PST Hot Topics · Example of Payroll Services and Payroll Software ... Current Law –introduced in...

PST Hot TopicsCPA Commodity Tax Symposium 2019Ottawa, Canada

Andrew Azmudeh | Deloitte LLP | October 23, 2019

© Deloitte LLP and affiliated entities.

• British Columbia – Software

• British Columbia – Real property contracts

• British Columbia, Saskatchewan and Manitoba – Allocation of PST

• Saskatchewan and Manitoba – Bonding/holdback requirements

• Manitoba – Real property

• Saskatchewan – Real property services

• Registration requirements in Saskatchewan

Table of contents

PST Hot Topics 2


BC Software

PST Hot Topics 3


Is Software a Property or Service

BC PST :

“Software” is defined in Section 1, BC Provincial Sales Tax Act (BC PSTA):

• A software program that is delivered or accessed by any means;

• The right, whether exercised or not, to use a software program that is delivered or accessed by any means;

• Contractual right to receive modifications to or new versions of software programs, subject to conditions

Property has the following key characteristics:

• A right or thing;

• Valuable;

• Transferrable;

• It may be tangible or intangible

4PST Hot Topics


Characterization as a service

BC PST:

What is a service?

• The main object of a service contract is the performance of work

• A service provider possesses unique skills or talents for the performance of work.

• The customer has control over the nature of service provided

• Service provider may control or operate equipment used to fulfill the contract.

Software can be tangible or intangible property

Not always clear if software is property or service.

5PST Hot Topics


Software Incidental to Provision of Services

BC PST:

Provision of property or software that is “incidental” to provision of a non-taxable services is not a “sale”

(Section 1, BC PSTA, paragraph (k) of the definition of “sale”)

Software will be incidental to a service when :

Paragraph 7(2)(a) of BC Provincial Sales Tax Act Regulations

• Fundamental and overriding objective of contract is for acquisition of service and not software;

• No separate price for software; and

• Total consideration for service with or without software are same or marginally different.

6PST Hot Topics


Example of Payroll Services and Payroll Software

BC PST:

• A payroll service helps companies to manage their payroll processing - employee pay, tax deductions, keeping track of information for reporting purposes, etc.

• Payroll software allows customer to enter employee information, hours worked and similar information on payroll software.

• The essence of the supply is payroll services.

• The payroll service:

− Fundamental and overriding objective of contract is for the payroll service.

− There is no separate price for the software.

− Customer pays for payroll processing services as a whole.

• PST Bulletin 105 – Software takes the position that the supply is a supply of taxable software where:

− The service provider is responsible for the payroll processing, such as cheque issuance and bank verification, and uses a software application to automate these tasks; and

− The agreement expressly provides the purchaser with the right to use the software application to compile and send information to the service provider for processing.

• Payroll contract may mention a right to access or use software.

7PST Hot Topics


• Access to standalone online database – generally exempt

• Access to online database becomes taxable when the following requirements are met under Bulletin PST 105:

− Person can complete a particular task using the online software independent of any action or service by the service provider (or their employees).

− Person can use functions of the online software to create data files and manipulate them.

− The contract expressly states that the person is acquiring a right to access software.

• What if these rights are incidental to the actual service?

Example of Payroll Services and Payroll Software

BC PST:

8PST Hot Topics


BC Ministry of Finance policy revised policy:

• Is the software incidental?

• Is the software ordinarily available for sale without the services?

• Would it be artificial to allocate prices to the software and services?

How should PST apply to the software of the future?

• How should PST apply to artificial intelligence?

− Service?

− Intangible personal property?

Future of Application of PST to Software

BC PST:

9PST Hot Topics


BC Real Property Contracts

PST Hot Topics 10


• Supply and install contracts involves:

− the supply of tangible property, and

− the supply of services to real property.

• Customer does not pay PST on the supply of services.

• PST applies to the materials.

− Who should pay PST on the supply of TPP?

