Get Ready for GST Rate Cut — Managing the Transition
By John Frim, Senior Manager, KPMG

This article provides an overview of the transitional rules for the rate reduction and other matters to consider that may help your business manage the transition to the new GST rate.

Basic transitional rule
The government’s approach to the rate change transition is simplicity rather than precision. Under the basic transitional rule, GST that is paid or becomes payable before July 1 will apply at the current 7% rate. For GST that becomes payable on or after July 1, the rate will be 6%. This simplicity will help businesses prepare for the change. However, some goods and services will be taxed at 7% when the goods are delivered or the services consumed after June 30. In some cases, this simplicity will also result in the 6% rate being applied to services consumed before the July 1 implementation date.

Sales of real property
Under the transitional rules, sales of real property will usually be taxed at 6% if closing occurs on or after July 1, 2006. However, a special transitional rule will apply to sales of new residential real property when the purchase agreement was entered into on or before May 2, 2006 and closing occurs after June 30, 2006.
Under this rule, the builder will be required to collect and remit GST on these transactions at the 7% rate. However, purchasers will be entitled to claim a 1% rebate from the Canada Revenue Agency (CRA), adjusted for the new housing rebate credited by the builder.

Getting ready for the change
Businesses will have several issues to consider as they prepare for the rate change. For example, businesses will have to adjust their sales systems to reflect the new rate.
Suppliers will have to ensure that they can continue dealing with transactions originally taxed at the 7% rate after July 1, 2006. Issues to consider include returned goods and price adjustments.
The rate change could also affect purchase order and accounts payable systems, employee benefit calculations and inter-company charges, among other things.
Registrants are entitled to claim input tax credits on amounts reimbursed to employees for expense claims and amounts reimbursed to third-party retailers for redeemed coupons based on the time the reimbursement is paid. The input tax credit on amounts reimbursed after June 30 will be based on the 6% rate, even if the expense or coupon reimbursement claim was received by the registrant before July 1. Registrants should try to process as many of these claims as possible before the July 1 implementation date.

Transitional issues relating to customers
Consumers and businesses engaged in exempt activities may not want to pay GST at the 7% rate when the goods will be delivered or the services rendered after June 30. Many customers will delay purchases, particularly in the case of large-ticket items such as cars. Suppliers should consider what steps they can take to address these and other transitional issues faced by their customers.