Canadian Sales Tax in M3

Outcome

After reading this document, you understand how to use the functional solution in M3 for managing European VAT to manage Canadian tax on purchases, the setup required, and how it affects the user workflow.

Use this information to define the components required, such as VAT codes, and to troubleshoot.

Before you start

Not applicable.

About Canadian Taxes

• Types of Taxes

  There are three types of taxes in Canada. They can all be applied on purchases, so purchasing companies are required to declare tax on behalf of the suppliers.

  Name	Description
  Provincial Sales Tax, PST	The consumption tax PST is applied in most Canadian provinces, although the tax rates and the goods to tax vary by province. PST is usually regarded as a cost in the business on the supplier side since the tax cannot be offset, with the exception of self-assessment PST. PST is regarded as a compound tax (in M3 called combined tax or chain tax), depending on province. PST as a combined tax means that both GST and PST are calculated based on the same base amount. PST as a compound tax means that PST is calculated not only on the base amount but also on top of the GST amount. Self-assessment PST is recorded by the company when a supplier invoice does not contain any PST but the company is required to declare it. In Quebec PST, called Taxe de Vente du Quebec, TVQ (in English, Quebec Sales Tax, QST), is also a deductible value-added tax.
  Goods and Services Tax, GST	The GST is both a sales tax and a value-added tax. It is processed just like the European VAT in M3. It applies to the supply of most goods and services in Canada. Almost everyone must pay GST on purchases of taxable supplies of goods and services that are not zero rated. Some sales or supplies are exempt from GST.
  Harmonized Sales Tax, HST	The provinces Nova Scotia, New Brunswick and Newfoundland and Labrador have combined or "harmonized" their provincial sales tax with the GST to create the single HST. The HST applies to the same base of taxable goods and services as the GST.

• Outbound Sales Tax

  In sales, the delivery address of the goods determines the type of tax to apply. For example, if the customer's office is located in Ontario but the goods are shipped to Quebec, then QST is applied. For the GST and PST taxes – but not the QST and HST – the end use of the goods also has an effect on the tax. If a customer is using the goods as input in their production, only the GST is invoiced, whereas if the customer consumes the goods, PST is invoiced as well. Different types of taxes must be printed on different lines on the invoice.

  The invoice layouts for Canada requires the use of Vertex, because the detailed tax information printed on customer invoices is retrieved from Vertex if the division has tax method 4 selected (see below).

• Inbound Sales Tax

  The supplier invoice should state the tax based on the delivery address, whether the company's warehouse or the end customer, and the end use of the goods. The GST, HST and QST must be accounted separately when recording invoices for reporting to the government or the province.

• How Managed in M3

  U.S. and Canadian sales tax on customer sales are managed by the third-party product Vertex. The integrated Vertex/M3 solution is described in a separate technical document titled "M3 BE Vertex Integration." Canadian sales tax on purchases is managed by reusing the existing functionality for processing VAT in M3.

Follow these steps - Activities in M3

1. Select Tax Method for Division

   For Canadian divisions, select tax method 4 in 'Company. Connect Division' (MNS100/G). This tax method defines that sales tax on supplier invoices will be calculated using the M3 solution for VAT whereas Vertex will calculate sales tax on customer invoices.

2. Define Accounting Rules for Sales Tax

   Account entries for sales tax on purchases can at present be created for accounting event AP10 only, that is, when manually entering supplier invoices in 'Supplier Invoice. Record' (APS100).

   The following accounting types are used to record sales tax:

   • 211 for GST or HST (also used for VAT)
   • 212 for PST or QST (also used for VAT)
   • 217 for self-assessed PST

   Define accounting rules AP10-211, AP10-212 and AP10-217 in 'Accounting Rule. Set' (CRS395). Each accounting rule contains the accounting string to apply when recording the tax. Since there is a separate accounting type for each kind of sales tax, these taxes can be recorded separately. The accounts selected for accounting types 212 and 217 could be either expense accounts or accounts labeled as VAT accounts in 'Accounting Identity. Open' (CRS630), depending on whether the PST is reclaimable. For more information about accounting rules, see Accounting Rules Setup and Usage.

3. Enter Tax Registration Numbers

   For suppliers, enter their respective tax registration number per state in 'Supplier Tax Number. Open' (CRS628). For Canadian sales tax, the M3 state is synonymous to province. Although the field reserved for the tax registration number is called 'PST/QST registration number', it can be used for any kind of tax registration number. You access (CRS628) by selecting the 'Tax numbers' option for the supplier in 'Supplier. Open' (CRS620/B).

