With the hectic holiday season upon them, businesses across Canada have a new administrative task to manage in the coming days: accounting for the federal government’s HST holiday (see the government announcement for the full details and implementation guidelines).
The measure—which has now received royal assent and will be in effect between December 14th, 2024 and February 15th, 2025—is designed to give a tax break to Canadians before and after the holidays, in an attempt to relieve the pressure of inflation-related cost increases that have continued to cause stress for shoppers since the end of the pandemic (although inflation on many goods has since moderated considerably and mostly returned to the Bank of Canada’s target range). The measure will zero-rate the HST on a range of qualifying consumer items, including some children’s clothing and toys, prepared foods and some alcoholic beverages, printed books and newspapers and Christmas trees.
In some cases, the exclusions from the program will be challenging for affected businesses to manage. One quirk of the measure that has been raised by many observers is the potential for mixed-used overlap. For example, the provision exempts the HST from building toys, such as certain Lego that is intended for play by children. But the HST will still be applied to ‘adult’ Lego—this, despite the fact that adults and children may play with the same Lego sets. There are numerous other examples where the application of the relief measure could cause interpretational headaches.
While the tax holiday will inevitably cause confusion amongst consumers—who may take out their frustration on checkout clerks and store managers as they attempt to determine which of the items in their shopping cart are tax exempt and which aren’t—businesses face a raft of potential challenges related to the measure.
First, they must adjust their point-of-sale systems overnight (on a product or category basis) on or before December 14th to account for the zero-rating of qualifying items. Again, understanding which of those items qualifies could be a complex undertaking. With the short implementation period, there has been little time for businesses to contact the Canada Revenue Agency with questions relating to points of interpretation around exemptions. Then, after the holidays, those systems will need to be reprogrammed to add back the HST. Managing merchandise returns during this period could be another source of friction. There is also the risk that shoppers could return items purchased before the tax holiday, only to repurchase them immediately to save the HST.
Managing the cost of administration around the sales tax zero-rating could be significant for some businesses. Whether a potential boost in sales activity will offset those costs remains to be seen.
By far the biggest risk for affected businesses will not be at checkout when the HST relief is applied, but in the spring when HST returns will need to be filed. Put simply, the potential for compliance and reporting errors is substantial; more so when taking activities such as importing into account. Because the HST will be zero-rated on qualifying imported goods during the relief period, businesses can claim an input tax credit for HST paid or payable on expenses related to those goods. That will require fastidious documentation to mitigate the risk of HST overpayments on imported items. Importers may need to work closely with customs brokers to avoid reporting and compliance errors.
As such, maintaining accurate documentation will be key for affected businesses in the event of a Canada Revenue Agency audit. The federal government has not indicated that the CRA will turn a blind (or even lenient) eye to compliance errors. Will the CRA offer non-compliant businesses an amnesty period (or some other accommodation) to correct reporting or remittance errors? If not, many could be subject to interest and penalties should reporting errors be detected during an audit. The reporting complexity will likely be exacerbated because the relief period begins and ends mid-month.
The best practice for business owners is to be as diligent as possible, but to not let compliance-related anxieties distract from sales during the crucial holiday season. This is a make-or-break time of year for many retailers, restaurateurs and offer affected businesses, so prioritizing revenue generation over tax remittance analysis is an obvious priority. But by doing their best to maintain accurate records and apply the HST break according to government compliance rules, businesses will reduce the risk of audit-related run-ins with the CRA.
Tony Sokic, Managing Partner
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