Preparing for tax deharmonization in B.C. (Legal View)

A checklist for payroll professionals who will be processing tax in the province
By Cyndee Todgham Cherniak
|Canadian Payroll Reporter|Last Updated: 06/06/2012

Just when payroll professionals think they have the systems set up to pay the right amount of sales tax at the right time to the right governmental authority, the rules undergo another change. Effective April 1, 2013, the 12 per cent federal harmonized sales tax (HST) will no longer apply on taxable supplies made in British Columbia.

Starting April 1, 2013, the five per cent goods and services tax (GST) will apply on taxable supplies made in B.C. and will be remittable to the Receiver General of Canada.

In addition, B.C.’s provincial sales tax (PST) will be reimplemented effective April 1, 2013, at a general PST rate of seven per cent and will be remittable to the government of B.C.

Determine if changes are required to payroll systems

Employees: Every payroll department should review their payroll systems.  If 100 per cent of the payments are made to employees, then 100 per cent of the payments will not be subject to either GST or PST. This is because supplies in the employer/employee context are not services for the purposes of the Excise Tax Act (ETA) and, therefore, are not taxable supplies.

The Canada Revenue Agency (CRA) has policies on when a person is considered to be an employee and when a person is considered to be a consultant or independent contractor. The key case is Wiebe Door Services Ltd. v. Canada, which established the following criteria to be used:

•the extent to which the employer controls how the work is done

•the risk of profit or loss

•the ownership of tools

•the extent to which the work performed is an integral part of the process in the employer’s business

Subsequent cases have elaborated upon these points and the facts relevant to each employee/consultant should be reviewed separately.

Non-employees/consultants: Many payroll departments manage the payments made to non-employee consultants. If any payments are made to consultants (non-employees) and the payroll department currently pays the consultant 12 per cent HST because the place of supply of the consulting services is in B.C., it will be necessary to ensure an adjustment is made so the consultant only receives five per cent GST and an analysis is conducted as to whether the consultant is required to collect PST.

If the payroll department continues to pay the consultant 12 per cent HST, the consultant will have to remit the amount, but the payor may not be entitled to recover the extra seven per cent by way of an input tax credit.  The error may be an unrecoverable cost if the CRA takes the position the seven per cent represents additional consideration for the supply and not PVAT (B.C.’s HST).

Whether the consultant must charge, and the payroll department must pay, PST will depend on the type of service being performed and whether the consultant is required to be registered for PST purposes. Under the old B.C. PST regime, most services were not subject to PST. Only “taxable services” were subject to PST. Certain services were listed within the statutory definition of “taxable services” and were subject to PST. The statutory provisions have not been released and it is not possible to provide a complete list at the time of writing.