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Looking to close a looming tax gap with Ontario, British Columbia is merging its provincial sales tax with the federal GST - a move that will slash the cost of doing business in the province but drive up the cost to consumers of everything from getting a haircut to buying pricey new homes.

B.C. Premier Gordon Campbell and Finance Minister Colin Hansen said Thursday that they will follow Ontario in creating a single sales tax in their province on July 1, 2010. The harmonized sales tax in B.C. will be 12 per cent, the lowest for those provinces that have agreed to combine their provincial sales taxes with the GST.

Mr. Campbell said B.C.'s shift to a harmonized tax will create pressure on the remaining provinces with separate levies - Saskatchewan, Manitoba and Prince Edward Island - to follow suit. "There will be a move now in Canada to move toward this HST."

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A senior government source in Ontario agreed, saying it will become increasingly difficult for the three remaining provinces not to follow with their own harmonization plans. British Columbia's move "will reset the conversation nationally," he said.

B.C. is portraying the shift as a major cost savings for business, which will be able to claim HST rebates in virtually all cases, Mr. Campbell said. The province had rejected the idea of an HST several times, but Ontario's decision to adopt a blended sales tax altered that calculation in at least two ways. The federal government loosened the rules governing a harmonized tax, but more critically for B.C., Ontario's move opened up a competitive gap that would have threatened to drain corporate investment eastward. "B.C. cannot be left behind," Mr. Hansen said Thursday.

Once fully implemented, the HST will reduce sales taxes paid by business by $1.9-billion, and save companies $150-million in administrative costs. For large businesses, the changeover will be gradual, meaning their savings will take longer to full materialize.

But the savings for business will become new costs for consumers. A number of basic goods will be exempt, including basic food items, children's clothing and shoes, diapers, booster seats, car seats, feminine hygiene products and books. A slew of goods and services formerly not subject to the PST will fall under the umbrella of the new combined tax, including hair cuts, restaurant meals - and far larger expenditures such as new homes.

Any home buyer spending less than $400,000 will be no worse off under the new tax. But in the Lower Mainland, where prices can easily top seven digits, buyers could end up paying significantly larger tax bills; a new $700,000 home would incur an extra $18,000 in sales tax, according to the B.C. finance ministry.

B.C.'s move to the HST comes as the province grapples with a growing budget deficit - and could prove to be a solution to those fiscal woes. The changeover to a harmonized will result in a slight drop in tax revenues for the province in the first year, Mr. Hansen said. But the federal government will pay $1.6-billion to B.C. for transition costs, an amount that far outstrips the actual expenses of adopting the harmonized tax. In essence, B.C. has gotten a major windfall - Mr. Hansen called it "a very welcome infusion" - just as it seeks to contain a deficit officially pegged at $495-million, but which economists and provincial officials agree is set to grow substantially.

The opposition in Ontario has denounced the government there for boosting taxes when consumers can least afford to pay, but in B.C., the reaction of the NDP opposition was muted. Finance critic Bruce Ralston said he is concerned that consumer prices will rise, but that his party will need time to evaluate the surprise announcement.

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On goods already subject to the provincial tax, the consumer should be no worse off - if retailers drop their prices as their own tax bills fall. In theory, retailers should reduce prices to offset what will be an explicit, instead of embedded, sales tax. But there will be no requirement for them to do so. When questioned on the issue of retail prices, B.C. finance ministry officials pointed to a 2007 study from the University of Toronto. That study found that overall consumer prices fell after harmonization, but that prices rose for shelter, clothing and footwear, making the changeover "slightly regressive." In other words, lower income consumers were affected more than those with higher incomes. Like Ontario, B.C. is introducing low-income credits along with the blended sales tax, to cushion the blow to poorer consumers.

With files from Karen Howlett in Toronto

What's currently exempt from British Columbia's sales tax

Goods • Residential fuels (i.e., electricity, natural gas) and heat (i.e., steam heat) • Basic cable TV and residential telephone • All food products • Non-prescription medications • Vitamins and dietary supplements • Bicycles • School supplies • Magazines and newspapers • Work-related safety equipment • Safety helmets, life jackets, first aid kits • Smoke detectors and fire extinguishers • Energy conservation equipment (e.g., insulation, solar power equipment)

Services • Personal services (i.e., hair care) • Dry-cleaning services • Repair and maintenance services to household appliances • Household repair and maintenance (i.e., renovations, painting) • Real estate fees • Membership fees (i.e., health and fitness clubs) • Admission (i.e., movies, live theatre) • Tourism services (i.e., booking fees, tours) • Funeral services • Professional services (i.e., accounting, architectural, photography, graphic design, home care services) • Airline fares (within Canada)

Exempt from the planned harmonized sales tax

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• Basic groceries • Gasoline, diesel fuel and other motor fuels • Books • Diapers, children's clothes and car seats • Feminine hygiene products • New homes up to $400,000

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