Burlington, Ontario, 05-April-2010 - Effective July 1st, 2010 the harmonized sales tax (HST) will be applied to a majority of products and services across Ontario and British Columbia. Ontario and British Columbia will replace the existing GST and PST with a single harmonized value-add tax.

In Ontario, the HST will have a combined tax rate of 13%, comprised of 5% GST and 8% PST. In British Columbia, the HST will have a combined tax rate of 12%, comprised of 5% GST and 7% PST.

How does the HST impact energy?

‘Specified Energy’ purchases subject to HST include electricity, gas, fuel (other than fuel used in a propulsion engine), steam, propane and oil.

As a consumer who purchases energy, you will experience an increase in your procurement expenditures of 7-8%.

As a business you will have the opportunity to possibly offset some portion of this increased cost by claiming input tax credits (ITC) on this HST, but only if it meets specific criteria set out by the government.

Claim input tax credits for the HST paid on energy

In an HST system, most businesses can deduct the amount of HST they pay from the total amount they collect and send to the government. As long as your organization is an HST registrant, and you are claiming purchases and expenses that were used in commercial activities, then you are qualified to claim ITC.

However, for specified energy purchases, there are temporary restrictions on the provincial portion of the ITC. For the purposes of this document, these restrictions on the provincial portion of the ITC are referred to as ‘recapture of input tax credits’ (RITC). This means a business will not be able to claim the provincial portion of the ITC on HST for certain situations.

Energy Advantage, your independent and objective partner

Energy Advantage has released this bulletin on the impact of HST on energy to keep our clients informed on matters that affect their businesses.

Energy Advantage will continue to follow and provide appropriate guidance on HST and the impact it has on energy. Statements made in the releases are intended to provide high-level information only and we strongly recommend you contact your tax advisors for more detailed discussions.¹

Energy Advantage has outlined the ruling for RITC in the following diagram.

Tentative Conclusions

The Public Service Bodies are relatively not affected by the proposed provisions of Ontario’s and British Columbia’s harmonized value-add tax.

Large Businesses will likely see relatively higher net costs for essentially all their energy consumption. These costs will reflect both the 10-year span of the RITC transition years and, quite possibly, the ancillary costs of new accounting systems. For businesses that qualify for the Production Proxy Percentage, there will still be increased costs for energy based strictly on the RITC formula.

Key Definitions

Value-added Tax Systems (VAT Systems) - VAT Systems are becoming mainstay in the international community. The VAT system is essentially intended to only tax the value added at each stage of production, in contrast to a sales tax levied on the full value of the goods. The mechanism used to tax the value-added is described below:
Taxes are collected and remittable to the government on the sale of the end product as goods pass through a production chain and reductions in this liability are claimed through input tax credits (ITC) related to certain costs incurred. The ITC refund claim is the bedrock of the VAT system.

Public Service Bodies - Public Service Bodies are defined to include charities and qualifying non-profits, municipalities, universities and colleges, school boards and hospitals, each subset with its own HST implications.

Large Businesses - Large businesses are essentially conventional businesses with sales over $10 million.

Specified Energy - Specified energy is generally any costs incurred by a large business for electricity, gas, fuel (other than fuel used in a prolusion engine), steam, propane and oil.

Tangible Personal Property (TPP) for Sale - Tangible personal property for sale is essentially the output from any business, including a large business.

Recapture of Input Tax Credit (RITC) - RITC is the mechanism Ontario and British Columbia has chosen to ensure that over the next 10 years, the HST is not a fully efficient VAT for most business consumers when it comes to certain expenses. RITC refers to the grind in the value of the ITC refund claim available to large businesses. Among other expenses, it is intended to apply to specified energy costs incurred. RITC only applies to the 8% Ontario and 7% British Columbia sales tax portion of the combined HST. The rates for RITC are 100% for the years 2010 through 2015, then declining 25% each of the next 4 years.

About Energy Advantage Inc.

Energy Advantage Inc. provides total energy management solutions to our customers’ sustainability challenges, delivering them best results in managing their risks, reducing their costs and enhancing their reputation within the markets and communities they serve. Our company is fully independent from energy commodity and equipment suppliers. We sit with our customers on their side of the table, providing objectivity in seeking and developing the best solutions to their sustainability challenges. With a depth of expertise in the energy and energy related environmental areas, we have been providing notable North American organizations with effective energy management solutions for over 12 years.

¹The information in this bulletin is prepared from the Government of Ontario’s release of Information Notice No. 5 on February 1st 2010 and the Government of British Columbia’s release of Notice No. 4 on February 19th, 2010.