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Canadian Indirect Taxes Out Of The Box

It is easy to be fooled into thinking that the Canadian tax system is much easier to understand and regulate than the United States’ sales and use tax. Canada may only have ten provinces and three territories, instead of the fifty states, several territories, and one district south of the border.

However, Canada’s local taxes are very different. The Canadian tax system would appear simple on the surface, but the devil is in the details. It would be a mistake to think that just because Canada has only ten provinces and three territories that tax compliance is easy.

For organizations that administer or control Canadian taxes from outside the country, it is tempting to assume that provincial taxes operate similarly to the U.S. state sales and use tax and that federal GST/HST operates like European VAT. While the Canadian systems have similarities with both the U.S. and European systems, there are also significant differences that, if ignored, can result in substantial assessments and lost dollars.

As many businesses focus on moving to a digital process, there are some areas of concern. Many are overhauling their systems, and, let’s face it, for large Canadian corporations with parent companies located outside Canada, individuals outside Canada are at the centre of these overhauls. In addition to this, Canadian taxes are considered “simple” and are not given the required attention to ensure the company is compliant and that appropriate taxes are paid. As a result, the company is often exposed to extensive assessments, tax is paid in error, or a tax recovery is missed.

Barbara Hoffmann, of B. Hoffmann & Associates, has 30 years of experience in accounting and tax. Her company helps medium and large corporations in Ontario and across Canada minimize the indirect tax they pay on an ongoing, consistent and supported basis.

She said: “I am not an IT person, but I love all the stories in an organization that, when put together, are classed as a business. It concerns me that there appears to be a general assumption that any IT finance solution can tell the story of the business through programming transactions and get the right tax result.

“Most systems start with an “Out of The Box” (OTB) solution. The solution is then customized to fit the transactions of a particular business. I find the term “solution,” combined with OTB, an oxymoron since I have yet to come across a client that has been able to implement an iERP system OTB without spending significant amounts on customization.

“It is not unreasonable to assume that tax logic is a standard part of any OTB finance solution – because it is. The OTB tax logic applied to transactions is affected by the customizations that are always necessary to make a solution operational within a business. In making the solution operational, it seems tax functionality is almost always compromised. Unless the tax is specifically considered, it is more likely that errors will happen once the system goes live.”

Imagine a situation where a new purchasing system was implemented and that it required the suppliers to input the data elements of their invoices through a supplier portal. The system was expected to interpret the data elements and apply GST/HST accordingly.

calculating hidden canadian taxes

After implementing the system, several vendors complained that they were not getting paid tax as billed on their invoices. An analysis of the system confirmed that the purchases would be considered taxable purchases, yet the system was returning a “zero” tax result, and so the tax was not getting paid. In fact, these invoice payments were rejected by the system. It also showed instances of GST/HST being incorrectly paid to suppliers.

The reason for this, Barbara says, is that the system has been implemented without specific and early tax involvement. As a result, the system did not capture all of the data elements required in these transactions to calculate the Canadian indirect taxes properly. Why?

She added: “Once upon a time, finance systems were built by accountants with enough programming knowledge to build the systems to function well. Today, systems are built by IT geniuses who can take an “if this, then that” statement, put it together with a trillion different answers, and make it work. They have my utmost respect.”

There is a theory that if Canadian indirect taxes appears simple enough to fit within an “if-then” statement. If the goods are made in Canada, then GST/HST will apply at a rate of x%. There are several additional rules, all of which could fit into the “if-then” logic. However, the problems arise when real-life account processes and transactions don’t fit within that logic, which is why many systems are installed with the help of large accounting firms.

Another issue is that the external accounts can only apply general principles of accounting. The details of an organization’s internal account structure must come from those within who have intimate knowledge of transactions, including how the Canadian indirect tax applies.

Do you remember the phrase mentioned earlier? The devil is in the details. It cannot be assumed that systems will correctly calculate Canadian indirect taxes without a detailed analysis of an organization’s transaction types and the exceptional transaction in the context of their business story. What is certain is that getting to the core of these transactions can mean significant savings for a company’s indirect taxes in Canada.

Our experts at B. Hoffmann and Associates Ltd. will save you time on your indirect taxes, help you with indirect tax recoveries, and help protect your business’s money!

Contact us today

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