|
Avoid the ‘tax stab’ when doing business in neighbouring provinces
The heavy world demand for oil and gas resources is leading many Alberta businesses, especially those in construction and manufacturing, to expand their business into British Columbia (B.C.) and Saskatchewan which are also experiencing increased activity in their natural resource sectors. Because Alberta does not have a provincial sales tax (PST), Alberta businesses often aren't aware, or underestimate, the impact of these taxes when doing business in neighbouring provinces. Taking these tax rules into consideration upfront is critical to your bottom line when calculating your cost of doing business, bidding for contracts or setting your prices/fees. For instance, if you enter into a contract to construct a building in B.C., you will pay 7 per cent PST on all of the construction materials you purchase or bring into B.C. If the construction materials cost $100,000 you will incur an additional $7,000 cost that you will need to build into your bid or you'll lower your profit margin significantly.
To avoid being caught off guard with significant hidden costs that you can't pass on to your customers, we've identified a few common scenarios and related tax rules to help you make more informed business decisions with regards to paying PST and collecting PST on behalf of the government.
Taking equipment, machinery or other goods into B.C. or Saskatchewan
When taking equipment, machinery or other goods into B.C. or Saskatchewan, you may have to pay 7 per cent PST on the value of those items, even if they were purchased in Alberta. For example, if you win a contract to work on a pipeline in B.C. and must take your $100,000 backhoe into B.C. to perform the work, you will be required to pay $7,000 in PST.
This can get expensive and is particularly problematic for businesses wanting to move equipment into a province for short-tem contracts. Since partial relief may be available if the equipment will be in the province for a limited time, it's worth seeking tax advice.
Performing construction contracts
In Saskatchewan
If you purchase your materials and equipment in Saskatchewan, you will be charged 7 per cent sales tax by the supplier. If you decide to purchase them in Alberta and take them into Saskatchewan, you will still have to pay the 7 per cent tax, but directly to the government.
In bidding for a construction project in Saskatchewan, you need to take into account that, if successful, you will have to pay 5 per cent of the contract price upfront to the Saskatchewan government. For example, if you are a plumber contracting to do a $200,000 project in Saskatchewan, you will have to post a $10,000 bond or pay $10,000 cash upfront to the government. This amount is held as security to ensure you pay the 7% PST you will owe the government on the construction materials, supplies and equipment used in the completion of the project.
Before you are paid for the completed project, the project manager or owner will verify that you posted the security deposit upfront. If you haven't, they can withhold the deposit from your payment because they are required to pay the sales tax if you don't.
To avoid paying the 5 per cent security deposit, you may want to consider the tax advantages of setting up a business office in Saskatchewan.
In B.C.
In B.C., although you will also have to pay the 7 per cent sales tax on the construction materials, supplies and equipment used in a construction project, you won't have to post the 5% security deposit.
Also, in B.C. you can purchase work-related safety equipment including gloves, safety clothing, footwear, glasses, fire extinguishers and distress flares without paying the 7% PST.
Leasing a vehicle or equipment in B.C. or Saskatchewan
When you lease a vehicle or equipment in either of these provinces, you will have to pay 7 per cent PST on the lease payments. For example, if you lease a $75,000 truck, you will pay $5,250 in PST on the lease payments. Likewise, if you lease a fleet of 5 vehicles, you'd be paying $26,250 in PST. .
Leasing property in B.C. or Saskatchewan
If you decide to establish a location in either province, you will not pay PST when leasing a business office, warehouse, or on any type of permanent building or land including storage yards and parking lots.
However, if you lease a building and equipment together, it may not be easy to determine if the lease of a particular piece of equipment is taxable or forms part of the building. For example, the lease of a refrigeration unit that is free standing or only attached to the floor by electrical cables would not be considered to be part of the building and would be taxable. However, the lease of a refrigeration unit that is built into the wall of a building is considered part of the building and would not be taxable.
Although this is a relatively straightforward example, many situations are not, and it is advisable to seek tax counsel. If the equipment is indeed taxable, and you assumed it wasn't, the landlord can pass on any assessed taxes should he be audited.
Qualifying contractors for manufacturing tax breaks
B.C. and Saskatchewan provide tax breaks for manufacturers. As these provinces have broad definitions of manufacturing, you may qualify for the tax breaks. You may qualify as a manufacturer if you:
- regularly engage in the exploration, discovery, development, production or processing of petroleum and natural gas deposits;
- are a mining company, pulp and paper mill, refinery or saw mill; or
- are an engine re-builder.
In B.C.
If you qualify as a manufacturer, you will not pay the 7 per cent PST on:
• purchases or leases of production machinery and equipment provided they will be used directly in the manufacture of taxable goods at the manufacturing site; and
• raw materials or materials used in the production process.
In Saskatchewan
If you qualify as a manufacturer, you will not pay the 7 per cent PST on purchases of:
• raw materials, prototypes, and materials consumed or expended in the manufacturing process and
• electricity, diesel fuel, and gas used in the manufacturing process.
Constructing an office or other type of building
in B.C. or Saskatchewan
Ensuring that you don't pay too much tax when building or repairing property depends on the type of contract you have.
A lump-sum contract
This contract states a single price for the construction which includes labour and materials used. In this case, you will not pay PST on the construction. Instead, the contractor will pay the PST on the purchase of the construction materials and equipment used. In most cases, you will pay less PST under a lump-sum contract as the contractor will only pay PST on his costs and will only mark-up his prices to include the PST he has to pay.
A time-and-material contract
This contract separates the cost of labour from the materials. In this case, you will pay PST to the contractor on the cost of materials used but not on the labour cost. Under a time-and-materials contract, you will generally pay more PST as the contractor will usually mark-up the cost of construction materials and charge the 7 per cent PST on the marked-up price.
For example, if you enter into a contract to have an office building constructed for a lump sum price of $5,000,000, you will not pay PST on this construction. However, if your contract stipulates that the cost of the building materials is $2,000,000 and the cost of labour is $3,000,000, you will pay 7 per cent PST, or $140,000, on the building materials.
Collecting provincial sales tax from your customers in B.C. and Saskatchewan
Generally, you are not required to collect the PST from your customers when you don't have a business location (office, warehouse, manufacturing plant) in the province. However, once you open a business location to sell goods or some services in the province, you will have to register and collect the PST.
|
