Provincial sales taxes, or PST, are provincially administered sales taxes that are determined by each individual provincial or territorial government in Canada. The table here lists the current PST rates in Canada.

Similar to GST, PST applies to the purchase of most goods and services in the province, and consumers bear the burden. For the same reasons as with GST, businesses typically pay the PST on purchases for non-resale items (such as equipment and machinery) and do not pay the PST on resale items. Businesses are responsible for collecting PST on sales and remitting the tax to the provincial government. Individual provincial websites list the items and services that are exempt from PST.

Harmonized Sales Tax (HST)

The harmonized sales tax, or HST, is a combination of GST and PST into a single number. Since most goods and services are subjected to both taxes anyway, HST offers a simpler method of collecting and remitting the sales tax—a business has to collect and remit only one tax instead of two. Because there are pros and cons to HST, not all provinces use this method of collection, as summarized in the table below.

Calculating the Sales Tax Amount

A sales tax is a percent rate calculated on the base selling price of the product. Therefore, if you are interested solely in the amount of the sales tax (the portion owing), apply Formula 2.2 on Rate, Portion, Base:

becomes

Rearranging this formula to solve for the tax amount gives the following:

Tax Amount = Tax Rate × Price before Taxes (which is the same as Portion = Rate × Base)

This is not a new formula. It applies the existing formula from Chapter 2.

Calculating a Price Including Tax

When calculating a selling price including the tax, you take the regular selling price and increase it by the sales tax percentage. This is a percent change calculation using Formula 3.1 from Chapter 3:

The Old price is the price before taxes, the percent change is the sales tax percentage, and you need to calculate the New price including the tax. Rearranging the formula for New, you have which you factor and rewrite as or this is a widespread application of the percent change formula. Since it can be tedious to keep rearranging Formula 3.1, Formula 5.1 expresses this relationship.

Selling Price Including Tax

Important Notes

To calculate a price including a single sales tax rate, use the percent change function (∆%) on the calculator. You can review the full instructions for this function at the end of Chapter 3. When using this function, OLD is the price before taxes, NEW is the price after taxes, and %CH is the single tax rate in its percentage format. You do not use the #PD variable, which therefore defaults to 1. Note that if more than one tax rate applies on the same base, you cannot use this calculator function because of the possibility of a rounding error, as explained above.

Paths To Success

You will often need to manipulate Formula 5.1. Most of the time, prices are advertised without taxes and you need to calculate the price including the taxes. However, sometimes prices are advertised including the taxes and you must calculate the original price of the product before taxes. When only one tax is involved, this poses no problem, but when two taxes are involved (GST and PST), combine the taxes into a single amount before you solve for S.

Give It Some Thought

On any given product selling for the same price, put the following provinces in order from highest price to lowest price including taxes (GST and PST, or HST): Alberta, Saskatchewan, British Columbia, Ontario, Prince Edward Island.

Solutions:

PEI (14% HST), Ontario (13% HST), British Columbia (5% GST 7% PST), Saskatchewan (5% GST 5% PST), Alberta (5% GST, no PST)

The GST/HST Remittance

When a business collects sales taxes, it is a go-between in the transaction. These sales tax monies do not belong to the business. On a regular basis, the business must forward this money to the government. This payment is known as a tax remittance.

The Formula

Generally speaking, a business does not pay sales taxes. As a result, the government permits a business to take all eligible sales taxes that it paid through its acquisitions and net them against all sales taxes collected from sales. The end result is that the business is reimbursed for any eligible out-of-pocket sales tax that it paid. Formula 5.2 expresses this relationship.

Tax Collected and Tax Paid: Both of these parts of the formula apply Formula 2.2, representing the total amount of sales tax (portion) from all taxable amounts (base) at the appropriate sales tax rate (rate). The taxes collected are based on total tax-eligible revenues. The taxes paid are based on the total tax-eligible acquisitions

5.2 Property Taxes

As you drive through your neighbourhood, you pass a city crew repairing the potholes in the road. Hearing sirens, you check your rear-view mirror and pull to the side of the road as a police car and fire engine race by, heading toward some emergency. Pulling back out, you drive slowly through a public school zone, where you smile as you watch children playing on the gigantic play structure. A city worker mows the lawn.

