March 10, 2010

Harmonized sales tax

Ontario architects, general contractor associations issue joint HST bulletin

Addresses key questions as July 1 implementation date nears

The Ontario Architects Association and the Ontario General Contractors Association have released a joint bulletin for the design and building communities on the implementation of the harmonized sales tax (HST) in Ontario.

The following is their joint recommendation on applying the HST:

First and foremost: Don’t panic

This joint bulletin is provided to the design and construction industry in an effort to bring clearer information and guidance to our members, given the lack of detailed information relative to the transition and implementation of the HST as it relates to projects within the industry.

Key representatives from the industry met with the assistant deputy minister of finance to get the answers our members need to move forward as the July 1 implementation date approaches.

The following information represents the best advice available to the members of our organizations.

We would suggest that clients also be advised to review the HST impact with their appropriate legal or accounting advisors before finalizing tender documentation.

Our main concern is that under many standard contracts, if taxes are affected during construction, any savings belong to the owner.

For example, CCDC2 states:

GC 10.1.2 Any increase or decrease in costs to the Contractor due to changes in such included taxes and duties after the time of the bid closing shall increase or decrease the Contract price accordingly.

This sounds simple, but has obvious practical difficulties. For our industry, the two key situations are:

Tender calls for construction which starts before the HST takes effect July 1, 2010;

Contracts already underway which will run past July 1, 2010.

With respect to the first issue, there was some suggestion that the legislation had a slight chance of not reaching implementation and there was some confusion as to how to deal with this situation should it occur.

Our meeting with the ADM clarified that this is not true. The legislation eliminating the PST and introducing the HST was passed through the legislature in December and there is no question about it taking effect on July 1, 2010.

So the question is: How to bid? PST in or out? GST as usual? What to do? By the time a contractor gets a tender call, the wording is written, so we have to alert owners and consultants to this issue.

As recommended by the Canadian Construction Association, there needs to be clear wording in the instruction to bidders. In keeping with this, the OGCA and OAA recommend to owners and consultants that the following approach be taken.

The Instructions to Bidders should be amended by adding the following paragraph:

Bidders should factor into their bid price and any other prices submitted as part of the bid, the transition to the Harmonized Sales Tax on July 1, 2010, including the removal of the provincial sales tax (PST) on those line items of cost for which PST will cease to be payable after June 30, 2010.

Secondly, the general conditions should be amended to make it clear that the contract is already based on the HST coming into effect on July 1 and that the introduction of HST will not be considered a change in taxes for the purposes of calculating an extra or credit of construction.

It is the recommendation of the OAA and OGCA that the above instructions be recommended to all buyers of construction. Our associations will communicate these recommendations to our members and as many client groups and buyer representatives as possible.

So in practice, what does this mean?

Based on the inclusion of this clause in any new bid documents, contractors and their trades will not include for PST on any work to be executed after July 1, 2010 nor will they be required to provide a credit for this PST.

Under these clarified instructions to bidders, the bidders should consider the following when preparing their bids.

PST will be paid on materials purchased up to June 30. You may be eligible for an inventory credit for inventory held on June 30, and you will receive increased input tax credit equal to the PST for materials purchased after June 30. GST, and then HST would continue typically to be excluded from the bid price, and would be applied on top.

If this method is followed, savings from increased input tax credits due to the contractors are incorporated into the bid itself, which eliminates the administrative overhead.

With respect to the second issue, for contracts containing a credit clause that are currently underway and for projects being bid now where the owners insist that the credit clause remain, we can look at how the GST and MST (Manufacturer’s Sales Tax) were dealt with. When the MST was removed, it was left to the market to settle and any questions were answered through negotiation between the owner, architect, and GC on a project by project basis.

To ease in the transition, we are currently working with senior officials at the Ministry of Finance, legal and accounting representatives as well as the other professional associations to develop a process to deal with what has been described by some as the “claw back” or “credit” provision.

Owners, Subtrades, Architects, GCs and others should rest assured that we are attempting to provide answers as quickly as possible. Subtrade Position

Subtrades need not be concerned about dealing with the owners as there is no contractual relationship between the subtrades and the owner. Subtrades must bid as per the instructions to bidders as outlined in the documents. For example, if an owner includes language that PST be included or excluded, then that’s how the subtrade should bid.

GCs should ensure this information is clearly provided to subtrades. Any issues should be dealt with through negotiation and discussion as is recommended between the owner and the GC.

If you have further questions, please feel free to email any one of the participating industry associations (info@ogca.ca or oaamail@oaa.on.ca).

Let’s keep in mind that the issues raised will have a very short life span and we should work to reduce the “administrative burden,” not increase it. Be reasonable and use a simple solution, especially when one exists.

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