Ontario’s Retail Sales Tax: A User’s Guide

Confusing language that doesn’t reflect the way IT companies work makes the Ontario Retail Sales Tax too complex and nearly impossible to apply, a consortium of provincial technology associations said Friday.


over the Ontario Retail Sales Tax (ORST) have raged throughout the local industry since the government made changes to the legislation five years ago as it applies to software and IT services. According to tax information bulletin 1-94, for example, while software itself was taxable, contracting programming services was not. In the 1997 budget, however, then-Minister of Finance Ernie Eves changed the definition of what is considered “”tangible personal property”” (TPP) and made a general rule that purchasers must pay ORST in respect to sales of “”labour provided to install, repair, dismantle, adjust repair or maintain”” TPP.

At a meeting convened by ITAC Ontario on behalf of a coalition that includes Communitech, the CATAAlliance and other industry associations, legal experts said the changes caught many vendors and their customers by surprise, leading to audits that put some firms out of business entirely.

“”When the government finds you in a penalty situation, they can charge attractive interest rates from their point of view,”” said ITAC president Robert Horwood.

Horwood said the Ministry of Finance has recognized the problem and has undertaken a “”simplification program”” to improve the law. Draft legislation was released in July 19, 2002 and comments were solicited from the IT industry. Slight adjustments were made on Oct. 30, but some argue they’re not enough.

According to Cyndee Todgham Cherniak, a lawyer with Toronto-based law firm Goodmans LLP, the legislation continues to use words that mislead or pose interpretation challenges for IT people. The July 19 changes, for example, continue to use the word “”install”” under the general rules. “”Does that just cover the act of installation? What about pre-installation, when you clean out the system beforehand? What about post-installation?”” she asked. “”I’ve seen a lot of contracts where there has been a lot of money allocated for install. The actual install may only be one hour of the service.””

Likewise, the legislation defines “”configuration”” as “”the work done to input customer-specific values and parameters with respect to a computer program or hardware.”” Todgham Cherniak questioned whether that could include some as simple as data entry, while customer-specific values and parameters remain unclear.

Given that some services are exempt from ORST, things may get even murkier when software vendors bundle taxable and non-taxable products and services together. Before July 19, tax only applied to TPP bundles if the taxable items cost more than 10 per cent of the non-taxable items. Under the draft legislation, fully taxes apply to the entire bundle. The only recourse is to segregate the non-taxable TTP components of the bundle, communicating the separately charged or taxable items to the purchaser and maintaining detailed records of these situations.

Audrey Diamant, a partner with PricewaterhouseCoopers, said most IT companies would prefer not to separate the components of a product or service bundle, for obvious reasons. “”Vendors do not want purchasers to be able to cherry-pick,”” she said. “”Now, some people may not agree with that, but it certainly operates against normal business practices.””

Horwood said some MPs have reacted to the IT industry’s concerns with derision, calling them “”fat cats”” who don’t want to pay their taxes. “”This isn’t about us as the taxpayers at all,”” he said. “”We’re being put in the position of tax collector for the government.”” To do a good job of that, he added, software vendors need a better idea of how to implement the legislation.

Todgham Cherniak said the rules put Ontario companies at a competitive disadvantage next to their counterparts in Alberta, for example, where similar laws don’t exist. Diamant said some parts of the legislation penalize firms for working in Ontario. A server location portion of the legislation, for example, says that if software services are provided from a server located in Ontario but whose clients are based outside the province, they are charged ORST. If, on the other hand, a server from outside of Ontario provides software services to customers in the province, no tax is charged.

“”It seems, at a minimum, counter-intuitive to what you’d expect,”” Diamant said.

Horwood said the coalition is urging software vendors and customers to send comments and concerns to the government before it goes to its second reading in the house. ITAC Ontario offers a form on its Web site to submit these comments and will assist in the writing and forwarding of letters to MPs.

Comment: info@itbusiness.ca

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