ANALYZING THE NUMBERS
A number of GFO’S members have inquired about the upcoming introduction of the Harmonized Sales Tax (HST). Provided is a brief explanation of the changes and an analysis of the likely impact on producers. For the purpose of this analysis, the impact of HST on soybean production was chosen to simply provide an example for grain farmers.
hst, what is it?
Starting July 1, 2010, Ontario’s Retail Sales Tax (RST) will be combined with the federal Goods and Services Tax (GST) to create a single, federally administered Harmonized Sales Tax (HST).
Table 1 below outlines the changes farmers can expect on their inputs. Table 2 compares the typical soybean production costs under the current tax system and the HST system.
|Table 1. Impact on Farm Inputs and Overheads|
|Currently zero rated at point of sale.||Farm inputs that are currently taxed with RST will be subject to the HST but will be eligible for an offsetting input tax credit.||Farm inputs that are exempt from the RST but not the GST would be subject to the HST, but eligible for an offsetting input tax credit.|
|Will pay HST:
13% Will claim back input tax credit of 13%
|Currently pay GST:
|Will pay HST:
|Fertilizer, seed, farming equipment and machinery, grain bins and dryers, livestock purchases, pesticides, Tractors (>40 HP).||Pick-up trucks used on the farm, computers and office equipment used in the farm’s business.
|Contract work, freight and trucking, veterinary fees and drugs, machinery lease and rental, fuel, oil and grease.
|Table 2. Typical Soybean Production Costs||Currently||With HST||End Position|
|Pay upfront||Claim back later||Pay upfront||Claim back later|
|Fertilizer – Nitrogen, if required||$26.35||$26.35|
|Seed treatment/innoculant||$ 5.00||$ 5.00|
|Tractor and Machinery – parts and maintenance||$10.90||$10.90|
|Operator labour (non contract labour)||$ 6.15||$ 6.15|
|Interest on operating||$ 3.65||$ 3.65|
|Marketing fees||$ 1.15||$0.05||$ 1.24||$0.14|
|Off-farm drying (on farm drying facilities are tax exempt)||$11.60||$0.55||$12.49||$1.44|
|Custom work (pesticide application)||$18.95||$0.90||$20.40||$2.35|
|Custom work (fertilizer applicaton, mixing &?delivery)||$9.50||$0.45||$10.23||$1.18|
|Off farm storage (on farm storage facilities are tax exempt)||$8.98||$0.43||$9.66||$1.11|
|Fuels and lubricants||$9.50||$0.45||$10.23||$1.18|
|Machinery – interest on investment||$12.00||$12.00|
|Machinery – depreciation||$14.70||$14.70|
|Machinery – depreciation (pickup trucks)||$2.26||$0.10||$2.26||$0.26||$0.16|
|Total Operating Expenses||$264.24||$3.45||$269.37||$8.98||$0.39|
|*Based on 2010 OMAFRA Field Crop Budgets which provides a guide to typical cropping expenses but does not include all farm overheads. The analysis also assumes the producer is registered for GST.|
cash flow and administrative issues
The main disadvantage for producers lies in reduced cash-flow. Where currently producers are exempt from RST on selected inputs (green items in tables 1 and 2), producers will now have to wait until a return is filed before receiving a refund. For many producers this will amount to a significant portion of working capital tied up until tax season. These producers might consider filing returns on a bi-annual, quarterly or even monthly basis to maintain cash flow.
To assist with the added administration caused by HST, most farms will be eligible for a small business transition credit of between $300 and $1000. Many producers plan to use these funds to purchase updated bookkeeping software which automatically recognizes HST amounts that are recoverable and also charges the correct tax rate if a farm issues invoices for services.
associated tax cuts and benefits
- The corporate income tax (CIT) rate for farming income will be cut from 12 percent to 10 percent.
- The small business CIT rate will be cut from 5.5 percent to 4.5 percent.
- Producers will realize benefits on everyday non-business related consumables.
the bottom line
Using the typical soybean production costs (table 2 on page 14) it is estimated that farmers will save $0.39 per acre per year under HST. However, this basic analysis does not include other farm expenses not directly related to soybean production, therefore the savings could be much higher. OMAFRA estimates that the average farm business in Ontario will save around $600 per annum under HST. •