A recent concluded that consumers will bear the brunt of the Ontario and British Columbia governments' plans to harmonize their provincial sales taxes with the federal goods and services tax.
Businesses will be the big winners, as the combined tax reduces their costs by a total of $6.9-billion in Ontario and British Columbia, said Toronto-Dominion Bank chief economist Don Drummond.
But the tax burden will shift from businesses to consumers as they begin paying levies on a broad range of goods and services that are now exempt, the report said.
The Ontario government announced in March that it plans to combine the 8 per cent provincial sales tax and the 5 per cent goods and services tax into a new value-added tax of 13 per cent.
British Columbia, looking to close a looming tax gap with Ontario, announced plans in July to create a harmonized sales tax of 12 per cent. Both changes will take effect July 1.
Vocal critics, , where the Campbell government has faced , say the merged tax will hurt families because they'll be paying tax on things that are currently not taxed, including haircuts and restaurant meals.
And say investors will pay another $500-million a year in fees once the proposed harmonized tax takes effect. There is currently no provincial tax on mutual funds in any province, while the 5-per-cent GST is already applied and included in fees. A move to include funds in a harmonized tax would mean an extra 8 per cent on management fees in Ontario and 7 per cent in British Columbia.
Canada's also fear a backlash, worried that higher taxes on goods will encourage recession-wary consumers to shut their wallets even tighter.
Newfoundland and Labrador, New Brunswick and Nova Scotia have already implemented the HST. Saskatchewan, Prince Edward Island and Manitoba have not merged their sales taxes and Alberta has no provincial sales tax.
Whether you're from B.C., Ontario, or anywhere in between, whether you're a small business owner, a big business owner or just a regular Canadian consumer trying to keep an eye on your spending, the HST will affect you in one way or another.
What should you know before July 1?
Rod Butcher, certified general accountant, and director of consulting services with Brendan Moore & Associates, is one of the leading commodity tax commentators in Canada. He took reader questions in an online discussion. Thanks to everyone who participated. Please use our comments area to contribute your thoughts.
Rod has over 25 years of experience in both industry and public practice and was co-author of CCH Canadian's publications Value-Added Taxation in Canada and Common Audit Exposures, and a contributor of commentary to CCH Canadian's Ontario Retail Sales Tax.
Lisa: Where can I get a list of consumer products which are EXEMPT from taxes in Ontario? Knowing these items will help me 'adjust' my spending habits & be a bit better off within the constraints of my pension income.
Rod Butcher: The Ontario Ministry of Finance web site, under sales tax harmonization, has a bulletin entitled Tax Benefits for Consumers that lists exempt items and zero-rated items, and those items eligible for point of sale rebates such as books and children's clothing and footwear. http://www.rev.gov.on.ca/en/taxchange/consumers.html B.C. has a similar Bulletin at www.gov.bc.ca/hst/rebates_exemptions.html
Bruce Williamson: I live in Toronto. Nobody seems to be saying how much the HST will cost an average household. Any idea?
Rod Butcher: Bruce - the $64-million question. Studies after harmonization in the Atlantic provinces showed an overall minute reduction in the tax-included cost of goods and services that made up the CPI. Some costs went up (shelter, clothing and footwear, transportation) and some went down (food, household operation, health). Throw in the tax credits and tax reductions, and if you put your faith in politicians and economists, we should be cost neutral.
Paul: In your monthly living expenses, what items will not be taxed at 13 %? For example Gas, Electricity, Home and Auto insurance.
Rod Butcher: Gas and hydro in Ontario will be taxed at 13%. Home insurance will remain taxable at a special 8% rate for Ontario, but auto insurance will remain exempt. B.C. plans to have a rebate in effect to remove the provincial portion of the tax on residential energy costs.
Paul: Will bank account fees be subject to the HST?
Rod Butcher: Charges for general chequing and savings accounts are currently exempt for GST and will remain so for HST.
On Gas Prices: How will the HST affect prices at the pumps?
Rod Butcher: On Ontario, gas will be subject to the 13% at the pumps, but some cost reductions will be realized by the producers and distributors that have expenses incurred in Ontario. Overall, after harmonization out East, transportation costs increased. In B.C., rebates are available at point of sale for the provincial tax charged on gas and diesel - no impact there.
YK: Will online buying/purchasing be affected by the HST?
Rod Butcher: Generally, only in so much as the rate you pay will increase if you are resident in Ontario or BC and are having goods shipped to either of those provinces. If you buy on-line from a Canadian supplier, the supplier should charge the appropriate tax.
henry wojak: Can we avoid the HST by cross border shopping or buying on line in Ontario?
Rod Butcher: The Canada Border Services Agency will be vigilant in enforcing observance of the personal duty free exemptions, and are authorized to collect both federal and provincial tax at the border, based on province of residence of the individual. Imports through the postal and courier streams are also included, so buying on-line from an unregistered supplier may not help.
Guest: Basic prices for goods vary greatly across a province, hence those who already pay more for goods, such as remote and rural communities, will pay more taxes. Have either Ontario or BC provided countermeasures?
