The following is a simplified presentation of the situation for GST/HST in Ontario. Please consult an accountant or the Provincial and Federal governments for more detailed explanations. Because Provincial Sales Tax (PST or RST) no longer applies in Ontario (since May 1, 2010), this is no longer covered here.
Purchasers of all goods and services, including the material and labour for a microFIT system, must pay HST on those expenses. However, those who are registered for HST may be able to claim an Input Tax Credit for the HST they have paid for the goods and services they use to operate their businesses.
Thus, every business in Ontario with sales of goods and services of over $30,000 is required to be registered for HST, and other businesses may register. Under the GST/HST system, every level in the sales system, from the manufacturer to the final consumer, pays 13% HST (i.e. 5% GST + 8% PST = 13% HST) on their cost of goods and services, and then charges 13% to their clients on the goods and services they sell. Then they send to the government the difference between what they paid in HST and what they charged. The only one who does not get reimbursed is the final consumer, because s/he is not registered for GST/HST.
The GST/HST system is much simpler to administer for merchants, making for a more efficient and transparent system. It is a very fair tax system, because every family or individual is taxed directly on the consumption; those who spend the most (and in theory are the wealthiest), pay the most tax.
The Canada Revenue Agency (CRA) considers microFIT projects to be small “business projects”, and therefore subject to taxes on their net revenues (i.e. after expenses). It is therefore perfectly appropriate for their owners to register for the HST for those projects, and therefore to collect HST for the sale of their electricity. This has the effect of removing the HST from the project's costs (see below).
Once a business is registered for HST, it is required to send in regular reports (usually quarterly is what would be chosen for a microFIT project) to the CRA. These reports indicate the total sales of goods and services, the total HST charged on those sales, and the total HST spent on goods and services required to run the business (i.e. raw materials, equipment for resale, office supplies, etc). This amount spent on HST is called an “Input Tax Credit”.
In the usual situation, companies make a profit by selling more than they spend. However, in certain periods, a company will be in a situation of “investing” in their future: they will spend more than they have sold. When a microFIT project is being installed, there are high capital investment costs (for panels, inverters, racking, the Hydro connection, engineering fees, etc.), but no income at all, because they are not yet connected, or because no payment has been received fro the Hydro company.
In this case, when the HST paid out is higher than the HST charged for a given period, the CRA will send a cheque to pay the difference. In a typical example, a homeowner might pay $9,000 in HST for their installation, but have collected no HST from their Hydro company. The CRA would then refund that $9,000. Currently, while the CRA comes to understand the microFIT project, this triggers an automatic “audit” (really a request for proof of HST payment as reported),and a delay in reimbursement.
The principle behind all of this that the CRA will eventually get all of its HST back (and lots more) during later reporting periods, and it benefits from the long-term profit which comes from reasonable investment by businesses.
For microFIT project owners who are registering a new business for their solar project, they can register for HST at the same time on the CRA's site for Business Registration Online. This is a relatively painless process that permits one to register a business with the province at the same time. (See also Business_Registration_Hints.)
microFIT project owners who already have a business may choose to operate their solar project from within this structure, if it fits well with the reality of who owns the project, where the money is coming from, and who will get the income. If this is a small business which is not yet registered for HST, they can probably do so through the CRA Business Registration Online site (mentioned earlier) as well.
When your first reporting period comes around, you can claim back the excess of what you paid out for your system, compared to what you have received from the Hydro company. In your planning, be sure to keep in mind that you will have to finance this excess HST for 1-6 months, depending on the timing of your reporting period, and the speed with which the CRA reviews your application.
On September 16, the Canada Revenue Agency began calling residential microFIT project owners to tell them that they would soon be receiving their Input Tax Credits (ITC, the amounts they paid in HST on equipment). This followed a province-wide moratorium on HST-ITC refunds for microFIT solar systems (mostly residential and farm locations) that had been put in effect in May. The main issue was whether the solar power system was on commercial property or on property that is used for at least 90% commercial purposes, in which case it was already eligible for an ITC, and what to do if this was over 10% on personal property. The CRA staff have been given the directive to classify this expenditure as “Capital Personal Property” (which is eligible for an ITC) rather than “Capital Real Property” (which is not eligible).
This summary was developed by Mark Gibson of L&M Solar
For more information read the Canada Revenue Agency information sheet The GST/HST Implications of the Acquisition of Solar Panels under the micro Feed-in Tariff program in Ontario.