Where does the municipality get the money to pay for all you have seen? No one owns the roads, schools are free, fire crews and police do not charge for their services, play structures have no admission, and parks are open to everyone. These are just some examples of what your municipality does with the money it raises through property taxes.

Property Taxation

Property taxes are annual taxes paid by real estate owners to local levying authorities to pay for services such as roads, water, sewers, public schools, policing, fire departments, and other community services. Every individual and every business pays property taxes. Even if you don’t own property, you pay property taxes that are included in your rental and leasing rates from your landlord.

Property taxes are imposed on real estate owners by their municipal government along with any other bodies authorized to levy taxes. For example, in Manitoba each divisional school board is authorized to levy property taxes within its local school division boundaries.

The Formula

Since property taxes are administered at the municipal level and every municipality has different financial needs, there are a variety of ways to calculate a total property tax bill. Formula 5.3 (on next page) is designed to be flexible to meet the varying needs of municipal tax calculations throughout Canada.

Property Tax

Important Notes

Mill rates are commonly expressed with four decimals and tax rates are expressed with six decimals. Although some municipalities use other standards, this text uses these common formats in its rounding rules. In addition, each property tax levied against the property owner is a separate tax. Therefore, you must round each property tax to two decimals before summing the grand total property tax.

Things To Watch Out For

The most common mistake is to use the wrong denominator in the tax calculation. Ensure that you read the question accurately, noting which term it uses, tax rate or mill rate. If neither appears, remember that Ontario eastward uses tax rates and Manitoba westward uses mill rates.

A second common mistake is to add multiple property tax rates together when the assessed value remains constant across all taxable elements. For example, if the assessed value of $250,000 is used for two tax rates of 2.168975 and 1.015566, you may be tempted to sum the rates, which would yield a rate of 3.184541. This does not always work and may produce a small error (a penny or two) since each tax is itemized on a tax bill. You must round each individual tax to two decimals before summing to the total property tax.

The collective property taxes paid by all of the property owners form either all or part of the operating budget for the municipality. Thus, if a municipality consisted of 1,000 real estate owners each paying $2,000 in property tax, the municipality’s operating income from property taxes is $2,000 × 1,000 = $2,000,000. If the municipality needs a larger budget from property owners, either the assessed values, the mill/tax rate, or some combination of the two needs to increase.

5.3 Exchange Rates and Currency Exchange

You have set aside $6,000 in Canadian funds toward hostel costs during a long backpacking trip through the United States, Mexico, and Europe. After searching on the Internet, you decide to use Hotwire.com to reserve your hostel rooms. The website quotes you the following amounts for each country: 1,980 US dollars, 21,675 Mexican pesos, and 1,400 euros. Have you allocated enough money to cover these costs?

Whether you are a consumer backpacking around the world on distant vacations, investing in international securities, or shopping online at global Internet sites, you must pay for your purchases in local currencies out of your Canadian currency accounts. Businesses are no different as they export and import products to and from other countries. With outsourcing on the rise, it is also common for business services such as call centres and advertising agencies to be located abroad along with manufacturing facilities. Large-scale companies may have operations in several countries throughout the world.

All of these transactions and operations require the conversion of Canadian currency to a foreign currency or vice versa. This section shows you the basics of currency conversion rates and then explores finer details such as charges for currency conversion and what happens when one currency gets stronger or weaker relative to another.

Exchange Rates

An exchange rate between two currencies is defined as the number of units of a foreign currency that are bought with one unit of the domestic currency, or vice versa. Since two currencies are involved in every transaction, two published exchange rates are available. Let’s use Canada and the United States to illustrate this concept.

• The first exchange rate indicates what one dollar of Canada’s currency becomes in US currency.
• The second exchange rate indicates what one dollar of US currency becomes in Canadian currency.

