Information Notice, January 2006

As announced in the 2007 Ontario Budget, this pilot project has been extended to March 31, 2009.

The 2005 Budget announced the Simplified Calculation, a pilot project for small businesses that provide computer program related services.  The Simplified Calculation consists of an optional method for calculating retail sales tax on sales that include both taxable and non-taxable services related to computer programs.  This notice explains how the Simplified Calculation works and who may participate.

Who May Participate?

You may participate in this pilot project if you answer 'yes' to:

Were your total sales less than $400,000 between January 1, 2005 and December 31, 2005, or if you have been operating your business for less than one year, do you anticipate your total sales to be less than $400,000 in your first twelve months of operation?

AND

Do you provide both taxable and non-taxable services related to computer programs?

AND

Would you be willing to complete a survey from the Ministry of Revenue to evaluate the effectiveness of the Simplified Calculation?

If you answered 'yes' to all of the above, you are eligible to participate in the Simplified Calculation pilot project. Please complete the attached application form and return it to the Ministry of Revenue, or apply online at ontario.ca/revenue.

Please be advised that applications for this pilot project must be received by the Ministry of Finance no later than February 28, 2006.

You may begin using the Simplified Calculation as of April 1, 2006, provided you have received correspondence from the Ministry of Revenue confirming your participation in the pilot project. If you applied and have not received confirmation by March 15, 2006, please contact ministry staff at 905 433-6170.

This pilot project will be in effect during the period of April 1, 2006 to March 31, 2007.

Background

Taxable computer program services include labour to install, configure, modify or upgrade computer programs, and contracts for the service, maintenance or warranty of computer programs. Non-taxable computer program services include training or advising users of computer programs, project planning, etc.

Currently, as a vendor of computer program services you are required to apply RST at a rate of 8 per cent on the sale of taxable computer program services. Where a sale includes both taxable and non-taxable computer program services, you must determine whether RST applies to each service being provided.

Under the Simplified Calculation pilot project, where a sale includes both taxable and non-taxable computer program services, you may apply RST at a rate of 6 per cent to all the computer program services included in the sale. You would no longer be required to determine whether RST applies to each computer program service being provided.

Applying the Simplified Calculation

Effective April 1, 2006, authorized vendors may begin applying the Simplified Calculation to sales that include both taxable and non-taxable computer program services. If a sale includes only taxable computer program services, RST must be charged at a rate of 8 per cent and the Simplified Calculation cannot be used.

Under the Simplified Calculation, you are not required to separate charges for taxable and non-taxable computer program services on the customer's invoice/contract. However, you may still wish to list the services provided on the contract/invoice for the benefit of your customer.

Both the vendor and purchaser must agree to use the Simplified Calculation before RST can be calculated using this method. Such agreement is to be indicated on the invoice with a statement similar to the following:

"The purchaser has agreed that retail sales tax, at the rate of 6%, has been applied to the taxable and non-taxable computer program services included in this sale, in accordance with the Simplified Calculation."

Where both parties agree to use the Simplified Calculation, it must be understood that the Simplified Calculation applies to all taxable and non-taxable computer program services provided as a result of the sale arrangement. A sale includes all billings and invoices for the same 'job'. Therefore, regardless of the method and content of a specific bill/invoice, the Simplified Calculation must be applied to all taxable and non-taxable computer program services provided as a result of the sale arrangement.

For example: If a single sale arrangement results in multiple billings, RST applies at a rate of 6 per cent to all computer program services billed even if one particular billing contains only non-taxable services.

Where the Simplified Calculation has been applied, you must maintain documentation to support that both taxable and non-taxable computer program services were provided as a result of the sale.

Without the agreement of both the vendor and the purchaser, the Simplified Calculation cannot be used.

What Services are Covered?

All taxable and non-taxable computer program services are covered under this pilot project.

The Simplified Calculation applies to sales that are entered into after March 31, 2006 and before April 1, 2007. The Simplified Calculation may be applied to all sales of computer program services that occur during the pilot period, whether or not the delivery of the resulting services occurs after March 31, 2007.

The Simplified Calculation applies to computer program services only. The Simplified Calculation cannot be applied to sales of computer programs, hardware, or taxable services not related to computer programs. These charges must be separated from computer program services before the Simplified Calculation can be applied. RST at a rate of 8 per cent must be applied to all taxable sales not including computer program services.

Example of a sales invoice:

Computer Program Licence Agreement    $ 2,000 (8% RST applicable)
Training and Maintenance Agreement      $    500 (6% RST applicable)
Sub-total                                               $ 2,500
RST                                                      $    190
Total                                                     $ 2,690

The purchaser has agreed that retail sales tax, at the rate of 6%, has been applied to the taxable and non-taxable computer program services included in this sale, in accordance with the Simplified Calculation.

Computer program license agreements, or 'right to use' arrangements, are considered the sale of a computer program and do not qualify as computer program services. RST must be applied at a rate of 8 per cent to all licence agreements, and 'right to use' arrangements, for the use of taxable computer programs.

The Simplified Calculation cannot be applied to contracts for the development of a computer program. Even though computer program 'services' are provided throughout the development stage, the services form part of the fair value of the sale of the computer program. Whether or not the charges for these services are separated, or simply included in a contract, the Simplified Calculation cannot be applied since this is a sale of a computer program.

Upgrades can be provided as tangible personal property (TPP) or as a computer program service. Upgrades that are provided in a ready to install format are considered TPP. You cannot apply the Simplified Calculation to the sale of an upgrade that qualifies as TPP.

Project Survey

As a participant in the pilot project, you will be required to complete a project survey that will be used by the Ministry of Revenue to determine the effectiveness of the Simplified Calculation. Your feedback will be extremely important in determining the success of the pilot project. The Ministry of Revenue will provide all participants with the survey within the period of the pilot project.

For More Information

For more information on this pilot project, please contact the Ministry of Revenue at 905 433-6313 or 1 888 285-7815
(ext. 6313) or via e-mail at rstsimplifiedcalculation@ontario.ca.

© Queen's Printer for Ontario, 2006

ISBN 0-7794-9914-X