British Columbia and Ontario Moving to Harmonized Sales Tax Regime
By: Craig Burley and Michael Bussmann

The Provinces of British Columbia and Ontario will replace their respective provincial sales taxes (the social services tax in British Columbia and the retail sales tax in Ontario) with a Harmonized Sales Tax ("HST") that will displace the existing federal Goods and Services Tax ("GST") effective July 1, 2010. It is hoped that the relatively late date for harmonization will give businesses adequate time to adapt to the new collection and remittance regime.

The HST rate will be 12% in British Columbia and 13% in Ontario. Like the existing 5% GST, the HST will be administered by the Canada Revenue Agency and imposed under the Excise Tax Act (Canada) following the necessary amendments.

The HST will be the same as the HST that has been in place in New Brunswick, Nova Scotia, and Newfoundland and Labrador since those Provinces harmonized with the GST in April 1997.

The change from a provincial sales tax to a multi-stage value added tax in the form of the HST should benefit many businesses. It will allow businesses to comply with one transaction tax, rather than two, saving millions of dollars in compliance costs for business and in administration costs for the Ontario and British Columbia governments.

Most businesses that currently make GST taxable supplies or that supply goods or services on a GST zero-rated basis, including franchisors that collect GST on initial franchise fees and royalty fees, should be entitled to recover the higher HST that they will pay on inputs into their businesses. They will no longer have to pay unrecoverable provincial sales taxes on purchases of goods and the limited range of currently taxable services.

However, some aspects of the new HST will be costly to certain medium and large-sized businesses. All businesses that make more than $10 million in GST/HST taxable sales will be unable to claim input tax credits to recover the provincial portion (8% in Ontario, 7% in British Columbia) of the 13% HST payable on a limited range of inputs that would otherwise be creditable. These will include energy, along with telecommunications services (other than internet access or toll-free numbers), road vehicles under 3,000 kg (including parts, services and fuel), food, beverages and entertainment.

The restriction on recoverability for inputs of energy should have the most significant impact as energy inputs are currently fully exempt under the existing provincial sales tax regimes. By contrast, telecommunications services and road vehicles are already subject to the unrecoverable provincial sales taxes, such that there should be not be a net change.

There will be a number of exemptions from the British Columbia and Ontario provincial sales taxes that will be eliminated in the transition. One of these is the exemption from Ontario provincial sales tax for prepared foods at $4.00 or less. These same prepared foods have always been subject to the 5% GST, but will be subject to the 13% HST following implementation.

Businesses will need to adapt their accounting and computer systems to cope with the restricted recoverability of the provincial component of the HST for these inputs. These restrictions are supposed to apply for five years, with a three year phase-in of credit relief thereafter. The phase-in means that accounting and computer systems will have to adapt to these changes as well.

Ontario has publicly committed to releasing its draft legislation to wind down its provincial sales tax regime in the fall of 2009. British Columbia has made no similar announcement yet. The federal government has committed to releasing its legislation implementing the HST by March 2010.

The most common compliance issue for businesses operating in more than one province will be determining the correct province of supply. The difference in HST rates of 12% in British Columbia, 13% in Ontario, New Brunswick, Nova Scotia and Newfoundland, the 5% GST rate in the rest of Canada, as well as the 7.5% Quebec Sales Tax rate in Quebec, will make these determinations very relevant.

Ontario and British Columbia have announced a limited range of point-of-sale relief for the provincial component of the HST for books, children's clothing and car seats, diapers, and feminine hygiene products. British Columbia will also provide point-of-sale relief for gasoline and diesel fuel for motor vehicles.

It is likely that British Columbia and Ontario will agree to begin paying the HST following harmonization. Neither Province currently pays GST as they are not required to do so under the Canadian Constitution. However, the existing HST provinces agreed to begin paying the HST following their harmonization, and Ontario and British Columbia are expected to do the same. The Provinces would recover the HST through a rebate mechanism that is yet to be determined. Accordingly, HST should be considered in contracting with the British Columbia and Ontario governments or when preparing and submitting bids for new contracts.

The Ontario Budget contemplates a one-time transition credit of up to $1,000 for businesses with less than $2 million in annual revenues from GST/HST taxable sales. British Columbia has not yet announced a similar credit.

Gowlings Tax Group can assist you with the transition compliance of your business to the HST regime and advise on the system changes that will be necessary once the implementing legislation is available.

New Amendments to the Ontario Motor Vehicle Dealers Act
By: Charles McCarragher and Daniel Sterescu

Motor vehicle dealers, as well as purchasers of motor vehicles in Ontario, will be impacted by amendments, including two new set of regulations, to the Motor Vehicle Dealers Act, 2002 (Ontario) ("MVDA"). January 1, 2010 has been proclaimed as the date the amendments are to come into force.