These two exchange rates allow Canadians to determine how many US dollars their money can buy and vice versa. These currency rates have an inverse relationship to one another: if 1 Canadian dollar equals 0.80 US dollars, then 1 US dollar equals  = 1.25 Canadian dollars.

Most Canadian daily and business newspapers publish exchange rates in their financial sections. Although exchange rates are published in a variety of ways, a currency cross-rate table, like the table below, is most common. Note that exchange rates fluctuate all of the time as currencies are actively traded in exchange markets. Therefore, any published table needs to indicate the date and time at which the rates were determined. Also note that the cells where the same currency appears show no published rate as you never need to convert from Canadian dollars to Canadian dollars!

In the table, all exchange rates have been rounded to four decimals. In true exchange markets, most exchange rates are expressed in 10 decimals or more such that currency exchanges in larger denominations are precisely performed. For the purposes of this textbook, we will use a four decimal standard to simplify the calculations while still illustrating the principles of currency exchange.

Technically, only half of the table is needed, since one side of the diagonal line is nothing more than the inverse of the other. For example, the euro is 0.7137 per C$ on the bottom of the diagonal. The inverse, or = 1.4011 per €, is what is listed on top of the diagonal (the difference of 0.0001 is due to rounding to four decimals).

The Formula

Currency Appreciation and Depreciation

An analyst on Global News is discussing how the Canadian dollar has strengthened against the US dollar. Your first reaction is that a strong Canadian dollar ought to be good thing, so hearing that this change might hurt Canada’s exports, you wonder how that could be.

Currencies are actively traded in the international marketplace, which means that exchange rates are changing all the time. As such, exchange rates rise and decline. A currency appreciates (or strengthens) relative to another currency when it is able to purchase more of that other currency than it could previously. A currency depreciates (or weakens) relative to another currency when it is able to purchase less of that other currency than it could previously. Take a look at two examples illustrating these concepts:

• EXAMPLE 1: If C$1 buys US$1.02 and the exchange rate rises to US$1.03, then your C$1 purchases an additional penny of the US dollars. Therefore, the Canadian currency appreciates, or strengthens, relative to the US dollar.
• EXAMPLE 2: Similarly, if the exchange rate drops to US$1.01, then your C$1 purchases one less penny of the US dollars. Therefore, the Canadian currency depreciates, or weakens, relative to the US dollar.

These concepts are particularly important to international business and global economies. Generally speaking, when a currency appreciates it has a positive effect on imports from the other country because it costs less money than it used to for domestic companies to purchase the same amount of products from the other country. However, the currency appreciation tends to also have a negative effect on exports to other countries because it costs the foreign companies more money to purchase the same amount of products from the domestic companies.

Important Notes

It is critical to observe that if currency A appreciates relative to currency B, then the opposite is true for currency B relative to currency A (currency B depreciates relative to currency A). The figure to the right illustrates this concept. Recalling Example 1 above, the Canadian currency appreciated, so the US currency depreciated. In Example 2, the Canadian currency depreciated, so the US currency appreciated.

How It Works

When you work with currency appreciation or depreciation, you still use the same basic steps as before. The additional skill you require in the first step is to adjust an exchange rate appropriately based on how it has appreciated or depreciated.

Things To Watch Out For

It is very easy to confuse the two relative currencies, their values, and the concepts of appreciation and depreciation. For example, if the exchange rate increases between currency A relative to a unit of currency B, which exchange rate appreciated? If currency A has increased per unit of currency B, then it takes more money of currency A to buy one unit of currency B. As a result, currency B appreciates because a single unit of currency B can now buy more of currency A. For example, if the exchange rate is US$1.0218 relative to C$1 and it increases to US$1.0318 relative to C$1, then the Canadian dollar purchases one penny more. The figure helps you understand the relationships involved and provides a visual reminder of which direction everything is moving.

