In the most recent Ontario budget, it was announced that Ontario will be harmonizing its sales tax system with the GST effective July 1, 2010. Instead of a five percent federal GST and an eight percent Ontario PST, there will be a single 13 percent Harmonized Sales Tax (HST) in Ontario. This same system has been in place in three Maritime Provinces since 1997. We predict that other provinces will follow this trend as the temptation to tax more services is irresistible to both the Federal and Provincial governments, especially given that the federal deficit is likely to be about $50 Billion for 2009!
The Ontario HST will be administered by the Canada Revenue Agency. To ease the administrative burdens on the system, the basic rules concerning the HST will be substantially the same as the GST.
Will this have an impact on Ontario dentists?
Yes; there will be a significant net cost for operating practices and, in many situations, there will be an increase in the overall taxes payable when a sale of a practice takes place.
The PST is currently limited to the sale of “tangible personal property.” This definition excludes the purchase of services (for example, the fees paid to practice consultants, lawyers, accountants and technicians for equipment maintenance are not subject to PST) and also excludes the cost of rent. Also, if a dentist wishes to purchase a building or commercial condominium for the practice, PST does not apply (although land transfer tax is payable). ALL of these items are subject to GST — and as of July 1, 2010, the rate of tax will almost triple!
Since the supply of dental services is almost always an exempt supply (meaning that the dentist does not charge GST but also cannot claim input tax credits for any purchases the dentist makes), there will be a shift of tax burden which will, on balance, increase costs for Ontario dentists.
Historically, purchases and sales of dental practices were structured as the purchase/sale of assets (when dentists were not permitted to incorporate professional corporations). For the purchaser of assets, the purchaser is required to pay eight percent PST on the purchase price allocated in the purchase agreement to furniture and equipment (unless the furniture and equipment is affixed to the premises) and five percent GST on the purchase price allocated to the leasehold improvements. When the shares of a professional corporation are purchased, there is no tax (PST or GST) payable. Still, there are many situations where the parties agree that an asset purchase/sale is preferable. Also, in many situations a vendor is carrying on his/her practice personally but wishes to transfer the assets of the practice to a corporation in order to be eligible for the $750,000 capital gains exemption on the sale of shares. Since this requires the transfer of the practice assets to the corporation prior to the sale, the same PST and GST rules generally apply as if it were a sale of assets to a third party.
For vendors of a dental practice, five percent GST is currently payable on appraisal and brokerage fees. Under the new HST, this will increase to 13 percent! This may be an ideal time to sell, if only to avoid costly sales taxes!
Co-authored by Martin Houser, LLB
Dental Practice Management – Summer 2009