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Seek clarity on HST status #120

Closed patcon closed 4 years ago

patcon commented 4 years ago

Re-ticketed from https://github.com/hyphacoop/organizing/issues/70#issuecomment-538146143 and

Shared Description

:speaking_head: Loomio: N/A
:date: Due date: N/A
:dart: Success criteria: We have a shared understanding with our accountant about when we're charging HST.

Arose from accountant kick-off meeting. notes.

To Do

benhylau commented 4 years ago

Moved here from https://github.com/hyphacoop/organizing/issues/154

Thanks @YurkoWasHere, [your previously linked -- context added by patcon] "non-profit organization promoting the arts in your local community in Nova Scotia" example is very helpful. Basically we'd charge HST for everything except mission-aligned initiatives (e.g. workshops), and we are eligible to claim Input Tax Credit (ITC) on expenditures not relating to already exempt activities.

International Clients

For international clients, it seems we do not need to collect HST on most of our digitally-offered services (e.g. software development, devops, design) because it is classified as exported goods and services, which is zero-rated. This means we can also collect ITC on related expenditures, since zero-rated is not the same as exempt. See: Intangible personal property and Excise Tax Act section 10 of Part V of Schedule VI. The latter text reproduced below:

10 A supply of an invention, patent, trade secret, trademark, trade-name, copyright, industrial design or other intellectual property or any right, licence or privilege to use any such property, where the recipient is a non-resident person who is not registered under Subdivision D of Division V of Part IX of the Act at the time the supply is made.

10.1 A supply of intangible personal property made to a non-resident person who is not registered under Subdivision D of Division V of Part IX of the Act at the time the supply is made, but not including

    (a) a supply made to an individual unless the individual is outside Canada at that time;

    (b) a supply of intangible personal property that relates to

        (i) real property situated in Canada,

        (ii) tangible personal property ordinarily situated in Canada, or

        (iii) a service the supply of which is made in Canada and is not a zero-rated supply described by any section of this Part or Part VII or IX;

    (c) a supply that is the making available of a telecommunications facility that is intangible personal property for use in providing a service described in paragraph (a) of the definition telecommunication service in subsection 123(1) of the Act;

    (d) a supply of intangible personal property that may only be used in Canada; or

    (e) a prescribed supply.

My read is that these activities are intellectual property exports made in Canada, which are zero-rated for the purpose of HST collection.

More accessible but unofficial references below:

Once we get consensus among ourselves for this, we should reach out to other Canadian software shops (for-profit or not-for-profit) to make sure it's consistent. Also to our accountant.

patcon commented 4 years ago

Aligns with what's Matt @ 4P told me via email (and I've perhaps not been stating clearly enough in convo):

@patcon wrote on aug 20:

Hopefully a quick one:

Conflicting info from two accountants we're vetting: One says don't charge clients HST, the other says that HST is based on service type, and web development service should have it added.

Do you charge HST on services rendered as nonprofit builder?

Response:

there are things that we charge HST for and those that we don't - so service type. I checked with [our accounting consultant, SM] whose non-profit was just audited and she said 100% you have to charge HST on some items (a contract yes, services under a grant maybe no). In fact they had to get a ruling from CRA on a specific grant and whether they needed to have had charged HST for one part of it. I strongly suspect you need to charge HST for web development. A workshop on how to do web development for the public good? Maybe not. The thing is that non-profits can recover some HST.

patcon commented 4 years ago

Another unofficial doc supporting the fact that international software dev (when product not serving Canadians) being zero-rated:

Inside Formstack: Working Remotely for an American Company as a Canadian

If you’re a Canadian working for an American company, your services may be what they call zero-rated. This applies to services and intellectual property that is exported outside Canada and is not generally consumed, used, or enjoyed in Canada. In my case, I do product design where the work is saved on servers outside Canada, where the product is delivered to a US company who sells the services from the US. This type of work IS zero-rated. Here are the CRA zero-rated documents for reference and CRA electronic commerce reference. It would be a good idea to reference those above documents in your invoices just in case the CRA questions you about not charging HST.