BC PST: Taxation of Supply and Install Contracts

BC – Real Property Contracts

11PST Hot Topics


• Pre-2008 Social Service Tax Act (SSTA):

− If a lump-sum contract: contractor will pay tax on TPP – “last purchaser”

− If a Time and Materials contract: customer will pay tax on TPP, as title passes to customer prior to installation – some exceptions.

• 2008 Amendments to SSTA: Default Rule: contractor pays tax on TPP, unless specific contractual language is used.

• 2010 to 2013 – British Columbia was a participating province

• 2013: When BC PSTA was introduced, Default Rule: contractor pays tax on TPP, unless specific contractual language is used

(section 79 and 80).

BC PST: Taxation of Supply and Install Contracts (cont’d)


12PST Hot Topics


• Definition of “use” under the PSTA includes:

− the consumption, employment or utilization of tangible personal property by a person in the course of providing a service;

− the consumption, employment or utilization of tangible personal property for the purposes of fulfilling a contract for the supply and installation of affixed machinery or improvements to real property;

• Definition of “sale” under the PSTA excludes:

− the provision of tangible personal property by a contractor for the purposes of fulfilling a contract under which the contractor is required to supply and affix, or install, affixed machinery or improvements to real property

− Section 79 and 80 – Exception to the default rule

• The rule is only for TPP that is supplied and installed and does not apply to goods that do not become part of real property

Application of Default Rule in Supply-Install Contracts


13PST Hot Topics


Well service contractors perform various services for O&G producers:

• Drilling wellbore, inserting casing

• Cementing casings to the wellbore

• Hydraulic fracturing by injecting water/chemicals/ sand, and

• Coil tubing.

BC PST: Supply and Install Contracts in the Oil & Gas Industry

Real Property Contracts – BC

14PST Hot Topics


• What is the application of PST to the “unincorporated goods”?

• What is the application of PST to materials that become part of TPP?

• Does the agreement have a specific provision that transfers the title of the goods to the customer prior to the service?

• What was the purpose of the amendments in 2008?

• Currently, this is an issue with a specific contractor’s agreements.

BC PST: Complexities of Oil and Gas Supply and Install Contracts


15PST Hot Topics


• A new court case at BCSC – The hearing would be in late 2019/early 2020

• BC v. Burlington Resources Canada Ltd., 2015 BCCA 19 (under the pre-2008 SSTA):

− BJ Services Company provided oil well cementing services to Burlington. BJ did not collect BC PST on cementing materials.

− Ministry assessed Burlington for PST on the materials.

− BCCA agreed that possession of the cementing material was never transferred to Burlington.

− Burlington acquired the service.

− No PST on materials.

BC PST: Default Rule in Oil and Gas Supply and Install Contracts


16PST Hot Topics


Allocation of PST to services and property in BC, SK and MB

PST Hot Topics 17


• PST is required to be paid on taxable goods and taxable services acquired outside the province for consumption in the province

• Examples of where the customer has issues with property:

− Goods are acquired in Ontario

− the default tax-code in the system is HST at the rate of 13%

− Goods are moved from Ontario to BC

− System does not allow for more than one tax code – NO BC PST

− System does not self-assess PST

− Does the customer have a manual procedure to keep track of goods movement and self-assess PST accordingly?

• Promotional materials

• Administrative materials

• Software – BC and Saskatchewan

• Goods brought into BC, SK, or MB temporarily

PST on Goods and Services

Allocation of PST to BC, SK and MB on goods and services consumed in the province

18PST Hot Topics


PST on Services

• Legal Fees – Taxable in BC, Saskatchewan, Manitoba

• Accounting Services – Taxable in Saskatchewan, Manitoba

• When are these services related to the province and PST should be self-assessed?

• Implication for the following:

− Audit and accounting fees

− Legal fees on transactional work

− What about general legal and accounting fees related to the parent?

− It depends!

