Tax advisors at Ernst & Young caution Canadian businesses are facing pressure to prepare for the changes required to handle the 1% reduction in the GST announced earlier this month in the federal government’s budget.

“The drop in the GST rate is going to be more complex than originally anticipated,” said Bruce Goudy, Tax partner with Ernst & Young. “Some systems are simply not set up to handle transactions that straddle the day the GST changes, leading to challenges for businesses that now have little over a month before the rate is lowered. Businesses should be aware of these problems and work quickly to deal with them.”

For example, businesses whose accounting systems claim tax credits based on the date a purchase invoice is processed are finding they need to set up a “fix” to capture the proper amount of GST on invoices dated prior to July 1, 2006 (and subject to the higher rate of GST), but processed afterward. Similarly, businesses that collect their revenue using pre-authorized withdrawals from their customers’ accounts must adjust the amounts being withdrawn from all of their customers.

“The worry is that businesses could be short-changing either themselves or the government if a structure is not in place that plans for these transactions. Furthermore, employers need to ensure that factors used on expense reimbursements are accurate based on the tax rate in effect when the expenses are incurred rather than when the expense reports are processed. Businesses that have activity in Quebec face an even quicker turnaround time if revised Quebec factors are announced for expense reports and reimbursements,” said Goudy.