Rod Butcher: Unfortunately, there has been no provision made yet for regional relief within a province.
Rick Sellens: Will the switch to HST eliminate the current sales tax on used cars, used boats, etc.?
Rod Butcher: Ontario plans to maintain an 8% tax on the private sale of automobiles (which will be paid to the MTO on registration of title change). Used vehicles - boats, cars, planes - will be subject to HST if purchased from a registered dealer.
Henry Christoff: How is the HST in BC suppose to help businesses- large or small?
Rod Butcher: The theory behind a value-added tax is that you can recover any tax charged to you by suppliers. Your costs then decrease (as you would no longer be paying unrecoverable BC SST - and nor will your suppliers), benefiting the business. In addition, you no longer have to deal with a second level of tax administration - one return, one audit, not two (or three if you are registered in Ontario as well).
Carla: I heard that with the implementation of the HST commission sales reps will no longer be able to use restaurant bills for tax purposes. Is that true?
Rod Butcher: Large businesses will generally be prevented from recovering the provincial portion of the GST/HST paid on entertainment expenses (including restaurant charges) for the first five years following implementation (followed by a 3-year phase-in). Your employer will not therefore be able to get that portion of the tax back.
Dominic: I run a small web development and consulting business. We currently add 5% GST to our service fees. We've always been told that for our services, we don't need to bill PST. With the change to the HST model, presumably we'll be charging the full 13% to our customers. Will there be a 'clawback' - so that we can get for the 8% we never charged before, or are those days over now? Is this one of the ways that the government will be collecting more money than it did previously (for services which formerly did not require PST)? Thanks
Rod Butcher: Yes, you would be charging the 13% on your fees after the implementation date. You will, however, be paying less tax on your non-resale purchases. Consumables, furniture, computers, software, telecomm charges, the tax on all these will be recoverable for a small business. Before, that would not have happened under the retail sales tax.
Sandy: I run a small services business, and charge GST to our customers on our services. How will this change with HST?
Rod Butcher: After the implementation date, you will be charging the HST rate - 12 or 13%, depending on the province, but you would be eligible to recover the HST you pay to other registrants on goods and services you purchase for the business.
Allan Coates: I own my own small business in Ontario and sell my writing services to other businesses, not consumers. Currently, I add 5% GST to my invoices. Under the HST, do I just increase the per centage to 13% or do I have to register separately with the provincial sales tax as well? If the latter is the case, the HST is not pro-business, as the politicians claim.
Rod Butcher: No separate registration is required, you simply commence charging the 13%, and recover on your periodic returns the tax you paid to other suppliers, just as you do for GST now.
Joseph: I am the owner of a general interest bookstore in Vancouver. Currently books are exempt from PST and my understanding is that exemption would continue under harmonization. My confusion is how this would work, the wording of the BC government's website implies there would be some sort of instant rebate applied to offset the PST portion of the HST at point of sale. Do you have any idea how this would work? Also, if I'm right in thinking books would be exempt, could I still expect to claim an itc on my PST portion of business purchases? (we do sell items that are not exempt from PST such as calendars and greeting cards). Thanks.
Rod Butcher: The exemption under the BC HST is to be applied as a point-of-sale rebate. At the till, you would process an "instant" credit equal to the amount of the provincial portion of the BC HST (7%). The reason for structuring the relief as a rebate is to give you an input tax credit for the full amount of the HST you are charged, whether or not it relates to the sale of books that receive the rebate. When you sell calendars and postcards that are not eligible for the rebate, you would collect the 12% from the purchaser.
Brenda: I own a service business as well. I charge some of my customers GST at 0% because of the service. Will this change now, as in there will be no service at 0% GST, or HST?
Rod Butcher: Not familiar with the type of business, but if at present your services are zero-rated or exempt for GST, you will continue to zero-rate or exempt your services under the HST. The tax base remains the same.
Hilda: I work for a small charity that claims back the PST it pays, on printing of educational materials for the charity and other items. How will the HST affect this?
Rod Butcher: Charities will no longer pay the ORST or BC SST. Ontario charities will receive an 82% rebate of the provincial 8% for the provincial tax they pay. BC charities will receive 57% rebates. The factors were designed to reflect the net impact on charities of changing the retail sales tax to a broad-based tax like the HST.
Craig: I'm on the board of a small charity that currently claims GST, but not PST. How will this affect our rebate claims, and is there anything we'll need to do?
Rod Butcher: By claiming GST, I assume you mean you have registered and are recovering GST rebates. Charities will be able to recover 82% (in Ontario) and 57% (if in BC) of the provincial component of the HST paid in those provinces. It will be claimed on your periodic GST return, and there is nothing extra you need to do.
Individuals and tax
Pat: We currently use the quick method for calculating the GST we need to remit. Will the rates be changed for what we need to remit?
Rod Butcher: Yes, they will, but that level of detail has not been published yet. You could anticipate some rates by reference to the Atlantic provinces, but there is potential for differences and we would not like to speculate.
