The Ontario government has moved to douse a firestorm of criticism over its plans to reform the provincial sales tax by exempting a number of basic goods, including children's clothing, diapers and new homes costing less than $400,000.
The government also proposes to help consumers adjust to the new regime by providing one-time compensation of $1,000 - in three equal payments over 12 months - to families with annual incomes of less than $160,000.
Government sources confirmed last night that today's budget will include plans to harmonize the 8-per-cent provincial sales tax with the 5-per-cent federal goods and services tax. The sources also confirmed that the government is taking the sting out of harmonization for consumers by exempting from the new blended sales tax many household goods that are not currently subject to provincial sales taxes.
However, not everyone is happy. Newly built homes that cost more than $400,000 will be hit with higher taxes - ranging from $12,000 to $46,676 in Toronto, according to one study - while the federal government has agreed to drop the GST for those under that threshold. Closing costs on all homes, including realtor fees, legal services and home inspections, will climb because they are not currently subject to provincial sales taxes. The Toronto Real Estate Board estimates that will add $2,037 to the purchase of a $360,000 home.
TREB spokesman Von Palmer called it a "double whammy" for Toronto, which introduced a land transfer tax last year.
"I think the last thing the home market needs right now is increased taxes on homes," he said.
Premier Dalton McGuinty's government has been under siege over its plans to introduce tax reforms as part of a broader initiative to help the province's ailing economy. Constituents have flooded their MPPs' constituency offices with telephone calls, expressing fears that taxes would increase on basic goods that are currently exempt from Ontario sales tax. And opposition members have seized on harmonization as a new opportunity to label Mr. McGuinty a tax-raising promise breaker.
In fact, any doubt that the provincial budget will be delivered in an atmosphere of crisis and intense scrutiny was dispelled yesterday, when Finance Minister Dwight Duncan trod on tradition.
He did not buy a new pair of shoes for presenting the budget, nor did he hold the usual pre-budget photo-op.
Mr. McGuinty has said his government would not pursue harmonization unless the Harper government agreed to drop the goods and services tax from household goods or provide compensation in the form of rebates for low-income households.
"We're going to have a budget that protects families and strengthens the economy," he told reporters yesterday morning.
With the help of the federal government, it appears that Mr. McGuinty will be able to make good on that pledge. The federal government has agreed to exempt basic goods from the GST.
The deal will also deliver multibillion dollars in compensation to Ontario, said sources familiar with the tentative accord signed by the two governments.
The compensation will be similar to what three of the Atlantic provinces received when they harmonized their taxes in 1997.
The former Liberal government paid Newfoundland and Labrador, Nova Scotia and New Brunswick $961-million.
A source also told The Globe and Mail that the government would put the blended tax in place before the 2011 provincial election. Businesses have been pushing for harmonization because it will make them more competitive by reducing their costs.
They could receive a refund for taxes paid on goods and services to run their operations.
The federal government also plans to bring a bill to Parliament for approval, which could well be tricky for the federal Liberals.
Voting for the blended tax might jeopardize federal Liberal popularity in the province, where it hopes to make large gains in the next election.
By the same token, voting against the proposal could create tension between the federal and provincial wings. Liberal Leader Michael Ignatieff has forged substantial ties with members of Mr. McGuinty's government.
The payoff for the federal government comes in the backing it gives Finance Minister Jim Flaherty as he presses other provinces to adopt a blended tax, something the government has been seeking since it was elected in 2006.
British Columbia, Saskatchewan, Manitoba and Prince Edward Island have all resisted harmonization.
Alberta has no provincial sales taxes.
Mr. Flaherty was tight-lipped about the harmonization idea yesterday.
The minister, who has been criticized for saying the province was not a good place to invest, was asked if he now thinks the opposite.
"If you would like to ask me that question after they publish their budget," he said, "I'd love to answer it."
Avoiding the hit
Items that will be exempt from the proposed blended tax, which will combine the provincial sales tax with the federal GST:
New homes costing under $400,000
Children's clothes
Children's shoes
Books
Feminine hygiene products
Car seats
Booster seats
Diapers
Karen Howlett