Wednesday, January 23, 2013

Some Clarity for HST Complications

A few weeks ago, a reader I’ll call Jeremy asked a question about how to handle HST for a practice run with a partner I’ll call Sandy. Sales tax specialist Andrew Davis (contact details below) was good enough to help me sort out HST rules for Jeremy. Here is Jeremy’s situation:
Sandy runs a business in Ontario offering an HST-exempt service out of an office she rents. The service Jeremy offers is HST-taxable. Because Jeremy offers a different but complementary service to the public, Sandy suggested that Jeremy offer his service out of Sandy’s office space. To compensate Sandy for directing customers to Jeremy and providing office space, supplies, computers, etc., Sandy suggests that Jeremy pay her 40% of his revenues.

The complication comes with how to handle the HST. Jeremy must charge his clients the HST, but how should it be split between Jeremy and Sandy.
How to handle HST starts with exactly who is contracting with the customers. Here are some possibilities:

Case 1: Jeremy contracts directly with the customers in his own name. In this case Jeremy must collect and remit to CRA 100% of the HST payable.

Case 2: Sandy contracts directly with the customers for Jeremy’s services. In this case Sandy must collect and remit to CRA 100% of the HST payable.

Case 3: Jeremy and Sandy are in a partnership, and this partnership contracts with the customers. Then the partnership would be required to collect and remit 100% of HST payable.

The next level of complication comes when we consider the HST in the transactions between Jeremy and Sandy. Jeremy’s situation actually falls into case 1 above where it is Jeremy who contracts directly with customers of his service. So, we’ll focus on this case.

Although the arrangement is described as a revenue sharing arrangement, CRA would likely consider the revenue sharing as a payment by Jeremy to Sandy for a separate supply of the use of Sandy’s facilities. The supply of premises, administrative services, and other miscellaneous facilities are generally HST taxable. So, Jeremy must pay Sandy HST on these services, unless Sandy is a small supplier (definition here).

For this case, assuming that Sandy has no other HST-taxable revenue, she qualifies as a small supplier when she has charged Jeremy less than $30,000 in the past 4 quarters. If this is the case, Sandy is not required to register for HST but has the option of voluntarily registering. At this point, it’s useful to consider an example to see the implications of Sandy’s choice to register for HST or not.

An Example

Jeremy’s sales: $10,000
HST on those sales: $1300
Sandy’s cut of sales: $4000
Jeremy’s cut of sales: $6000

Scenario 1: Sandy does not register for HST

In this case, Jeremy collects the whole $1300 in HST and files an HST return declaring $10,000 in revenue and $1300 HST collected. He then either claims any HST input credits he has to reduce the HST owing, or he uses the quick method if he qualifies and remits 8.8% of the full $11,300 ($994.40).

Scenario 2: Sandy registers for HST

In this case, Sandy charges and collects HST on the 40% revenue charge for the provision of facilities (13% of $4000 is $520). Sandy files an HST return and may claim HST input credits against any costs relating to facilities provided to Jeremy to reduce the $520 owing, or alternatively she may use the quick method if she qualifies. Jeremy is still required to declare $10,000 in revenue and declare the full $1300 HST collected. Jeremy is also entitled to claim HST input tax credits of $520 which is the HST cost Jeremy paid to Sandy on the $4000 cost of Sandy’s facilities. In the end, Jeremy’s HST return will be a net payable of $1300-$520=$780 less any other HST input credits he has. Using the quick method is not to Jeremy’s advantage for this scenario.  Whether Sandy should register for HST comes down to whether Sandy has any significant HST costs associated with the facilities provided to Jeremy.

Andrew Davis is a sales tax specialist who works on his own. He can be reached at Tel.: 416-441-0698 or Cell: 416-817-6675. 

Disclaimer:  There is no financial arrangement between Andrew and me. He was good enough to help me sort this out and I acknowledge that help.

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