This article are provided for information purposes only, and are not intended as legal advice.


Will HST affect the timing change the timing to buy a business?

February 9th, 2010

You have been looking to buy a business for a long period of time, you just found the ideal business and now you are conducting due diligence.  When is a good time to close the sale?  Normally, sales for many companies are weak in January and February, pick up in the spring and fall off significantly in the summer.  In Canada I predict that summer will be busy but the months of May and June will be slow.  Why should this year be different in Canada?

 

Effective July 1, HST will be imposed in Ontario and in British Columbia for the first time.  This will increase everyone’s personal taxes however, this provides an excellent time for businesses to improve their bottom line by timing when they purchase goods.  When you are buying goods for your own consumption in Ontario and BC, you may be required to pay or self assess PST/RST (provincial sales tax also known as retail sales tax).  If you were going to spend say $100,000 on something that will have PST and take delivery in June 2010, you will have to pay the 8% PST.  If you are a business and wait for delivery for the same asset until July 1, 2010, you do not have to pay the PST.  You will pay the HST and if you have a HST/GST number, you will get a refund of the HST which you paid.  Other than the timing of the payment, you will now have saved 8% on your purchase. 

 

If you were going to buy heavy equipment, trucks, vehicles for your business, delaying the purchase of $1 million of items which include PST may save your company $80,000.  ITC refunds and eligibility is dependent on your business therefore you should contact your accountant to see how GST/HST affects your business.  Assuming that you are eligible for the GST, why would you take delivery of the vehicle in May or June?  By only changing the timing of your purchase, you can save potentially 8% and that goes straight to the owner/bottom line. 

 

How does this affect businesses?  Business customers will defer the delivery of the goods.  As a result, you may be acquiring or building finished goods for delivery in July but your sales will drop lower than normal in May and June if businesses are not taking delivery of goods until July 1.  As a result, the cash flow needs of the businesses for sale will increase to cover the cost of the overhead.  Although the goods may be ordered, the sale will take place in July.  When is the best time to close the sale of the business?  June 30 if the business that you want to buy will be affected by customers deferring delivery of the goods.

 

This is a one time chance for businesses to save money and make 8% on items which they normally would have spent anyways.  From a business perspective, sales may drop in May and June if businesses defer the purchase of goods which are subject to Ontario or BC sales tax until July 1.

 

Plan your purchases accordingly.  Closing a business in May or early June may be disappointing because the sales will probably drop and you may attribute that to new ownership rather than a change in tax rules.  This is only applicable to businesses which have to pay the PST for goods used in their business.


Filed under: Buying a business — Gary Landa @ 12:24 pm


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