You are planning for the sale of your business sometime next year. In order to attract a higher price, you want to increase your profits as high as possible in the year before the sale. If you have a business in Ontario or British Columbia, you may have one time opprtunity to save money without having to take any risks, just change the timing of when you do your purchasing. Usually if it sounds too good to be true it is, but not in this case. This tax planning strategy is a very rare opportunity to make more money by changing the timing of when you purchase some goods. If you do the same thing as your normally would do but can make more money, is it worth it?
On July 1, Ontario and British Columbia are changing from a retail sales tax RST, sometimes known as PST to HST – a harmonized sales tax. Effective July 1, the HST sales tax in Ontario will be 13%. The concept of GST/HST is businesses do not pay the tax, only the end consumer pays the tax. A business may have to charge the tax, collect if on behalf of the government and remit it. Before remitting the tax to the government, you get to deduct all the GST/HST tax that you paid. As a result, the only amount which you remit to the government is the total tax collected less what you paid out. This type of tax may create a cash flow problem for a company but it does not cost the business anything. The cash flow problem arises when you have to pay the tax to the government before you collect the money from your clients. For further information on GST/HST, please contact your accountant.
PST/RST is being phased out in Ontario and British Columbia. There are many different rules of PST. The general concept was if you consumed an item for your personal/business use, you had to pay the provincial sales tax. This is a very general statement and there are many rules. Please contact your accountant to find out the rules as they pertain to your particular business.
The tax savings comes in when there is a conversion from PST to HST. You may have to pay the PST for goods which your business consumes, such as computers, office supplies, vehicles, warehousing supplies etc., after July 1, the PST is replaced by HST. If your business has a GST number and is entitled to recover all GST paid, then if you hold off on your purchases which include PST and defer the delivery to after July 1, you will be able to save the 8% PST that you would have otherwise paid. If you use $100,000 of supplies per month subject to PST, then if you defer all your June purchases to July, you may be able to save 8% on the purchases. That 8% is pure profit. If you are trying to sell your business, your financial statements would show an additional $8,000 profit this year even if sales did not increase. Will the additional profit increase the value of your business? Contact your business broker or talk to your accountant.
Remember, this is a one time opportunity to improve profits and is only applicable to businesses in Ontario and BC who pay PST for goods used for their own consumption and are also eligible to claim GST input credits on all their purchases. GST/HST and PST have many rules. Please contact your accountant to see how each of these taxes affects your business and if you will qualify for this tax planning stategy.