Give It Some Thought

1. If the exchange rate in terms of US dollars per unit of euros increases, which currency weakened?
2. If the Australian dollar weakens against the Canadian dollar, did the exchange rate increase or decrease in terms of Australian dollars per unit of Canadian dollars?
3. If the exchange rate in terms of yen per unit of the Mexican pesos decreases, which currency weakened?
4. If the British pound (£) appreciates against the US dollar, did the exchange rate increase or decrease in terms of pounds per unit of US dollars?

assessed value  The portion of the market value of a property that is subject to municipal taxes.

buy rate  The rate at which a foreign currency is bought; it will always be lower than the mid-rate in terms of money per unit of foreign currency.

cash discount  A percentage of the balance owing on an invoice that can be deducted for payment received either in full or in part during the discount period.

credit period  The number of interest-free days from the date of commencement before full payment of the invoice is required.

currency appreciation  When one currency strengthens relative to another currency, resulting in an ability to purchase more of that other currency than it could previously.

currency depreciation  When one currency weakens relative to another currency, resulting in an ability to purchase less of that other currency than it could previously.

date of commencement  The first day from which the invoice terms extend forward in time and from which all due dates are established.

discount period  The number of days from the date of commencement for which a cash discount is offered.

end-of-month invoice dating  A term of payment where the date of commencement is the last day of the same month as indicated by the invoice date.

exchange rate  The number of units of a foreign currency that are bought with one unit of the domestic currency, or vice versa.

GST  The goods and services tax is a Canadian federal sales tax on most products purchased by businesses and consumers alike.

HST  The harmonized sales tax is a tax that combines the GST and PST into a single tax.

market value  A snapshot of the estimated selling price of a property at some specified point in time.

mid-rate  An exchange rate that does not involve or provide for any charges for currency conversion.

mill rate  A tax per $1,000 of assessed value to determine property taxes.

ordinary invoice dating  A term of payment where the date of commencement is the same date as the invoice date.

property taxes  Annual taxes paid by the owners of real estate to local levying authorities to pay for services such as roads, water, sewers, public schools, policing, fire departments, and other community services.

PST  The provincial sales tax is a consumer sales tax administered by Canadian provinces and territories.

receipt-of-goods invoice dating  A term of payment where the date of commencement is the day on which the customer physically receives the goods.

sales tax  A percent fee levied by a government on the supply of products.

sell rate  The rate at which a foreign currency is sold. It is always higher than the mid-rate in terms of money per unit of foreign currency.

tax policy  A municipality-based percentage of the market value of a property that is used to convert the market value into an assessed value.

tax rate  A tax per $100 of assessed value to determine property taxes.

tax remittance  The fulfillment of a tax obligation.

Chapter 5 Case Study Completing Summary Financial Reports

The Situation

An accountant at Lightning Wholesale needs to summarize the GST remittances, costs of goods sold, and sales for 2013 by quarter. The table below presents the purchases (in US$) that it made from its American supplier, average monthly supplier cash discounts, total monthly sales (in C$), and the average monthly exchange rate appreciation or depreciation.

The Data

(all figures are in thousands of dollars)

Important Information

• The imported products require GST to be paid on the equivalent Canadian value of the imported goods before any discounts.
• All sales are subject to GST.
• Lightning Wholesale’s suppliers offer it various cash discounts, which the accounting department always takes advantage of. These discounts have not been deducted from the purchase amounts listed in the table.

Your Tasks

1. Calculate the exchange rates for each month throughout the 2013 operating year. Round all exchange rates to four decimals before calculating the next exchange rate.
2. Compute quarterly GST remittances.
3. Convert monthly purchases into Canadian funds and determine the monthly GST paid to the CBSA (Canada Border Services Agency).
4. Assess the monthly GST collected on all sales.
5. Complete a quarterly GST remittance table summarizing GST paid, GST collected, and the net amount refunded or remitted in 2013.
6. Create a quarterly cost of goods sold and revenue table.
7. Apply the average monthly cash discount to the Canadian monthly purchases amounts. Round all answers to the nearest thousands of dollars.
8. Create a quarterly table summarizing costs of goods sold and sales with yearly totals of each.