RST Small Business Pointer 903, August 2006
- This Pointer will help you if you are a real property contractor who manufactures the goods that you install. It explains the basic Retail Sales Tax (RST) rules for your type of business.
Who is a manufacturing contractor?
A manufacturing contractor is a real property contractor who manufactures taxable goods and installs them as part of real property, provided the cost to produce the goods in a fiscal year is more than $50,000. If the cost to produce the goods is less than $50,000 (per fiscal year) the contractor is not considered a manufacturing contractor, and must pay 8 per cent RST on the purchase of all raw materials and manufacturing equipment.
The type of taxable goods (fixtures) manufactured and installed by manufacturing contractors may include such items as doors, windows, aluminum siding and roofing.
Terms to Know
- Real property means land and any item permanently attached to land, such as buildings, fences, driveways and patios.
- A real property contractor or subcontractor is someone who builds, repairs, or improves real property for others.
- Attached means by screws, nails, bolts, or embedded in concrete or permanently affixed in some way to real property.
- Fixtures are items that are permanently attached to real property, such as fireplace inserts, kitchen counters and cabinets, and water heaters.
Some items, such as telephone and computer equipment, are not considered fixtures even though they are attached to real property. If you are not sure that the items you install qualify as fixtures, you may call the nearest Ontario Ministry of Revenue Tax Office for confirmation or refer to RST Guide 206 - Real Property and Fixtures for more information.
How does RST apply to manufacturing contractors?
RST is a consumption tax. This means that the person (consumer) who consumes taxable goods or taxable services pays the RST. In real property contracts, the manufacturing contractor is the consumer and must pay 8 per cent RST on its cost to produce the goods that are installed. Manufacturing contractors are considered to have consumed their installation supplies and manufactured goods (fixtures) in the course of completing their real property contracts.
How do I bill my customer?
When you draw up a real property contract, do not show or charge any RST on your contract to your customer. The taxable portion of a real property contract is paid by you, the manufacturing contractor, on the manufactured cost of the goods you supply and install. Real property installation labour is not taxable for RST purposes. When you are estimating the price of a contract, remember to consider the RST you will pay on your costs.
If you sell any of your manufactured goods without installing them, you must charge your customer RST on your selling price. You are not required to pay RST on the manufactured cost of these goods. Report the RST you collect on Line 2 (Tax Collectable on Sales) of your RST return.
How do I pay RST?
If you qualify as a manufacturing contractor, you must pay Retail Sales Tax (RST) on the manufactured cost of the goods you produce. You remit your RST payable on periodic returns that are mailed to you after you have registered for a Vendor Permit.
To calculate the RST you owe, you multiply your manufactured cost by the RST rate. You pay the RST at the time you produce the goods, not when you install them. Report the RST you owe on Line 3 (Tax on Purchases for Own Consumption) of your RST return. Instructions on how to complete your RST return are included with your return card.
When you purchase installation supplies, tools and equipment, you must pay RST to your supplier.
Manufactured cost
Manufactured cost consists of three components: the cost of direct materials, direct labour, and manufacturing overhead, and is based on generally accepted accounting principles.
Direct materials include all processing materials and consumables that you use directly in producing the goods. Include the shipping cost to transport the goods to the manufacturing location, and any federal duty and excise tax. Consumables are items that are used up in the manufacturing of a product but do not become a part of the finished goods. You can purchase your manufacturing materials and consumables exempt from RST by providing your supplier with a valid Purchase Exemption Certificate (PEC). More information about PECs can be found in RST Guide 204 - Purchase Exemption Certificates.
Direct labour means any labour used to produce the goods, but not labour used to install the goods.
Manufacturing overhead should include all manufactured costs not classified as direct materials and direct labour. Manufactured cost does not include installation costs, profits, or any costs not associated with manufacturing, or any federal Goods and Services Tax (GST) paid on materials or services. More information about manufacturing overhead and manufactured cost can be found in RST Guide 401 - Manufacturing Contractors.
Manufactured cost estimates & formulas
If you have difficulty in establishing your manufactured cost, you may use the previous year's actual costs to estimate direct labour and overhead, provided you have written permission from the Ministry of Revenue. However, you must recalculate the RST you have paid for the current fiscal (business) year when the actual cost figures are available to determine the actual amount of RST you owe. If you have underestimated the RST, you must report the information on your next RST return and remit the balance you owe. If you have overpaid your RST, you may deduct the overpayment through an internal adjustment of your records.
Some manufacturers have the option of using approved formulas to calculate the RST that they owe. The formulas may be used by manufacturers of monuments, asphalt mix, sheet metal products and sod. More information about using estimates and formulas to calculate your RST can be found in RST Guide 401 - Manufacturing Contractors.
Manufacturing Exemptions
Manufacturing contractors can purchase certain equipment exempt from RST by giving their suppliers a valid PEC. The exemption applies to equipment which that is used primarily and directly (more than 50 per cent of the time) in manufacturing (such as manufacturing machinery, pollution control equipment and safety equipment). Equipment which is taxable includes office equipment, supplies, and installation equipment.
Exempt customers & refund programs
Certain customers may be entitled to an exemption or refund of RST. If you enter into real property contracts with farmers, religious, charitable or benevolent organizations, manufacturers, hospitals, status Indians and band councils, you should request the RST Guide that applies to your customer.
Keeping Records
You must keep all books and records to support your sales and purchases for at least seven years. Such records include sales invoices and journals, purchase invoices and journals, bank records and financial statements.
For more information
The information contained in this publication is only a guideline. For more information, please contact the Ontario Ministry of Revenue at 1 866 ONT-TAXS (1 866 668-8297) or visit our website at ontario.ca/revenue.
© Queen's Printer for Ontario, 2006
ISBN 1-4249-1887-1
