Cutting the GST rate – General considerations - Kanada

Canadian Indirect Tax News, April 2006
(06-3)

Overview
As part of its manifesto for the last election, the federal Conservative party announced a planned cut in the rate of the goods and services tax (GST) — initially from 7% to 6%, followed by a later reduction from 6% to 5%.

The minority Conservatives’ first budget is scheduled for May 2, 2006. The following highlights the key issues expected to affect business planning and adjustments, assuming enabling legislation is supported by the opposition.

The change will have most immediate and significant impact on business, in particular retailers. With the introduction of a new rate, all invoices, advertising signs, cash registers, accounting systems, etc. will need to be amended. Where businesses charge GST on top of the consideration paid, the rate change should be fairly transparent to the consumer; it will likely be much less so for businesses that traditionally bill on a tax-included basis, such as gas stations and taxis.

Impact on businesses
As the GST is essentially neutral to most registered businesses, they will see virtually no impact in their day-to-day operations.  Obviously, there will be a cost involved in amending software systems to account for the new rate and any associated changes, such as to tax-included calculations for determining the GST recovery for employee expenses, tax included pricing, simplified accounting applications, etc. It is unclear whether the government will provide funds to organizations to implement the changes as it did when the GST was first introduced in 1991. Nor is it clear how Quebec and Prince Edward Island will respond to the GST rate reduction as the sales taxes in those provinces are calculated on top of the GST and, barring any changes, they would experience a revenue loss.

Organizations that cannot fully or partially recover GST will see actual savings as the amount of non-recoverable GST paid will decrease.

Transitional considerations
The rate reduction will most likely take effect in an immediate manner (i.e., perhaps even the day following the budget announcement). Clearly, this will cause some problems for certain industries who sell or lease products and services on a continuous basis or who agree contractually for delivery before the rate change and fulfill the contract after the rate change.  Retailers, in particular, must ensure that they charge the correct amount of GST as per the government’s instruction.

When a rate changes or a new tax is introduced, there is a period of time during which transitional or grandfathering rules for specific situations (e.g., lease agreements) normally apply. It is expected that similar rules will apply for this rate reduction.

We will provide a full analysis of the rate reduction and attendant considerations following the May 2 budget. Contact your local
Deloitte Indirect Tax practitioner for more information.