PST on Services

Allocation of PST to BC, SK and MB on goods and services consumed in the province

19PST Hot Topics


Security/bonding requirements in SK and MB

PST Hot Topics 20


• A non-resident contractor in Saskatchewan and Manitoba is required to post security or bond.

• Alternative – obtain a clearance letter

• 6% in SK

• 9.15% in MB (10.15% prior to July 1, 2019)

Bonding/Holdback

Saskatchewan and Manitoba

21PST Hot Topics


Initial announcement after 2017 Budget

• On or after April 1, 2017 – SK announced that all resident and non-resident contractors were required to post security or bond.

• The Provincial Sales Tax Act and its regulations – they did limit this to real property contracts, whether exempt or taxable.

• Administrative policy – non-resident contractors were required to post security whether their supplies were taxable or non-taxable

SK PST (cont’d)

Bonding/Holdback – Saskatchewan

22PST Hot Topics


Current Law – introduced in 2018, effective April 1, 2017

Section 29 of the Provincial Sales Tax Act:

whether ordinarily resident in Saskatchewan or not, in this section referred to as the contractor, enters into a contract with another person, in this section referred to as the principal, under which or in the carrying out of which items, including but not limited to those listed in clauses (a) to (c), will be used or consumed by the contractor in Saskatchewan, the contractor shall deposit with the minister a sum equivalent to 6% of the total amount to be paid by the principal under the contract, or provide to the minister a guarantee bond, satisfactory to the minister, in a penal sum equivalent to 6% of the total amount to be paid by the principal under the contract, to secure payment of the tax imposed by this Act with respect to any of the items in clauses (a) to (c), or any other item consumed or used by the contractor under or in the carrying out of the contract:

(a) tangible personal property

(b) taxable services

(c) a contract of insurance.

SK PST (cont’d)


23PST Hot Topics


Sections 3(7.1) and 7.29 of the Regulations –Contractors providing exempt real property services –they are still required to comply with the bonding requirement

Section 18.7 of the Regulations – defines “contract”: under section 29

• A service that can be taxable or not

• It should be provided by a person not ordinarily a resident of SK

SK PST (cont’d)


24PST Hot Topics


• It should provide for

− Construction, alteration, erection, demolition, remodelling, improvement of real property, whether they increase the value of the property or not

− the supply and installation of tangible personal property where the contractor consumes or uses tangible personal property and the principal knows or ought to have known of this;

− the bringing into the province or receiving delivery into the province of tangible personal property for the contractor's own consumption or use, or for the consumption or use of other persons at his or her expense, or on behalf of or as agent for a principal who desires to acquire the property for consumption or use by the principal or other person at his or her expense, and the principal knows or ought to have known of the circumstances.

• Is this a supply of tangible personal property or a service?

SK PST (cont’d)


25PST Hot Topics


A non-resident contractor who uses goods or services to perform a contract in Manitoba should deposit cash/security with the Ministry or post a bond equivalent of 9.15 % of the total price (10.15 % prior to July 1, 2019).

Practical approach – holdback held by the principal and clearance letter should be obtained prior to the release.

MB RST

Bonding/Holdback – Manitoba

26PST Hot Topics


Manitoba real property

PST Hot Topics 27


• PST applies to tangible personal property, software, and certain services

• Definition of tangible personal property includes

− Machinery, equipment, an apparatus or a storage structure — other than a warehouse, grain elevator or other storage building prescribed by regulation that is installed on, under or in, or attached to, buildings or land and used in manufacturing, producing, processing, storing, handling, packaging, displaying, measuring, monitoring, transporting, transmitting or distributing tangible personal property, or in providing a service

• Pipelines, refineries, natural gas processing plants, electrical equipment, telecommunication equipment, oil and gas wells, most types of storage tanks

− Bulletin PST – Bulletin 008 – Installation, Repairs and Improvement to Real Property

