While many businesses are frustrated by the hassle of adjusting to a new tax system, the stark reality is that you have no choice. If you are a business in Ontario or B.C., HST takes effect on July 1, 2010 whether you like it or not. (For some it's even sooner, as we explain below.)

We have put together this comprehensive, plain-language guide to help smooth the transition for affected business owners and managers. From answers about who needs to charge the tax to information on incentive programs that can help defray the cost of changing point-of-sale systems, we've got it covered.

Brace yourself, and read on.

HST basics: five things you must know

Here are five fundamentals that businesses in Ontario and B.C. need to know about the new tax:

1. HST combines the federal Goods and Services Tax (GST) with the provincial sales tax (PST) into a single tax.
2. Ontario businesses will charge 13 per cent.
3. B.C. businesses will charge 12 per cent (the lowest HST rate in Canada).
4. HST applies to both goods and services, adding the provincial sales tax to services that would previously only have had GST applied.
5. As of May 1, 2010 businesses that sell goods or services to be delivered, installed or performed on or after July 1, 2010 are required charge HST.

Which businesses will need to charge HST?

HST will apply to goods, services, real property and intangible property, such as contractual rights and patents. (We've included two charts below to show how the tax status of many goods and services will change.)

You will need to charge HST if:

• you have sales over $30,000 in the calendar year or any four consecutive quarters;
• your business is registered for the GST already.

Current GST registrants won't need to apply for a new number. The business number (BN) you use for your GST account number will be the same number you will use for your HST account and your filing frequency stays the same.

Why harmonize?

In both Ontario and British Columbia, the HST is being introduced to help businesses cut red tape and save money. The purpose of harmonization is to make businesses more competitive and to stimulate the economy.

Here's how this works.

Under the current tax system, you can claim back the GST you've paid on all of your business expenses, but you can't do the same for PST. As a result, goods have a "tax history" that has PST added at every step of the supply chain. These hidden PST costs are included in the final price, with consumers paying tax on the embedded tax.

As a value-added tax, GST is different. There is no hidden tax, because businesses can use the GST they pay out as an input tax credit. The business only remits the difference between the GST it has collected and the GST it has paid.

Harmonization brings the same system and advantages to the collection of the retail sales tax portion. Every business expense that includes HST, from phone services to office supplies, will help reduce the total amount of tax remitted to the government.

Claiming input tax credits

Not all businesses will be able to claim input tax credits on the PST portion of the HST right away.

Small and medium-sized companies with annual taxable sales under $10 million will be able to claim input tax credits for the sales tax paid out after July 1, 2010. However, financial institutions and large businesses with annual taxable sales of more than $10 million will have to wait five years to claim input tax credits paid on the provincial portion of the HST for certain expenses. Then, full input tax credits will be phased in over a three-year period.

Once the HST is fully phased in, the estimated savings for business are substantial.

In B.C., it's estimated that businesses will save $1.9 billion in input costs. In Ontario, the HST will slash about $4.5 billion annually in hidden sales taxes once it's fully phased in.

Ontario's $400 million transition program

To help with the transition, the Ontario government will provide $400 million to help small businesses modify their point-of-sale and accounting systems for the HST.

One-time Small Business Transition Credit support payments of up to $1,000 will be available to most businesses with less than $2 million in annual taxable sales. (All financial institutions, regardless of their annual sales, are excluded.) The nice thing is that you don't need to do anything; credits will be issued automatically based on tax information filed.

Payment will be based on the total taxable revenues for the first full quarter that begins after June 30, 2010. Qualifying businesses will receive the following transition credit amounts:

B.C. has not created a transition credit program.

Lessons learned from other provinces

The HST is not new to Canada. Already, Quebec and the Atlantic provinces have tax harmonization. And around the world, more than 130 countries have adopted value-added taxes.

Interestingly, prices actually dropped slightly in the eastern provinces after the HST was introduced. According to the C.D. Howe Institute, lessons from the implementation of HST in the eastern provinces suggest that harmonization in Ontario and B.C. will not lead to higher consumer prices.

In Ontario, businesses can expect to save more than $500 million annually in compliance costs while B.C. businesses can expect to save $150 million a year.

