OTTAWA — Five years after changes to the Ontario retail sales tax made computer programs taxable, many businesses are still being caught off guard and some are being stuck with huge, retroactive tax bills.
“”This is a bad law and it’s been badly implemented,”” said Pat Maloney, whose company,
Plus Delta Communications Inc., was handed a $60,000 assessment after a 1999 audit.
“”We were retroactively assessed from 1995 to 1997,”” said Maloney, at a meeting of the IT Association of Canada for Ontario in Ottawa on Thursday.
“”The legislation has the effect of being retroactive because it wasn’t widely publicized,”” said Bob Horwood, president of ITAC Ontario. “”In a number of cases the effect has been sufficient to bankrupt firms,”” he added.
The changes to the retail sales tax in 1997 defined computer programs as tangible, personal property, or TPP. This meant almost any computer program was taxable, even if it wasn’t something packaged and sold off the shelf.
“”If you sell any type of computer program you were probably caught by the changes,”” said Cyndee Todgham Cherniak, a lawyer with the firm Goodmans LLP.
While the changes were made in 1997, the regulations outlining just what was exempt and what wasn’t didn’t appear until 1999, Cherniak said.
This became a big issue partly because of the amount of money spent on programs leading up to Y2K, she added. “”Everyone was operating in the dark . . . people didn’t know what the government was thinking.””
In March 2001 the government outlined it’s position in the RST Guide 650, which can be found on the Ministry’s Web page at http://www.rev.gov.on.ca:80/images/rsie_guide650e.pdf.
All computer programs are now taxable with a few exceptions: if they are custom computer applications as defined by the Ministry, or in some cases if they are modifications to an existing program.
But there are many twists and turns to the legislation, which even seasoned accountants might miss. For example, maintenance agreements or contracts are taxable, but testing and diagnostic services are not.
Also, when work is outsourced, the taxes are currently the responsibility of the placement agency – something ITAC Ontario would like to see changed.
There has been discrepancy between what the industry sees as taxable and what provincial auditors see as taxable, said Cherniak.
Provincial auditors don’t always understand computer programmers, she added. “”There’s been a lack of knowledge at the Ministry which has led to where we are today – there’s a problem.””
The Ontario Ministry of Finance has been working to simplify the RST as it applies to computer programs. It has sought input from industry groups like ITAC Ontario, and is in the process of reviewing the recommendations they received, said Angela Merlo, from the Ministry’s retail sales tax branch.
The Ministry is considering specialized audit groups to deal with complex cases involving computer programs, and plans on implementing some changes in the upcoming budget.
But confusion remains. “”The Ministry is now trying to be more uniform in deciding what exactly is taxable and what is not,”” said Merlo.
A good starting point for businesses, said Audrey Diamant, from PricewaterhouseCoopers, is simply to look at the Ministry’s tax guide.