As a result of the COVID-19 pandemic and the extensive shutdowns of local, national and global economies, potential liquidity crises have compelled many companies to explore different strategies to generate cash flow. Organizations are having to make difficult decisions related to staffing, capital spending and reducing overall expenses to survive this global economic shock.
In this piece, we set out some basic indirect tax strategies, considerations and practices to generate or preserve cash flow during these difficult times. Additionally, the federal government and some provincial governments have extended the remittance deadlines for the Goods and Services Tax/Harmonized Sales Tax (GST/HST), Quebec Sales Tax (QST), Provincial Sales Tax (PST), duties, and other indirect taxes. See here for additional information related to these extensions.
Timing of invoices issued to customers
Because indirect taxes generally are required to be reported in the period in which they are invoiced, suppliers generally are required to remit these taxes even if the invoice amount and taxes have not been collected from the customer. This is subject to the various indirect tax filing and payment extension deadlines.
Suppliers can take steps to reduce their risk of having to remit indirect tax with their own funds for customers that may otherwise be late in paying. These include invoicing customers as early in their indirect tax reporting periods as possible, and offering customers early payment discounts. These actions can help suppliers receive payment before the indirect tax needs to be reported or remitted.
Bad debt write-offs and indirect tax recoveries
As the economic fallout continues, there will be an increase in bad debts. For companies that invoiced and reported indirect taxes to customers who default on payment of those invoices and the related taxes, suppliers generally are eligible to recover GST/HST, QST and PST when a bad debt is recognized. When making these claims, it is essential to ensure that sufficient evidence is maintained to support your claims that the debt is, in fact, uncollectable in accordance with the different indirect tax laws.
Indirect taxes on payment deferrals
Companies have started to defer payments for materials and rent and other payments to preserve short-term liquidity. As contracts and agreements are changed to account for deferrals of payment, it is important to consider the effect these adjustments have on GST/HST, QST and PST.
Note that in instances when deferrals are structured to postpone the supplier’s obligation to remit indirect taxes, the deferral generally will also postpone the recipient’s entitlement to input tax credits (ITCs) and input tax refunds (ITRs) under QST.
It is especially important to consider the application of GST/HST and QST to commercial lease deferrals in which the landlord has applied for relief under the Canada Emergency Commercial Rent Assistance (CERAC) program. More information on the CERAC program can be found here.
It is especially important to consider the application of GST/HST and QST to commercial lease deferrals in which the landlord has applied for relief under the Canada Emergency Commercial Rent Assistance (CERAC) program.
Compensatory payments for cancelled contracts
Businesses facing difficult decisions may choose to cancel or alter contracts that were entered into before the COVID-19 outbreak. Certain compensatory payments may include GST/HST and QST and should be accounted for accordingly. Recipients of such payments may be required to remit GST/HST or QST in respect of the payment. Conversely, persons making these payments may be entitled to claim ITCs and ITRs to recover GST/HST and QST deemed to be included in the payment if certain criteria are met.
When entering into any new agreements in which a compensatory payment is expected to be made or received, the indirect tax implications should be considered prior to concluding the agreement. This will help prevent surprises.
Businesses should also consider whether a deposit or down payment is an indirect-tax inclusive amount or simply not subject to an indirect tax at the time of making the payment to a supplier. Depending on the type of transaction, these payments may include GST/HST and QST and may entitle the person making the payment to ITCs or ITRs.
Refundable indirect taxes
For GST/HST and QST payable to vendors on operational inputs, qualifying businesses should ensure that the associated ITCs and ITRs are being claimed on a timely basis. Companies in a net refund position should file their returns as soon as possible or even increase the filing frequency to monthly. While the Canada Revenue Agency (CRA) has stopped audit activity for the time being, GST/HST refund claims continue to be paid out with little enquiry. We expect that increased audit activity will ensue after the CRA resumes normal operations.
Businesses that are paying PST on purchases should consider if exemptions are available at the time of purchase. Depending on the province, there can be numerous exemptions or situations where a supplier has charged PST on an input that was simply nontaxable. For example, for British Columbia PST, there are various exemptions for most natural resource extractive industries, such as the production machinery and equipment exemption, exemptions on safety equipment and protective clothing, and various other gas areas and industries.
Businesses may want to consider conducting a review to determine instances when otherwise recoverable GST/HST and QST were not claimed or when refunds of PST were not claimed on overpaid PST.
Elections for closely related companies
Persons that are “closely related” for GST/HST and QST purposes may be entitled to elect to treat certain supplies between the parties as being made for nil consideration. As a result, such supplies made between members of the closely related group will not attract GST/HST and QST. That will help preserve cash outflows within these groups, subject to the extended temporary payment deadlines for these indirect tax regimes.
This election requires certain conditions to be met and also requires a timely filing of the election form. In some cases, the CRA and the Quebec Revenue Agency (QRA) may accept a late-filed election.
Taking advantage of PST and fuel tax exemptions
The PST provinces have certain exemptions available at the point of sale where the tax does not apply to the customer provided various criteria are met. Documentation to support the exemption may need to be provided to the supplier. Purchasers could implement controls or processes to ensure they are taking advantage of exemptions with suppliers.
Service providers or real property contractors should consider if they are required either to collect PST from customers or pay PST on their inputs to providing these services. If PST is collected where it is not required by the supplier, the customer can request a refund or provide a valid exemption certificate (where required) from the supplier or the PST province’s ministry of finance.
When goods, equipment, tools, materials, supplies, etc. are brought into any PST province, the tax implications should be considered, especially ways in which the applicable PST is minimized or eliminated. There are various ways to structure agreements to limit the upfront PST costs, and there are exemptions for specific types of equipment.
Certain provincial fuel tax and federal excise tax exemptions may be available for otherwise taxable fuels used to power certain off-road machinery, operate boilers, or heat buildings, including fuels used in certain natural resources extractive and processing. In most provinces, dyed fuel should be purchased where possible in order to obtain the full or partial fuel tax exemption.
Our RSM colleagues in other disciplines have numerous ideas beyond tax considerations, such as federal, provincial and local stimulus; grants and other incentives programs; corporate finance and borrowing options; restructuring and insolvency, among many others. Please visit the Coronavirus Resource Centre for more thoughts and strategies involving cash flow and liquidity.