"Sales tax harmonization will simplify tax compliance for businesses since they will only have to manage one sales tax system," says Ted Wigdor, vice-president, government and corporate affairs, with Certified General Accountants of Ontario. That means one harmonized tax base, one set of sales tax returns and one consistent reporting period, all of which will benefit small- and medium-sized enterprises.

HST implementation checklist

The following checklist will help you identify the systems you will need to change to be ready for the introduction of the HST on July 1, 2010.

• Do you qualify for government support to bring your systems in line with the new tax? (ON only)
• Do you need to modify your cash registers or point-of-sale systems?
• Do you need to update automatic payments to include HST?
• Do you need to update your e-commerce website to add the HST? (Remember, your business might be closed for the July 1 holiday, but your website is not!)
• Do you need to update your accounting software to accommodate the new tax?
• Do you need to update your accounts receivable / accounts payable / invoicing software?
• Do you need to make adjustments to the way you do your input tax/taxable benefits calculations?
• Are there any other aspects of your business that will be affected by the new tax?

Sample HST remittance calculation

To better understand how value-added tax works, let's take a British Columbia accounting firm as an example.

Scenario: The firm hires an independent contractor to work on an accounting project. The contractor bills the accounting firm $1,000 and the accounting firm, after reviewing the work and managing the project, bills its client $2,000.

Total HST remitted to government: $240.

Even though $360 of HST is collected between the two companies, only $240 is remitted to the government. That's because while the accounting firm collected $240 in HST, it keeps $120 of the funds collected to cover the money paid out to the contractor and only remits the remaining $120 to the government.

In reality, each business will likely have other qualifying HST deductions as well from the tax paid on other business expenses, so the amount paid to the government would likely be reduced even further.

Special rules for transactions that staddle the implementation date

Service businesses that have not charged provincial sales tax may need to charge both taxes on work that overlaps the July 1 implementation date.

If over 90 per cent of the work is done before July 1, the business will charge GST only. However: If more than 10 per cent of the work is done after July 1, the business will need to charge GST on the pre-transition portion of their work and charge HST on the remaining portion. These rules apply to the taxable supplies of personal property and services made in Ontario or B.C.

Consider a design firm that creates a brochure a client. Work begins in May and the brochure is completed at the end of July. Seventy per cent of the work is performed in May and June, while the remaining 30 per cent is performed in the month of July.

Since more than 10 per cent of the work overlaps the HST implentation date, the firm must charge both GST and HST. Here is an example of how the company would invoice both taxes:

Invoice for services rendered

How goods & services will be taxed as of July 1, 2010

Wondering which products and services will see a change in their tax status as of July 1? Here's a run-down of some of the key ones:

Goods & services that will have the HST added in both provinces

Goods and services with variable PST/HST status in Ontario and B.C.

* While the Ontario tax rate for prepared foods and beverages under $4 is often said to be tax exempt, that is not correct. According to a GST/HST bulletin GI-064, businesses will get an instant point-of-sale rebate on the 8 per cent provincial portion of the HST. There are strict guidelines for qualifying products as well as how the HST must be shown on the sales receipt.

Consumers will normally receive the rebate by being paid by the retailer at the point of sale. The consumer can file a rebate claim with CRA using Form GST189 within four years of the purchase if the vendor does not pay or credit the rebate amount at the point of sale. Be sure to visit the link in the further reading section below to learn more about which products qualify for this instant rebate.

These two charts are based on a chart published in "Harmonized Sales Tax in Canada," a booklet prepared by Ontario's Certified General Accountants.

Further reading

For more on how transitional rules for the HST may affect your business, go to http://www.cra-arc.gc.ca/tx/pstr/trnstnl/menu-eng.html.

For more information on the HST and how to get registered, go to "Demystifying the GST / HST" at https://www.canadaone.com/ezine/oct03/gst.html.

For more information on qualifying products for Ontario's Point-of-Sale rebate on Prepared Foods and Beverages http://www.crfa.ca/pdf/cra_pos_rebates.pdf.

For more information on point-of-sale rebates for Ontario newspapers visit http://www.cra-arc.gc.ca/E/pub/gi/gi-060/gi-060-e.pdf.

For more information on transition rules for services and personal property, visit http://www.cra-arc.gc.ca/E/pub/gi/notice247/notice247-e.html#P1.2