Disclosure Requirements

The regulations provide for a 27 point list of details to be included and clearly communicated to a potential new vehicle purchaser in the purchase agreement by a registered dealer. The list ranges to obvious and simple disclosures such as the date of the sale and the colour of the vehicle, to more arduous disclosures, including a detailed description of any and all charges the purchaser is responsible for and that are included in the final price of the motor vehicle (such as freight, fees and levies). The disclosure requirements are even more numerous for used vehicle sales. In addition to the applicable requirements of a new vehicle sale, a dealer must also include in the contract "[a]n itemized list of all repairs, if any, that, under the contract, the dealer has made to the vehicle and the cost of any such repairs that are to be paid by the purchaser." If the car is being sold with a safety standards certificate, specific language must be inserted to the contract notifying the purchaser what such a certificate entails. If the car is being sold "as-is", then language must be inserted into the contract notifying the purchaser that a car sold on an "as-is" basis may not be driveable.

The regulations also require compliance with a list of 25 additional pieces of information about the vehicle that must be disclosed before the completion of a proposed sale. The list is explicit and includes the disclosure of, for example, the maximum odometer reading upon delivery of the vehicle; any damage that has been caused by fire to the vehicle; any repairs required to the engine, transmission, frame, suspension, computer system, electrical system, air conditioning or the fuel operating system; the make, model and trim level of the vehicle; if the vehicle is a recovered stolen vehicle; if two or more adjacent body panels (other than bumpers) have been replaced; and if the dealer is aware of any other fact about the vehicle that, if disclosed, could reasonably be expected to influence the decision of a reasonable purchaser to buy the vehicle on the terms of the purchase.

Used car sales are heavily overseen under the regulations. Obviously, a dealer may only know what the previous owner has willingly disclosed, and thus even if a registered dealer has done all of his or her due diligence on the acquisition of a motor vehicle (accident reports, inspections, etc.) it is quite possible that a dealer may inadvertently be in breach of the disclosure requirements.

Depending upon the nature of the breach, a breach of the disclosure obligations by the dealer can result in the right of a purchaser to cancel the agreement of purchase and sale. This remedy is available to purchasers upon discovery of a breach of certain disclosure requirements (such as a misrepresentation as to previous use of the motor vehicle or the mileage of the motor vehicle). This right of cancellation exists even if the dealer "did not know the information that the dealer was required to disclose under that subsection or honestly believed it to be accurate, regardless of the steps taken by the dealer to ascertain or verify the information." A purchaser has up to 90 days after the receipt of the motor vehicle to rescind the transaction. Upon delivery of notice to the dealer, the car may be returned by the purchaser to the dealer and the dealer must refund all money paid by the purchaser. This remedy deems that the purchase agreement, any contract for an extended warranty or service plan, all guarantees in respect of money payable under the contract, all security given by the person or a guarantor, all credit agreements and other payment instruments be rescinded. Any failure to comply with the requirements of this section gives the purchaser a right to commence an action against the dealer.

It should be noted however, the cancellation remedy only applies to a breach of a limited number of disclosure requirements. Different remedies exist under the MVDA and its regulations which do not necessarily involve the return of the motor vehicle or the refund of any amounts paid under the contract. The MVDA also provides for the Registrar to receive complaints from individuals who believe that a dealer has breached its obligations under the MVDA. In particular, if the registrar believes there has been a failure with compliance under the code of ethics, a discipline committee may be formed to deal with the matter.

Disclosure is mandatory under the MVDA and a failure to disclose or to comply with an order, direction or other requirement under the MVDA renders a dealer guilty of an offence. However, failure to comply with the directions of the discipline committee, or a breach of the Code of Ethics, are not considered offences under the MVDA.

Classification of Dealers

The classification of dealers essentially creates exemptions to the requirements imposed by the regulations. The regulations create seven classifications of motor vehicle dealers. The majority of requirements under the regulations apply to the "general dealer" class only. A general dealer is the class of dealers that is authorized to act as a "motor vehicle dealer". The remainder of the classifications are groups of dealers who typically deal with other dealers on a wholesale basis, or who are fleet lessors and therefore obtain the benefit of being excluded from certain aspects of the regulations, one of which is the disclosure requirements. The exemptions from the MVDA are carved out in the regulations and include those who run auctions, auto wreckers and those who trade in motor vehicles under court order.

Code of Ethics

Under the regulations, a code of ethics must be followed by all registered classes under the MVDA. The code of ethics broadly covers the disclosure requirements, but also includes the requirements that all registrants act financially responsible; be "clear and truthful" in describing all aspects of the cars for sale including features and their prices; ensure that their sales force is equally compliant with all the new regulations; be respectful; and act professionally. Non- compliance with the code of ethics and other requirements under the regulations can lead to disciplinary action by the newly created discipline committee. The code of ethics cannot be contracted out of.

Other Notable Changes

The regulations provide for stringent new advertising requirements. The general requirement in all advertising is that it be in a "clear, comprehensible and prominent manner." There are more specific requirements if the advertisement is for a used vehicle, and the regulations set out what information about the used vehicle must be displayed in the advertisement.

In view of the rules for non-compliance with the new amendments, it is imperative that vehicle dealers subject to the MVDA become aware of the new disclosure obligations prior to January 1, 2010.