Geoffrey: I heard that there will be income tax cuts to compensate for the HST in Ontario. For sake of example, how much income tax could a single person making $50,000, $70,000, $90,000 expect to save? How does this compare to the estimated increased sales tax costs?
Rod Butcher: For this, you need an income tax advisor. Ontario announced a cut in the lowest rate of income tax to 5.05% from 6.05% effective January 1, 2010 - how much that would mean to you would depend on your personal circumstances.
Michael Creek: I'm very concerned on how the HST will impact those who live in poverty in our province and also the impact that the HST will have on low income earners along with our Seniors. Do you think that the rebates that are proposed will make the new HST equitable and fair to those who live in poverty and low income.
John glas: Seems like the viewers are heavily weighted in the business sector. I am a senior and one of the ones who will be impacted negatively.
Rod Butcher: Michael Creek, the intention was that the total package of tax cuts and credit cheques was designed to offset any additional cost from the new tax. Whether it's enough, I can't comment.
Steve: Hi ..I was wondering what the HST will do to purchasing a home either the first time or the second time ? My daughter want's to purchase a house in the near future should she be rushing to purchase before July ??? A concerned father !!!
Allan: How will the change to HST affect real estate transactions?
Andrew: I live in BC. If I buy a new condo now, I understand I would pay 5% GST. If harmonization goes through, what would be the difference paid on a new condo selling for say $300,000?
Rod Butcher: Whether the tax affects your purchase decision depends on the price point. There is no GST or HST on the purchase or rent of used residential housing. After June 2010, generally, new home purchases will attract a maximum $24,000 rebate of the Ontario component of the HST, and a maximum $20,000 rebate of the provincial portion of the BC HST. Each is reached at a $400,000 price level. The rebate is designed to eliminate the effect of the HST at the retail level, compared to the equivalent retail sales tax that would have been embedded in the cost of the home before the change. In BC, on a $300,000 purchase of a new residence, the provincial rebate would be $15,000 of the $21,000 that would otherwise be charged. At that price level, you should be indifferent to a price that includes BC SST on building costs, or one subject to BC HST - in theory!
Pete Kauchak: What will be the impact of the HST on condo fees? Will there be an actual 8% increase in fees or are condominium corporations exempt from paying this tax?
CndCondo: I was recently advised by my condo corporation that the HST will impact my condo fees, is that a cost that the corporation can download onto owners?
Rod Butcher: Condo fees are not currently subject to ORST, BC SST and GST, and will not be subject to Ontario or BC HST. However, condo corporations will be paying HST on their costs that cannot be recovered, and these costs will therefore be passed on to condo owners in their fees.
Joy: Under the new HST scheme, are real estate commissions and legal fees also subject to the 13% tax in Ontario? If that is the case, the buyers and sellers are really going to suffer.
Rod Butcher: Real estate commissions and legal fees will both be subject to HST. The registered agent or lawyer will be able to recover tax paid to suppliers, but for a services business, this may not offset the cost of the HST on fees charged to parties buying or selling a property materially.
House Buyer: Would this have an effect on people who are currently paying instalments for their houses/condos. Would they now be paying higher instalments as they'd have to add HST to the final instalment amount?
Rod Butcher: Yes, when the tax is in full effect, you would expect the additional cost to be factored into instalments.
Vince: I have a rental property in B.C. on which I charge my clients GST but no provincial tax. I previously had a B&B and because it had 3 suites I had to charge both the GST and the provincial tax. The local municipality added a 2% tax when I charged the provincial tax. They got the records of provincial taxes and sent me an invoice for 2%. My question is: How will local governments differentiate who is to pay the additional 2%?
Rod Butcher: To Vince, I'm sorry, I can't help you with the municipality's ability to detect other B&B renters if there are no more provincial sales tax returns to file.
Candice: What are your thoughts about the fight that Ontario mutual fund companies are putting up in order to make them exempt from the HST? Do you think they will have a chance?
Rod Butcher: On the change to an HST, there will be some winners and some losers. Any personal services-based business will likely not see tax savings on purchases that are as large as manufacturers or distributors. That means investment advisors that charge funds for investment advice (which you would see in the MER charged by the fund holder) will be colecting the HST based on the residence of the investor, but not reducing their fees significantly by any savings. This will mean a net price increase. Whether this is successfully addressed by mutual fund managers with the government remains to be seen.
Dimitry: For mutual funds, if I invest in funds outside of the province, will that allow me to save on the added tax?
Rod Butcher: Investing in funds based outside the province will not generally avoid the tax. The theory dictates that unit holders pay tax based on province of residence.
Michael in Vancouver: What is your opinion regarding the mutual fund industry's drive for HST exemption? And could you also clarify whether trading commissions (e.g. for transactions done via on-line trading or full service brokerage) - which are currently not subject to GST - will be subject to the HST in BC or Ontario?
Rod Butcher: If a service is exempt for GST, it is exempt for HST also. The tax base remains the same, except for the published point-of sale rebates.