The federal government’s HST break—set to take effect between December 14^th, 2024 and February 15^th, 2025—last week passed in the House of Commons. As we outlined in a previous blog the tax measure will temporarily remove the HST from a wide range of consumer items (whether purchased retail or wholesale) ranging from Christmas trees and some children’s clothes to certain foods and alcoholic beverages.

Excluded from the bill was the proposed Working Canadians Rebate, which would have provided eligible employed taxpayers with a $250 tax rebate in early 2025.  The measure has been set aside—whether it will be introduced in future legislation is unclear at this point—due to a lack of support from the opposition parties. Specifically, the New Democratic Party insisted that, in order for its members to vote with the government on the measure, the rebate program would have to be expanded to include other groups such as seniors and Canadians living with disabilities.

The legislation to pass the HST holiday clarified several key details, including a description of the various items that will be zero-rated at checkout during the break period. You can find a full list of the items here. Clarification was necessary because even within certain categories, there is significant room for interpretation as to which goods may or may not be HST exempt. In the children’s clothing category, for example, items that will qualify as children’s clothing or footwear include:

• Baby clothes, including bibs, bunting blankets, and receiving blankets
• Children’s clothes up to girls’ size 16 and boys’ size 20 (or in sizes XS, S, M, or L if there is no Canada Standard Size listed)
• Babies’ and children’s socks, hats, ties, scarves, belts, suspenders, gloves, and mittens
• Babies’ footwear
• Children’s footwear with an insole length of 24.25 cm or less
• Sports clothing and dancewear such as jerseys, ski jackets, leotards, unitards, bodysuits, and dual-purpose swimwear that can reasonably be worn outside of sports or dance activities

But not:

• Specialized clothing and footwear designed exclusively for sports or recreational activities (for example: wetsuits, soccer cleats, bowling shoes, skates, ski boots, tap shoes, pointe shoes)
• Adult clothing and footwear, even if it’s purchased for a child
• Costumes and make-up
• Jewellery

To qualify for HST exemption, an item on the list must be paid in full during the tax break period, while partial payments “… for a qualifying item must all be made between December 14^th, 2024, and February 15, 2025.” However, if a deposit was paid on a qualifying item before December 14^th, 2024, the entire remaining amount would need to be paid, and the item would need to be delivered (or made available), between December 14^th, 2024, and February 15^th, 2025. For suppliers that use the mail or shipping services such as a courier, the item will be considered delivered at the time the supplier transfers the item to the shipping service or when the item is mailed.

Businesses affected by the tax holiday are being instructed to follow standard HST remittance and reporting protocols, while claiming input tax credits for HST paid or payable “… on expenses made to provide zero-rated supplies.” They should also be prepared to spend extra time verifying HST-related records.

The major concern for businesses is the potential for post-tax holiday HST audits by the Canada Revenue Agency. It remains to be seen if the CRA will turn a blind eye to HST application and reporting errors—and make no mistake, many businesses will find it difficult to properly apply or remove sales tax during the break period given the complexity of the qualifying rules for some items. The mid-month span of the tax holiday is another complicating factor on the reporting front. We can expect there to be a significant number of compliance disputes that will require resolution in the New Year.

Businesses will face a raft of other challenges related to the tax holiday. One is the cost of temporarily adjusting point-of-sale systems to account for the HST zero-rating on some items, then managing post-holiday gift returns once those same systems are reprogrammed to restore the HST on exempted goods. The greater hurdle may be managing queries, complaints and craftiness as customers question why some items are zero-rated and others aren’t, express their disapproval for some of the measure’s technical specifics, or delay purchases until the tax holiday takes effect.

With less than two weeks remaining before the tax break, we’re advising RH Partners clients to begin organizing to account for the relief measure as soon as possible, while dedicating additional resources to manage compliance and reporting. With so much financially at stake for businesses during the holidays, there’s simply no room for tax-related delays, distractions or costly compliance errors.

The RH Partners Tax Team