The Harmonized Sales Tax is Coming!
The Harmonized Sales Tax is a single tax which combines both the GST and the PST. In cases where only GST had been charge previously (i.e. Fitness Club fees), both GST and PST would now be charged.
This has been implemented in four provinces in Canada: Newfoundland, Nova Scotia and New Brunswick. The HST is also used in Quebec where it is administered provincially. When first implemented in the Maritimes, we recall some club operators actively lobbied against it. (Without success)
While attending the Fitness Day on the Hill in Ottawa, Nov. 23/06, we were invited to attend a major budgetary statement given by Finance Minister Jim Flaherty. At this time, Minister Flaherty indicated the government’s intention to extend the HST to all remaining provinces.
To help explain the HST we contacted PriceWaterhouseCoopers. To assist us, Brian Wurts, a senior manager within their Indirect Tax Group, was able to write the following article for our readers. Following his article we have included a QA with Nubody’s Fitness in the Maritimes and several government links relating to the HST.
The Year of the HST?
By Brian Wurts
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The GST rate reduction in 2006 triggered a renewed debate on the possibility of Ontario and other provinces giving up their retail sales tax (“RST”) and instead opting for a share of a federally-administered Harmonized Sales Tax, as in operation in NB, NS, and Nfld. Quebec also has “harmonized” its sales tax with the GST, although there, under a “uniquely Canadian” system, the province administers the GST on behalf of the federal government. |
Could Ontario and the other four provinces with RSTs be heading towards the adoption of a Canada-wide HST? What would this mean for consumers and businesses? Who would win, and who would lose? And importantly, would this be just a tax grab, or would there be real benefits from this?
The current 14% HST in the three Atlantic provinces consists of a 6% federal share and an 8% provincial share. However, there is no need for taxpayers or governments to keep separate track of the two portions. The HST is simply lumped in with the GST amounts. In contrast, in Ontario, the GST and the RST are imposed separately. The 8% RST applies on most goods, but only on selected services. Unlike the GST, businesses don’t get a credit for any RST they pay on their inputs.
Harmonization: Who Wins and Who Loses?
If Ontario opted to join a 14% HST, the tax rate would remain unchanged for those goods and services which are currently subject to RST, such as cars, sporting equipment, computers, restaurant meals, and drycleaning. However, an Ontario HST would mean an 8% higher tax rate on a wide range of goods and services that currently aren’t subject to tax, including house repairs and renovations, professional services, and memberships to golf clubs and health clubs.
If some purchases remain at the same tax rate, while others face a higher tax rate, how could this possibly be revenue neutral? Wouldn’t this be a tax grab? The short answer is - not necessarily. Businesses in Ontario currently pay billions of dollars in RST on their purchases – on such items as building materials, office equipment, repair services, to name a few. This tax is not recoverable. Under an HST, most businesses in Ontario would be able to recover the provincial portion of the HST.
In fact, this would be the real benefit from a move to an HST system – by allowing businesses to recover the sales tax on their purchases, Ontario businesses would become more competitive internationally, and increase the attractiveness of Ontario as a place in which to invest.
The move to an HST would also result in significant savings in government administration and business compliance costs. Not only would the Ontario costs of administering its taxes be reduced dramatically, retail businesses would be able to save much time and effort as they would only have to deal with one sales tax system.
A move to the HST does have the potential to disproportionately impact lower income persons, even though a large portion of their purchases – such as food, and shelter – would be non-taxable. Consequently, any such harmonization would no doubt have to be accompanied by an increase in the refundable low income credit.
With an election on the horizon, it seems unlikely that the HST will be on the public agenda for Ontario in 2007. However, the economic arguments in favour of an HST system greatly outweigh any arguments against it. Improved competitiveness and the elimination of administrative duplication are long term benefits for Ontario which should neither be ignored nor delayed.
Brian Wurts is a senior manager in the Indirect Tax Group of PricewaterhouseCoopers (PwC) in Toronto. Previously, he was the Chief of the Policy Development Group in the Federal Department of Finance during the implementation of the GST.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. In Canada, PricewaterhouseCoopers LLP (www.pwc.com/ca) and its related entities have more than 4,300 partners and staff in offices across the country.
We Have the HST and It’s Not So Bad
We asked Joselyn Legge of Nubody’s Fitness in Dartmouth, Nova Scotia:
Did the introduction of the HST, which raised, membership fees, have any effect on membership sales at the time?
Reply: Yes – There were added costs to the consumer. This resulted in additional cancellations of 3%.
If so, did this effect gradually abate over time?
Reply: Yes – As all facilities charged it
Were there any direct club costs that went up?
Reply: No because for business consumers, it was a wash. We paid more; however, we got the money back on our HST filing to the government.
In general, does the HST pose a serious concern to the fitness operators in other provinces? Any advice, comfort or tips to them?
Reply: For business consumers, it is a wash. When more is charged to the business for tax, the input tax credit claimed at the end of the reporting period is increased so in effect, it washes.
Links from the Finance Department’s Web site which relate to the Harmonized Sales Tax (HST).
* The October 23, 2006 Press Release Entitled “Sales Tax Harmonization: Detailed Agreements Reached”, at: www.fin.gc.ca/news96/96-075e.html
* “Sales Tax Harmonization - An Overview”, at: www.fin.gc.ca/news96/data/96-075_1e.html
* “Sales Tax Harmonization - What it Means for Consumers and Businesses”, at: www.fin.gc.ca/news96/data/96-075_2e.html
* Sales Tax Harmonization - Questions and Answers, at: www.fin.gc.ca/news96/data/96-075_3e.html
* October 1996 Harmonized Sales Tax - Technical Paper, at: www.fin.gc.ca/toce/1996/hsttoc-e.html
* Comprehensive Integrated Tax Coordination Agreement, at: www.fin.gc.ca/hst/agree-e.html
* Proposed Regulatory Changes in Support of Harmonized Provinces: www.fin.gc.ca/toce/2006/bkHST_e.html
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