4. Define Retrieval of VAT Codes per Supplier

   Predefine where M3 will retrieve the VAT code when you create a purchase order for a specific supplier by selecting one of the following alternatives in the 'Tax applicable' field in 'Supplier. Define Purchase & Financial' (CRS624/F):

   • 0 = No tax calculated.
   • 1 = The VAT code is retrieved from the combination of item and warehouse in 'Item. Connect Warehouse' (MMS002). If there is no VAT code there, M3 regards the item as a non-taxable good. If the item itself is not connected to a warehouse in (MMS002), M3 searches for a VAT from the item in 'Item. Open' (MMS001) instead.
   • 2 = The VAT code is retrieved from the following tables in the following order: the combination of item and warehouse in (MMS002), the item in (MMS001) and the supplier in (CRS624) or 'Supplier. Open/Division' (MFS620/E). If no VAT code is found in the first table, the search continues in the following tables.

5. Define VAT Codes

   Define the tax rates per VAT code in 'VAT Code. Open' (CRS030). Each VAT code basically defines which method to use to calculate the tax and which tax rate percentage to apply. We recommend that you define VAT codes to use for sales tax as combined VAT (VAT method 2) or compound VAT (VAT method 3). Enter the GST or HST tax rate in the 'VAT rate 1' field and the PST or QST tax rate in the 'VAT rate 2' field. You can select a check box indicating that the VAT code is used to calculate self-assessment tax for VAT codes belonging to VAT method 2 or 3. The VAT code with ID 0 is predefined; it cannot have a VAT rate and it is used to indicate that no VAT or sales tax is to be calculated. A VAT code for HST would be defined as a VAT code for GST with only one VAT rate.

   Examples of VAT Codes for Sales Tax:

   ID	Description	VAT rate 1	VAT rate 2
   1	GST only	6.00	0.00
   2	GST 6%, PST 7%	6.00	7.00
   3	GST 6%, self-assessed PST 7%	6.00	7.00
   4	PST 7%, no GST	0.00	7.00
   5	GST 6%, PST exempt	6.00	0.00
   6	GST 6%, QST 8%	6.00	8.00
   7	Self-assessed PST 5%, no GST	0.00	5.00

6. Define Tax Exceptions

   Predefine whether and how to replace the VAT codes that would normally be retrieved by M3 by other VAT codes in 'VAT Exception. Open' (TXS020) in specific situations. The automated use of such replacement VAT codes enables you to comply with the Canadian sales tax legislation in complex tax scenarios involving sales. For example, if a supplier is a registrant in a specific province - that is, the supplier is registered with an official tax registration number there – and the company has entered the tax registration number for that province in (CRS628), another VAT code with another tax rate could automatically be applied when placing a purchase order for that supplier. For details, see VAT Exemptions.

Activity description

1. Create Purchase Order

   When you create a purchase order for a supplier, M3 Business Engine automatically proposes a VAT code for the good ordered based on the search path indicated by the 'Tax applicable' field for the supplier and the tax exceptions defined in (TXS020).

2. Record Supplier Invoice

   When you then record the supplier invoice in 'Supplier Invoice. Record' (APS100), you can manually change the VAT code on the invoice header as well as the VAT amounts, for example, by selecting VAT code 0 to indicate that the items referred to are tax exempt. If the invoice consists of several lines with different tax types or tax rates, you manually enter the invoice lines on the coding panel and select the corresponding VAT code for each one.

   If the invoice does not include any provincial sales tax but you know that the company is required to pay the tax, you select a VAT code for self-assessment tax. Two types of account entries for sales tax can be created; the first one is the debit or expense transaction based on accounting type 211 for GST or HST or 212 for PST or QST and the second is a credit transaction for any offset self-assessment PST based on accounting type 217. In other words, it works similarly to the recording of EU VAT, with the difference that EU VAT is recorded based on accounting types 211 and 212 only.

3. Declare Sales Tax

   You declare the GST sales tax using the functionality for declaring European VAT, as described in Reconciling and declaring VAT. The tax declaration is created in 'VAT Run. Open' (TXS100). The report template used determines which accounts and VAT codes are included in the report. The same functionality can also be used to create reports with PST.