Harmonized Tax (HST) - The Benefits to individuals & Small Business Owners
By Emil Alphonsus Chartered Accountant CA,CGA,CPA(MI) We would like to discuss cer- tain tax topics which are relevant on everyone’s life but please note that all issues relate to these headings cannot be discussed in detail. If you have any specific questions or concerns, please give us a call or email with your questions. Home Renovation Tax Credit (HRTC) - traps and tricks By the time when you read this article, you have already passed the deadline of January 31, 2010. Even if you incur any eligible expenses after this dead- line, you won’t be able to claim in your personal tax return of 2009 unless the government changes the rule.
Further, it is not neces- sary to complete all the work by January 31, 2010 to claim this credit. If you had purchased the materials before the deadline but not installed by the deadline, you still will be able to claim for the portion of the cost incurred before the deadline. Also, they are very specific that the cost should have been incurred before the deadline not on or before. Therefore, any cost incurred on February 1, 2010 or after is not eligible to claim in your tax return. Also, it is not nec- essary to pay cash to your con- tractor by the deadline to claim the credit but the percentage of completed work by the deadline.
Maximum non-refundable credit is only $1,350 and if you don’t have income you won’t be able to claim this credit. Also, you should have incurred eligible expenses for more than $1,000 and the maximum is $10,000. The credit is calculated as ($10,000- $1,000) X 15% = $1,350. Most importantly, it should be an eligible dwelling. Therefore, if you did some renovation work in the basement and it was rented during the eligible (January 27, 2009 to January 31, 2010) period, you won’t be able to claim the credit. It should be incurred for personal-use of your dwelling. What are the eligible expens- es? Most of the renovation cost incurred inside or outside of your home is eligible but the following are not eligible:
furniture, house- hold appliances, and electronic home-entertainment devices, purchasing of tools, carpet clean- ing, house cleaning, maintenance contracts (e.g., furnace cleaning, snow removal, lawn care, and pool cleaning), and financing costs. For complete list of eligible and non eligible expenses, please visit to http://www.cra-arc.gc.ca /tx/ndvdls/sgmnts/hmwnr/hrtc/lg bl-xpns-eng.html What is Harmonized Sales tax or HST in Ontario Effective July 1, 2010, there won’t be two taxes namely Goods and Services Tax or GST and Provincial Sales Tax or PST or RST (Retail Sales Tax). GST and PST would be combined into HST. Currently, GST is 5% and PST is 8% and HST would be 13%. Therefore, no different in terms percentages but there are far more implications due to HST.
Please remember, whether you like it or not, the legislation has been enacted by both Ontario and Federal Governments. This is very complicated topic and we won’t be able to discuss in a comprehensive manner in this short article. Therefore, we will select a certain number of impor- tant aspects of the legislation which are going to affect you, as a consumer or as a small business owner. HST would not be charged on basic groceries, prescription drugs, child care, residential rents, most health and education- al services, legal aid, most finan- cial services, tutoring, and music lessons.
Also, consumers won’t pay provincial component of HST for prepared food and beverages sold for $4 or less, print newspa- pers, children clothing and footwear, children car seats and car booster seats, diapers, books, and feminine hygiene products. Ontario Govt. is claiming that 83% of the consumer purchases will not see a new tax but most importantly, the following items will see additional 8% or Ontario component of HST. They are: Electricity, Gasoline, Heating fuels, personal and professional services, tobacco and new homes. We believe that you, as a consumer will spend more money on the above items than the other consumer purchases as claimed by the government. Further, govt. promises that buyers of new home will receive a rebate of up to $24, 000 regardless of the pur- chase price of the house. The Govt. logical explanation is that HST will help Ontarians by eliminating hidden sales tax and will reduce prices of many prod- ucts but this depends on sellers and manufacturers who are will- ing to pass the benefits to ulti- mate consumers. Hidden taxes are explained as RST is charged on many layers of manufactured products such as transportation cost, raw materials cost, etc but some of the items are already exempted through purchase exempt certificate.
For example, suppliers of raw materials could obtain purchase exemption cer- tificate and would not charge RST when they sell to manufacturers. In addition, Ontario Govt. promises that it will provide $10.6 billion over three years in the form of tax relief which includes permanent personal tax cuts and direct payments but it is believed to have negative impact over long term. As a small business owner, you will definitely have benefits accrued with HST. Currently, you cannot claim PST paid on pur- chases of assets or supplies or expenses in your PST return. From July 1, 2010 onwards, you could claim this amount in HST return as an input tax credits.
The mechanics of HST is similar to GST concept. Indirect Income Calcul- ation or “Net worth method” and Canada Revenue Agency In my practice, I came across certain reviews of individual tax returns by Canada Revenue Agency (CRA) based on Net Worth Method (”NWM”). Therefore, I have decided to write this article on the above topic to educate individual tax payers. From June 1, 2009 to December 31, 2009, there were 57 cases involved with NWM. Please note that these cases were decided at tax court but we don’t know how many other cases involved with NWM and resolved outside Tax Court. Therefore, we can safely conclude that this is a very popu- lar concept with CRA in recent times. Many people have probably heard of NWM used in the context of financial health and planning but not aware that NWM are also used by CRA to determine what they consider to be unreported or underreported income.
So what exactly are NWM and how do they work? Bowman, T.C.J., as he was then, offers the following insight of the NWM in Bigayan V. The Queen, [2000] 1 C.T.C. 2229: The NWM, as observed in Ramey V. The Queen, 93 DTC 791, is a last resort to be used when all else fails. Frequently it is used when a taxpayer has failed to file income tax returns or has kept no records. It is a blunt instrument, accurate within a range of indeterminate magni- tude. It is based on an assump- tion that if one subtracts a tax- payer’s net worth at the begin- ning of a year from that at the end, adds the taxpayer’s expendi- tures in the year, deletes non-tax- able receipts and accretions to value of existing assets, the net result, less any amount declared by the taxpayer, must be attribut- able to unreported income earned in the year, unless the taxpayer can demonstrate otherwise.
It is at best an unsatisfactory method, arbitrary and inaccurate but sometimes it is the only means of approximating the income of a taxpayer. Fortunately, Bowman, T.C.J., in Bigayan, also offers two possi- ble methods of disputing the NWM. The first and best method is to put forth evidence of what the taxpayer’s income actually is. The second and less desirable method is to prove the net worth statement to be wrong. The prob- lem with arguing the accuracy of separate components or assump- tions of the net worth statement is that the statement itself is inherently flawed and any changes to it will also be flawed. Generally, the two aspects of the NWM that can be adjusted are the calculations for revenue and for expenditure.
Since the NWM generally does not account for non-taxable income such as gifts and lottery winnings, one can present evidence of these rev- enues to diminish the taxable increase attributable to unreport- ed (taxable) income. For daily expenditures, one can use as guideline the statistics put out by Statistics Canada on the stan- dards of living. Although this article present- ed the NWM as a tool used by the CRA in arbitrary assessments, it is worth mentioning that the NWM can also be used by the taxpayer to refute unreported or under- reported income claimed by the CRA. Recently, most cases at Tax Court went against CRA but please note that it all depend on individual’s circumstances. The preparation of net worth state- ments, however, is expensive and as was discussed above it is not a method to which the tax court is receptive and should be used as a method of last resort. (The Writer is a Chartered Accountant with more than 15 years of experience and can be reached at Alphonsus & Associates (Tel: 416-493-8220 or email: emil@alphonsusca.com). You could view his other articles at www.alphonsusca.com, under newsletters.- Editor)