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Federal Finance Minister Jim Flaherty is throwing a road block in front of Ontario’s plans to build new subways and rail lines in the Greater Toronto and Hamilton Area.CHRIS WATTIE/Reuters

If the Ontario government raises the Harmonized Sales Tax to pay for new subways and rail lines in the Greater Toronto and Hamilton Area, it will have to apply the tax across the entire province and not only in one region, federal Finance Minister Jim Flaherty says.

Earlier this week, provincial transit agency Metrolinx recommended several methods of raising the $34-billion needed for the plan, including hiking the HST by 1 per cent.

Premier Kathleen Wynne has said that only residents of the GTHA will pay for transit expansion, and people in the rest of the province will not be asked to pony up.

In its report, Metrolinx said that it might be necessary to raise the HST for the entire province. In that case, the agency suggested, money raised outside the GTHA should be dedicated to projects in the communities where it is raised. Under this scenario, HST raised in Northern Ontario would be spent in the north, for instance.

"There are significant administrative and other hurdles with a regionally based approach with the HST, and that's why there's content in the report that talks about, you know, should the province decide to go with an Ontario-wide approach, then the revenue that's collected outside the GTHA should go to priorities in other parts of the province," Metrolinx CEO Bruce McCuaig said Friday after a speech to the Toronto Region Board of Trade. "So we understood all the way through that a regionally based HST solution was going to be a difficult solution, and that's why we included the content we did."

And in a letter to Ontario Finance Minister Charles Sousa, Mr. Flaherty affirmed that this would be the government's only choice if it chooses to hike the HST.

Applying the HST hike to the GTHA only would require renegotiation of an agreement with the federal government. And Mr. Flaherty says that is not going to happen.

"As you are well aware, the Comprehensive Integrated Tax Co-ordination Agreement signed by the Government of Ontario does not allow for the provincial component of the HST to vary between regions of the province," Mr. Flaherty wrote, before going on to criticize Ontario for even musing about raising taxes.

In an earlier statement to the Globe, Mr. Flaherty said he is no fan of Metrolinx's ideas: "As you all know, I do not believe in tax increases. Ontarians pay too much tax as it is," he said.

Mr. Sousa's spokeswoman said the government had not approached Ottawa about the HST and has not yet made any moves on transit revenue.

"Ontario has not made any requests of the federal government on this matter. It is one of many recommendations made by the agency, on which we will consult with the public and municipalities," Mr. Sousa's spokeswoman, Susie Heath, said in an e-mail. "The province has asked repeatedly for the federal government to come to the table, through a national transit strategy, and we hope we can get them to come to the table in a more substantive way."

Mr. Flaherty, MP for Whitby-Ajax, has been a vocal critic of the Ontario Liberals, singling out the projected $11.7-billion deficit in Canada's largest province as of concern to the entire country.

Metrolinx's recommendations are not final. Ms. Wynne and Mr. Sousa have said they are studying the report and will hold consultations across the province before coming up with a final transit-funding plan.

The Metrolinx plan hinges on the HST increase, which would raise about two-thirds of the money needed. Mr. McCuaig, the Metrolinx CEO, said that they have not given the province any suggestions for another "foundational" revenue tool should an HST rise prove politically impossible.

"We felt it was important for us to put forward our best advice – based on other jurisdictions, based on our own analysis, based on the input we receive – and that's what we did. We did not purposely put in, you know, here is the second choice, here is the third choice."

With a report from Bill Curry