In the budget, announced on May 2, the federal government, as expected, said it would drop the GST rate to six from seven per cent and the HST rate to 14 from 15 per cent starting July 1, 2006. While changing the rate may be a simple process for small businesses who can override the default tax amount programmed into their software, medium to large enterprises may face a bigger challenge, tax advisors at Ernst & Young caution.
“We’re trying to make sure that our clients are aware of this now so they don’t get blindsided on July 1,” said Bruce Goudy, tax partner at Ernst & Young’s Toronto office.
The federal government’s decision to lower the GST, which Prime Minister Stephen Harper promised to do when he was elected to office in January, isn’t a surprise for many businesses. Derek Nighbor, vice-president of national affairs for the Retail Council of Canada, said the council is telling retailers to do a top-to-bottom analysis of their business.
“The big thing is this is not just point-of-sale,” said Nighbor. The GST cut affects expense reports, automatic bill payments, suppliers and online transactions.
Retailers who are open on the national holiday should also get in touch with their point-of-sale support to ensure that if there is a glitch, someone will be around to help them, said Nighbor.
One of the main concerns for Ernst & Young’s clients and other Fortune 500 companies is whether their systems calculate tax based on the processing date or on the date of the invoice.
“The tax rate normally goes to the date of the invoice. If you end up having a seven per cent rate because the invoice is dated in June and then as soon as July 1 hits, the table that the ERP systems are drawing from is going to show six per cent,” said Goudy.
“It’s going to automatically take the six per cent as the total of $1,070, for example, as opposed to seven per cent and claim the wrong amount of credit.”
But in other situations, such as that of small business owner Kim Mortson, who runs her own personal training studio, Body Design, in Mount Albert, Ont., it’s just a matter of overriding the system to reflect the change.
“It really is not going to impact on me too much,” said Mortson. “Any sales that I make right now, the seven per cent GST will apply to. It’s only new sales as of July 1 and that I’ll have to apply the new six per cent to.”
While Mortson may service a client over a period of time such as six months, the total fee payable is due upfront, meaning she won’t have to adjust the tax rate over time as she might if the system were automated.
For larger businesses, however, Ernst & Young’s Goudy said they will need to set up a “fix” to capture the proper amount of GST on invoices dated prior to July 1.
“For some systems that’s what some of our clients are finding – they’ve got to put a fix in someplace,” he said. “If they correct it now so it looks at date of invoice, it would correct it for future changes.”
Hotline set up
Mortson runs Intuit’s QuickBooks software to keep track of her client invoices at Body Design. Debbie Fougere, products manager, QuickBooks Group, Intuit Canada, which is based in Edmonton, said Intuit designed its software to be very flexible to accommodate changes to business processes.
“In a few clicks the customer can have the new rate implemented and saved,” Fougere said. “The next time they perform a transaction that rate will take effect.”
QuickBooks 2007, which is due out this fall, will automatically default to six per cent GST and 14 per cent HST, she said.
If businesses don’t comply with the GST cut, they could be short-changing themselves or the government, said Goudy.
“Businesses could short-change themselves on credits that they would otherwise be entitled to,” he said.
“That could also take additional administration time to go back and correct that. If the invoicing system isn’t set up for July 1, they could end up in the unusual situation with collecting tax on the extra amount instead.”
Goudy said businesses with pre-authorized withdrawals could also end up being over-taxed.
The Canada Revenue Agency put up a FAQ section on its Web site following the budget’s release earlier this month. It includes information for consumers and businesses including when to apply the new rate and how to apply the rate to sales promotions that began in 2006.
The government also set up a hotline for businesses to call but a CRA spokesperson said that according to call centre employees it wasn’t too busy during the first week of operation.