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HomeMy WebLinkAboutFND-023-09• Enernrarlo ~, REPORT FINANCE DEPARTMENT Meeting: GENERAL PURPOSE AND ADMINISTRATION COMMITTEE Date: MONDAY, SEPTEMBER 14, 2009 Resolution #: (,iPr~- S I ~ - ~~`~ Report #: FND-023023-0~File #: By-law #: Subject: SALES TAX REFORM - 2010 HST UPDATE Recommendations: It is respectfully recommended that the General Purpose and Administration Committee recommend to Council the following: 1. THAT Report FND~023-09 be received for information. ,.,o Submitted by: Nancy ay r, .A., Director o Finance/Treasurer Reviewed by~~ """"~-"~---~'`'" ~ Franklin Wu, Chief Administrative Officer. NT/LB/cd REPORT NO.: FND-023-09 PAGE 2 BACKGROUND: 1.0 As part of the 2009 Ontario Budget the government announced a comprehensive tax reform package that will include the introduction of the Harmonized Sales Tax (HST) effective July 1, 2010. The Provincial Government has stated that this single sales tax would be treated the same as under the current GST rules. Items that are currently exempt or zero rated will remain exempt or zero rated and items that are currently subject to GST will be subject to the 13% HST. 1.1 The Province anticipates that all business organizations will benefit from reduced compliance costs. Municipal staff will be required to file one set of forms, make one payment and have one point of contact for audits, appeals and taxpayer services. 1.2 Under the single sales tax, the Province anticipates that the impact will be fiscally neutral municipally relative to the Retail Sales Tax (RST) that is currently paid. This will be achieved through each Municipality's ability to claim 100% Input Tax Credits (ITC) for the Provincial share of the HST paid to provide zero rated or taxable services and the additional claim of a 78% Rebates for the Provincial share of the HST paid to provide exempt services. 1.3 The Municipality can claim ITC's when items are purchased in the process of earning taxable income. For items that are purchased in the process of providing services that are exempt, the Municipality will be entitled to a rebate. IMPACT ON CLARINGTON: 2.0 The Municipality currently files monthly GST returns and semi annual RST returns. Under the new system, more detailed HST returns would be filed on a monthly basis in place of the current GST returns. 2.1 During the past five years the Municipality has received over $7,000 in direct compensation from the Province to cover the cost of compliance with the RST process. This funding will no longer be available when the tax is harmonized. 2.2 All services that are currently subject to GST will be subject to the new combined HST. This will require the Municipality to update all current financial software programs, including the reprogramming of any cash registers used. 2.3 The computer programs directly affected by this change that have been identified to date include our main financial "Great Plains" software, Recreation "Class" Software, Animal Services "Shelter Buddy" Software, Building and Engineering LDO Software. REPORT NO.: FND-023-09 PAGE 3 2.4 We have multiple cash registers located at various facilities that will need to be reprogrammed for the tax change. 2.5 The cost of programming changes will be dependent on the customization required. Our financial and recreational software programs are the same ones used by many other Municipalities across Ontario. All users will require the same basic HST changes. For these programs, our primary cost should be associated with the updating of customized reports for the printing of receipts, contracts, invoices, and purchase orders. 2.6 Specialized software will require the same updating of the customized reports; however we will also have to pay the cost for any changes in the programming if we are the only Ontario user of the software. 2.7 At this time, the Municipality is not eligible to claim any part of the Small Business Transition Credit offered by the Province to assist with any costs incurred to become compliant. 2.8 During 2008 the Municipality of Clarington was directly invoiced for more than $358,000 in RST on just under $4.5 million in purchases. Under the new harmonized HST, these purchases would qualify for either 100% ITC or 78% rebate treatment. Similar expenditures in future could result in refunds to the Municipality of between $279,240 and $358,000. 2.9 During 2008 the Municipality of Clarington had more than $27.5 million in purchases that were invoiced for GST. With the implementation of the tax reform, these invoices would be subject to the new harmonized HST increasing the rate from 5% to 13%. The existing 5% Federal will continue to qualify for either 100% ITC or 100% rebate treatment. The 8% Provincial will qualify for either 100% ITC or 78% rebate treatment. The additional 8% tax could cost the Municipality an additional $484,000, representing the 22% non-rebateable share on this mix of purchases in future. 2.10 The net impact of the above Provincial treatment could cost the Municipality an additional $126,000 to $204,760 if the purchasing volumes and patterns in future remain consistent with those in 2008. 2.11 Included in the 27.5 million dollars of purchases above, are a number of capital projects that may include RST that is embedded in the contract price and therefore not reported or invoiced separately. Under the new HST, this type of embedded RST will no longer be permitted. Contract wording needs to be adjusted to reflect the requirement to have pricing separate the RST component in all quotes. 2.12 Business with annual taxable sales in excess of $10 million will be restricted from claiming the input tax credits on energy for the first five years. The Municipality REPORT NO.: FND-023-09 PAGE 4 of Clarington currently reports annual taxable sales of just over $5 million. As long as the transitional rules are not written to specifically restrict Municipalities from claiming the creditor rebate for HST on energy, the Municipality of Clarington will continue to claim it. The Municipality spent more than $1,675,000 on hydro alone in 2008. These charges will be subject to an additional 8% tax with the implementation of the HST. How much of an impact the additional $134,000 will have on the annual municipal budget will depend on the HST Transitional Rules due to be issued shortly. CONCLUSION: 3.0 Based on a review of the information available at the time this report was prepared, it is estimated that the proposed implementation of the HST will not be fiscally neutral municipally relative to the Retail Sales Tax (RST) that is currently paid by the Municipality of Clarington. This situation may change depending on the timing of significant capital projects and further legislative adjustments in future years as the full impact of the harmonized HST is realized. The 2010 budget will be adjusted to reflect the impact based on the information available at that time. 3.1 It is recommended that this Sales Tax Reform - 2010 HST Update report be received for information. Further reports will be provided as information becomes available. CORPORATION OF THE MUNICIPALITY OF CLARINGTON 40 TEMPERANCE STREET, BOWMANVILLE, ONTARIO L1C 3A6 T (905)623-3379 F (905)623-416y