MB PST

Manitoba Real Property

28PST Hot Topics


Exemption for sale of buildings – 3(22.1)

• Otherwise all mechanical and electrical could be taxable

Engineering services

• Taxable at 30% where the service does not “relate to tangible personal property”

MB PST (cont’d)

Manitoba Real Property

29PST Hot Topics

Exemption for sale of manufacturing plants – 3(22)

• Otherwise, all equipment would be taxable

• Manufacturing – MB administratively applies the definition under subsection 125.1(3) of ITA (CAN)

• Transfer of natural gas processing plant can be taxable

Administrative policy

• Engineering firm charges at 30%

• Purchaser of the service self-assesses the remaining 70% when the designed goods are actually built, manufactured or constructed


Saskatchewan real property services

PST Hot Topics 30


• Services in relation to real property are taxable – effective April 1, 2017

• Contractor would be required to charge the PST on both labour and TPP for a supply and install contract

• The legislation imposes PST on services performed by one person for another person for consideration, relating to:

− the construction, alteration, repair, erection, demolition, remodelling or improvement of real property or a building or other structure on real property; or

− any other thing done or agreed to be done in relation to real property or a building or other structure on real property

General Rule

Saskatchewan Real Property Services

31PST Hot Topics


Exempt services – section 3(7.1) of Regulations

• inspection services or examination services in a number of cases;

• Services in the nature of the collection, clearing and removal of garbage or debris from land that are not otherwise a taxable service and that do not alter the land when performed

• Services that are a primary farming activity;

• the harvesting of forest products within the meaning of The Forest Resources Management Act;

• lawn care or yard care services, including cutting, pruning, fertilizer or chemical application, aeration, thatching or mulching or mowing;

• Pest control services;

• Septic services consisting of emptying or pumping out sewage or effluent storage tanks;

• Setup and teardown of cranes;

• Snow clearing and snow removal services;

Exempt services – section 3(7.1) of Regulations

• Surveying or mapping activities; and

• Safety consulting services performed by a third party.

Exempt services – section 7.29 of Regulations

• the drilling of oil and natural gas wells; and

• downhole servicing and downhole repairs directly related to production activity.

Cementing and above ground work, including pipeline work, remains taxable!!

Saskatchewan PST (cont’d)

Saskatchewan Real Property

32PST Hot Topics


Registration requirements in Saskatchewan

PST Hot Topics 33


Overview

Saskatchewan PST registration

• Definition of vendor was expanded in Saskatchewan in 2018

• Non-resident vendors generally need to register in a Canadian province if they carry on business

• Over the years, the provinces of British Columbia (BC), Saskatchewan (SK) and Manitoba introduced registration requirements for non-resident vendors who do not carry on business in the province but

− Seller

− Causes the property to be delivered in the province

− Solicits business

− Accepts orders to purchase tangible personal property that originate in the province, or

− Seller maintains inventory in the province

• BC also has similar rules for software and telecommunications

• 2018 SK change: For the definition of “vendor", a retail sale in the province includes a retail sale of tangible personal property or of a taxable service by a person who does not otherwise carry on business in Saskatchewan, if the tangible personal property or the taxable service is acquired for use or consumption in or relating to Saskatchewan

34PST Hot Topics


Administrative policy

• Retail sales in the province include retail sales by persons who do not otherwise carry on business in Saskatchewan, and include situations where a person selling or providing tangible personal property to a consumer or user

− Makes tangible personal property available for purchase in Saskatchewan

− Accepts orders to purchase tangible personal property that originate in Saskatchewan

− Causes the tangible personal property to be delivered in Saskatchewan

No requirement to solicit business in Saskatchewan

IS THIS CONSTITUTIONAL?

Overview (continued)

Saskatchewan PST registration

35PST Hot Topics


QUESTIONS?

PST Hot Topics 36

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PST Hot Topics · Example of Payroll Services and Payroll Software ... Current Law –introduced in...

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