(Aside: The above article also seems great for working with international contractors, should we ever wish to.)

patcon commented 4 years ago

I spent a few minutes making my understanding into a visual flow-chart. This worth playing with as a scratch space to ensure we're all on the same page for how we plan to charge taxes and get refunds?

Charging Taxes: Decision Flow Diagram (Click to edit)

Still prob needs to have something about "grants", and also, something about ITC.

Please feel free to edit it liberally, if you'd like

patcon commented 4 years ago

Added a todo for international invoices. Look ok?

Moved invoice todos to https://github.com/hyphacoop/organizing/issues/154, since not directly related to HST

patcon commented 4 years ago

Blocked on spending money for expert opinion. Next step should just be talking to expert.

patcon commented 4 years ago

Related to accrual vs cash decision, but no action: https://github.com/hyphacoop/organizing/issues/154#issuecomment-589221165

dcwalk commented 4 years ago

discussion in gov meeting, not our area, dropping our tag.

benhylau commented 4 years ago

We are a non-profit organizations and this GST/HST Information for Non-Profit Organizations applies to us for tax purposes. Here are the sections as they apply to us:

This is all consistent with Matt @ 4P's recommendations that @patcon posted https://github.com/hyphacoop/organizing/issues/120#issuecomment-557810167. Our next step is to verify everything with our Accountant.

benhylau commented 4 years ago

Clarify the following scenarios with our Accountant and add as concrete examples to handbook that are relevant to our business activities, once we are no longer a small supplier:

  1. We provide IT consultation and software development service to a Canadian client and subcontracts a Canadian web developer, spends $100 on web hosting and $1,000 on a laptop to help us fulfill the contract.

    • We will charge 13% HST when invoicing the client
    • The Canadian subcontractor will charge us 13% HST when invoicing us
    • We are eligible to reclaim the 13% HST paid to the subcontractor through ITC claim
    • We are eligible to reclaim the 13% HST of $100 paid to acquire web hosting through ITC claim
    • We are eligible to reclaim the 13% HST of $1,000 paid to acquire the laptop through ITC claim

  2. In the same scenario, but the client is a non-Canadian company.

    • We will charge no HST when invoicing the client, and mark as Intellectual property exports, zero-rated on invoice
    • The Canadian subcontractor will charge us 13% HST when invoicing us
    • We are still eligible for all ITC claims

  3. In the same scenario, but the subcontractor is a non-resident of Canada and the service is rendered outside the country.

    • The foreign subcontractor will not charge us HST when invoicing us
    • There is no ITC claim on the payment to our subcontractor
    • We are still eligible for all other ITC claims

  4. We receive a grant from a private company to facilitate a free digital security workshop that is open to public, and we spent $100 on materials.

    • HST does not apply, and we do not need to collect or remit HST on the grant amount
    • The $100 materials is not eligible for ITC claims because the grant is HST exempt (not zero-rated)

  5. We receive the same "grant" amount but the workshop has a registration fee, collected by the client, and is not open to public.

    • We need to charge 13% HST when invoicing the client, this is no longer a grant
    • The $100 materials is eligible for ITC claims

The method of claiming ITC is separate from this discussion, and should be a Finance decision with our Accountant and Bookkeeper.

benhylau commented 4 years ago

https://github.com/hyphacoop/organizing/issues/120#issuecomment-611993846

@dcwalk we have confirmation from our accountant that this is correct, do you think handbook/guides is the right place for this?

benhylau commented 4 years ago

use accrual method of accounting, and set up to remit taxes based on invoices (not collected cash)

@YurkoWasHere anything needs to be done for this? I want to close this one out asap as it's blocking two other issues that are also kinda urgent.

dcwalk commented 4 years ago

#120 (comment)

@dcwalk we have confirmation from our accountant that this is correct, do you think handbook/guides is the right place for this?

Sounds good to me! I'd say take care of this how you all in Finance WG need to, but that we should pull out a concise sentence after that to add to #155 and link to the Finance section?

benhylau commented 4 years ago

This has accountant recommendations about ITCs https://meetings.hypha.coop/2020-04-22-call-with-accountant.html which is pretty clear that we should do conventional method (not quick).

benhylau commented 4 years ago

We can close this once the PR merges.