Monday, July 5, 2010

HST and Contractors

With Ontario and BC making the jump to the Harmonized Sales Tax (HST), we’re bombarded with negative stories about paying more in sales taxes. However, the reality isn’t all bad. What is missed is that often the provincial sales tax (PST) used to be charged more than once on the same item. In these cases the HST is actually less than the combination of GST and PST. I’ll illustrate this with a simple contractor example and give you something to look out for on your next contractor bill.

Let’s look at an example using Ontario percentages (5% GST, 8% PST, and 13% HST). Suppose that you hire a contractor to do some work that involves $1000 worth of parts or materials that were subject to GST and PST before and HST now. After July 1, here is the accounting:

– contractor pays $1000 + HST = $1130 for the parts
– contractor collects HST on the entire job from you
– contractor gets back the $130 HST he paid on the parts in the form of an input credit

This way, the HST is only charged once on the whole job rather than added twice to the parts. This means that if the contractor’s parts charge is intended to reflect his actual cost, your bill should have just $1000 for parts (and one big HST amount calculated on the total bill). If the parts charge is $1130 with an additional HST amount charged on the total, then the HST is being charged on the parts twice, and the contractor is pocketing the extra $130.

No doubt some contractors will just put $1130 on the bill and pocket the extra money. Many contractors mark up the parts they use by even more than this. How this is handled will be determined by the competitiveness of the industry. If it is competitive, then some other contractor will do his billing differently or lower his labour price or make some other change that reflects his lower HST costs.

Under the old PST system, resellers often couldn’t recover the PST they paid on the components they bought. This means that the final price of some goods contained more than 8% PST. There were layers of PST hidden from the consumer.

Now, when your contractor presents you with a bill, you can ask whether the parts and materials charges contain the HST the contractor paid for them. If so, then the contractor is essentially marking up these costs.

10 comments:

  1. Something to look closely for, and shows the importance of an itemized bill.

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  2. MJ
    I wonder if people could negotiate a price less than $1,000+HST because many providers of goods and services are likely now noticing a drop in demand due to the pre-July 1 rush by consumers to beat the HST. In theory, one could perhaps even end up paying the same or lower price than someone who bought just before the HST took effect.

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  3. @Larry: That is certainly possible. It's nice to see someone thinking about market forces instead of just assuming that businesses have the pricing power to pocket any PST savings.

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  4. In your example, a contractor paid $1130 to buy materials including HST and collected $1130 from the client. Then does the contractor still receive $130 back from input tax credit? Does this mean the client should pay only $1000 instead of $1130?

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  5. @Anonymous: In my example, if the contractor had listed the parts cost as $1000 and had calculated HST on the whole bill, then he collected $1130 from the client for parts. If he put $1130 on the bill for parts and added HST again, then he collected $1276.90 for parts from the client. Either way he gets the $130 HST input credit from when he purchased the parts.

    If the contractor intends to pass the parts cost on to the client without a markup, then the client should pay a total of $1130 for parts AFTER the HST is added to the entire bill, which means that they should be listed as $1000 before the HST is added to the entire bill.

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  6. Michael,

    I understood your example for double HST charge.

    My qeustion is slightly different. For simplisity, lets assume the labor is free. As the contractor paid and received $1130, he is on par now. But if he gets HST credit of $130, he made $130 for just buying and selling the material.

    Is this normal? My question is (as client) that does the client need to pay $130 to the contractor if the contractor gets back $130 from the government.

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  7. @Anonymous: The contractor does not come out ahead in the scenario you describe. His HST return will have two entries. In one he has to give $130 to the government (the HST he collected from the client). In another entry, he claims the $130 input credit. These cancel and he owes nothing on his HST return.

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  8. Michael,

    I did not know the contractor needs to pay the HST on materials (eg tiles) to the government.

    Thank you for the clarification.

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  9. In your original article you wrote that if contractor charged customer 1130 for material, then charges HST on top of that, they pocket the difference, but in fact they don't (at least this is my understanding. If they charge customer 1130 + HST 146.90=1267.90, the contractor then, on their tax return has to show that they had an HST expense of $130 for materials they purchased and then a HST receivable of $146.90, so in fact they have to pay $16.90 to the government for their HST return. Isn't that correct? If so, then what do you mean by they are pocketing the extra money?

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  10. @Anonymous: The contractor paid $1130 for the parts and collected 1267.90 from the customer. This puts the contractor ahead $146.90 before we look at the HST return. As you point out, teh contractor pays $16.90 on the HST return. This nets to a profit of $130 on parts.

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