverable to physicians purchasing taxable computer soft- exempt supplies, the main benefit engaged only in exempt activities, ware that will be used exclusively would be that persons providing such consideration should be given to in taxable activities (e.g., cosmetic services would become eligible to whether the arrangement can be surgery), you may want to defer claim ITCs on all taxable property/ restructured to avoid incurring your purchase of this software services acquired. The reason is that such unrecoverable tax. For exam- until after June 30, 2010. By doing zero-rated supplies are considered to ple, if the management company so, although you will incur 13% be taxable supplies under the GST/ were to act in the capacity of an HST on the purchase of the soft- HST legislation, although they are agent when incurring non-taxable ware, you should be entitled to taxed at 0%. expenditures, such as payroll on claim a full ITC for the tax paid, as Thus, no tax would need to be col- behalf of the group of physicians, the software was acquired for use lected on health-care services where no HST should apply when physi- exclusively in taxable activities. they were accorded zero-rated status, cians reimburse the management but any and all purchases of goods/ company. Note that such plan- Other Considerations services acquired for use in making ning must be properly document- such supplies would give rise to full ed and executed to achieve the What would the implications be if the ITC entitlement. intended result — physicians federalgovernmentweretomakehealth- At this time, we are not aware as to wishing to consider such plan- care services zero-rated as opposed to whether Finance is currently consid- ning should consult their profes- exempt? ering this issue or not. OMR sional adviser. It is understood that the Department • If you are a physician who is en- of Finance (Finance) has received Lesley Tela is Associate Partner, gaged in a mixture of taxable and representations requesting that Indirect Tax, KPMG Canada, (416) exempt activities, and as such, will health-care services provided by 228-7090, e-mail: [email protected]; be entitled to claim at least partial physicians be treated as zero-rated website: www.kpmg.ca. ITCs once the HST is introduced, services under the GST/HST legisla- you may want to consider defer- tion. The information is current to April 30, ring purchases of items that are If the GST/HST legislation were 2009. The information is of a general currently subject to ORST until amended so as to treat health-care nature only and is not intended to be, after the implementation date. For services supplied by physicians as nor should a user of this information construe it to be, information address- ing any particular individual or entity. The information is based on under- standing of the potential implications regarding the proposed Ontario single sales tax (OVAT) as announced in Ontario’s 2009 budget delivered on March 26, 2009 and the Memorandum of Agreement Concerning a Canada- Ontario Comprehensive Integrated Tax Co-Ordination Agreement signed on March 10, 2009. As the underlying pol- icy, legislative and administrative details regarding the OVAT have not yet been released, there can be no assurance that these budget announcements will be enacted as proposed or at all. KPMG LLP, a Canadian limited lia- bility partnership established under the laws of Ontario, is the Canadian mem- ber firm affiliated with KPMG Inter- national, a global network of professional firms providing Audit, Tax, and Ad- visory services. Member firms operate in 145 countries and have more than 123,000 professionals working around the world.

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