This past spring, the Ontario Ministry of Finance planned to dispatch auditors to enforce the “exit tax” provision of the International Registration Plan (IRP). It’s a wake-up call for Ontario carriers, one not to be dismissed with a swat at the snooze button.

Exit tax is applied to a vehicle that switches from multijurisdictional travel to travel in Ontario only; i.e., it exits the IRP system. The amount due is eight percent retail sales tax on the depreciated value of the vehicle. While exit tax rules have been on the books since Ontario joined IRP in October 2001, the Ministry of Finance hasn’t enforced them because it said it lacked the capacity to do so.

No more. The first audit targets are those that represent the greatest possible potential to recoup lost sales tax. Sorry, I mean Multi-Jurisdictional Vehicle Tax (MJVT). IRP does not allow members to apply recurring sales taxes; the MJVT is Ontario’s way of skirting
the issue.

If you find yourself on an auditor’s list, your best defence may be a stronger offence, because the potential for confusion is great:

No notice: I don’t know what you’ve heard, but the Ministry of Transportation’s prorate office has never told our clients that exit tax was due. In these cases, the MTO should not, by their own guidelines, have issued commercial plates. The 809 RST Guide (available online at www.trd.fin.gov.on.ca) says: “The owner must pay the exit tax at the time the multi-jurisdictional vehicle is registered under the Highway Traffic Act for use in Ontario only. A vehicle that exits IRP after June 2, 2002, will pay this tax at an MTO Prorate Office at the time the vehicle is registered for commercial use in Ontario.”

In these instances, our clients, if they had been properly informed of the exit tax liability, would not have gone forward with a commercial plate purchase.

Owner-operator liability: Owner-operators have become victims in this scenario as in many cases their financing arrangements are formed by a lease agreement. The leasing company is liable for the exit tax. However, many owner-operators have been assessed the exit tax as they are perceived by the MTO as the “owner” of the vehicle.

Owner-operator credits: When owner-operator vehicles re-enter the IRP system, proof of PST paid must be presented so a credit calculation may be made. This credit, in turn, goes to the carrier fleet account and not to the owner-operator. Thankfully, many carriers properly credit these refunds to their owner-operators. But unfortunately many more either knowingly or mistakenly retain the credits.

Trailers: Dual-purpose trailers and their associated maintenance and repair costs will be a big audit nightmare. Here’s what the Ministry’s own guidelines state:

“Where the carrier is unable to designate specific trailers that are used solely for multi-jurisdictional commercial purposes and those that are used solely within Ontario, a reasonable allocation may be made to determine the trailer that is subject to RST. The method of allocation is subject to audit.”

Carriers have adopted varying methods of allocating trailers, all having certain validity. But without concrete guidelines from the Ministry in 2001, it’s unfair that 41 months later the auditors will develop audit guidelines retroactively at the expense of the taxpayer.

Tax formulas: There are inherent flaws in the Ministry’s formulas for applying the exit tax. It’s likely that vehicles subject to MJVT over a longer period will, using the current calculations, pay a greater amount of exit tax when compared to the same vehicle that has been under MJVT for a lesser period. It’s unfair.

Leases, particularly their treatment when a buy-out occurs, are grossly mishandled. Instead of relying on professional appraisals provided by the ultimate owner of the vehicle to establish fair market value for the purpose of paying a fair amount of sales tax, the assessment may be based on the vehicle’s original value.

So after waiting three years to see the first audit emerge from what was a horribly flawed IRP implementation, we’re getting more opportunities to challenge assessments instead of the fair, clearly communicated tax system we need. It’s enough to keep you up at night.