Grant Clark thinks he's the kind of business owner Ontario wasn't thinking of when it developed plans for the new, harmonized sales tax.
Mr. Clark is president of Solutions for HR Inc., a small consulting shop he's operated for the past 15 years. In this economy, potential customers are trying to minimize spending on outside expertise. He's getting a lot of requests to cut his hourly rate or do some kind of deal.
So he's not sure what's going to happen in July when, as a service provider, he'll need to begin charging clients a full 13 per cent HST, or harmonized sales tax. Previously, his services were exempt from Ontario's provincial sales tax, and he had to add only the 5 per cent federal Goods and Services Tax, or GST, to his bills.
"My cost to clients is going up 8 per cent, as is anyone's who sells professional services," he said. "I can see the logic behind it - I understand the goal is to encourage investment by businesses in Ontario. It's going to be beneficial overall, but there's going to be an impact on any professional services firm, and I don't think that was a major consideration by the provincial government."
That concern from the businesses on the front lines, who deal directly with the consumers who will pay higher taxes on certain services, is injecting a sour note into a tax-reform program that accomplishes major, long-standing goals of the business communities in Ontario and British Columbia, which will also fold its provincial sales tax into the federal one this summer.
The new HSTs replace two tax administrations, each with its own paperwork, remittance processes and auditors, with one.
It also exempts manufacturers from paying sales tax at various steps in the production process, a major change that proponents say will cut costs for businesses and allow the savings to be passed along to the end customer. For example, the construction industry will no longer pay sales tax on lumber, pipes and other inputs into a new home. That makes the HST more like the value-added tax system in place in most European countries.
In Ontario, the HST is also accompanied by cuts in the corporate income-tax rate and other business taxes that yield additional bottom-line savings. British Columbia is slashing its small-business income tax rate from 4.5 per cent in 2009 to 2.5 per cent this year to zero in April, 2012, as well as knocking a point off the corporate income tax rate.
While the British Columbia cuts were announced in advance of the news of an HST, the Ontario government is pitching all of its tax changes as part of one large package.
Stuart Johnston of the Ontario Chamber of Commerce says his group started advocating for a harmonized sales tax six years ago as part of a larger strategy that also included the rate cuts. The goal was to reduce a business-tax burden that Mr. Johnston said made Ontario deeply uncompetitive. The marginal effective tax rate on capital - a measure of how much each additional dollar invested is taxed - is nearly 33 per cent in Ontario today. The changes will reduce it to roughly 16 per cent, in line with international averages, Mr. Johnston said.
To those who might oppose the Ontario tax package, Mr. Johnston asks: "What about the status quo? We're overtaxed now as a jurisdiction, and our competitiveness is suffering globally."
The full package of proposals has caused some concern for the Canadian Federation of Independent Business despite the fact it advocates both lower corporate income tax rates and a harmonized sales tax.
The CFIB believes that the government's lumping the two major tax changes together, rather than making the two reforms separately, has created an HST conversion plan that fails to properly compensate businesses for the changeover.
The CFIB's Ontario director of provincial affairs, Satinder Chera, says the current proposal provides about $300 to $1,000 in subsidies for transition costs, but a survey of CFIB members shows they believe they'll spend about an average of $4,000 changing over to the HST system.
Similarly, Ontario plans to eliminate a $1,500 annual vendor compensation payment to businesses for collecting provincial sales taxes.
British Columbia businesses are faring worse: They're losing the annual subsidy and getting no transition payments, says Brian Bonney, Mr. Chera's counterpart at the B.C. CFIB. The subsidy loss "is one of the main complaints small businesses have, and it's the No. 1 thing we're working on with the provincial government," he said.
In both provinces, the CFIB is particularly concerned about an element of harmonization that's missing, at least when compared with the process the Nova Scotia, New Brunswick and Newfoundland went through in the 1990s: There, the new sales tax rate was cut by two to three percentage points compared with the federal and provincial rates before the combination.
In Ontario and B.C., that's not happening. The CFIB's Mr. Chera says the consumer will notice. (The government is instead arguing that consumer savings instead will come when businesses pass along the reduced costs of their inputs to customers.) "No one disputes the fact that one [sales tax]system is better than two systems," Mr. Chera said. "The question is how you get there."
While the federal and provincial governments have passed the enabling legislation that will make HST a reality, there's still room for tweaks to the plan, so CFIB will keep advocating for more compensation for businesses. In an economic environment in which governments are pressed for cash, the likelihood of Ontario or British Columbia forfeiting the extra sales-tax revenue by cutting the rate seems less likely.
In the meantime, both Mr. Chera and Mr. Johnston of the Ontario chamber agree that the major new challenge for businesses in the HST era will be managing cash flow.
As the PST gets scrapped, so will the system by which businesses avoid paying sales tax on exempt items. Instead of presenting a PST exemption certificate at the point of sale and paying just the 5 per cent GST, businesses will now pay the full 13 per cent HST and apply for a tax credit on inputs.
For many businesses, that means cash out sooner, with reimbursements later. But since most businesses will also be charging their customers HST, they'll need to consult with their accountants to find out whether to change how frequently they file their HST forms with the government.
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