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The Globe and Mail

Harper set to cut $2.2-billion cheque for Quebec over HST

Prime Minister Stephen Harper and Quebec Premier Jean Charest hold a news conference in Riviere-du-Loup on Jan. 12, 2010.


Prime Minister Stephen Harper will personally deliver a $2.2-billion cheque on Friday to the Quebec government to cover the cost of harmonizing the provincial sales tax with the federal goods and services tax more than two decades ago.

Mr. Harper will make the announcement during a joint news conference with Premier Jean Charest at the Quebec National Assembly after the two leaders meet for a private luncheon.

Quebec has waited a long time for the money. It was the first province to harmonize its sales tax when the GST took effect on Jan. 1, 1991 following an agreement signed between the two governments in August, 1990. But the province had never received compensation to cover the cost of harmonization.

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Since then, several provinces have signed similar deals, receiving federal payments in the process. For instance, when Ontario adopted the harmonized sales tax, it received $4.3-billion in compensation. British Columbia received a payment of $1.6-billion but will now have to return the money after voting down the HST in a referendum last month.

The Quebec government demanded similar compensation, but Ottawa refused to comply until last spring during the election campaign when the Conservatives promised to settle the matter by Sept. 15.

Quebec Finance Minister Raymond Bachand said recently he didn't mind extending the deadline a little longer as long as the Harper government lived up to its election promise to hand over the money.

The fact that Mr. Harper has decided to come to Quebec City to make the announcement himself was perhaps an indication that his government acknowledged the need to rebuild ties with the province.

Quebeckers turned their backs on the Conservatives in last May's federal election, choosing to elect 59 New Democratic Party members when ousting the Bloc Québécois as the dominant force in the province.

Since then, several moves taken by Mr. Harper's government have left perplexed voters with the impression that the Conservatives were out to settle the score. For instance, Ottawa was slow to react to the flooding disaster that hit residents along the Richelieu River last summer. It also appeared to be in no hurry to replace Montreal's crumbling Champlain Bridge, the busiest in the country.

Negotiations on a compensation deal have stalled for several months over a number of issues, which both sides have refused to discuss in detail.

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Under the 1990 agreement, the Quebec government was granted the right to collect the GST. During the current talks, Ottawa expressed some reservations, but Quebec insisted that it should continue collecting the harmonized tax. It argued that in 1992 federal employees administering the GST were hired by the province's revenue department and guaranteed equivalent employment in the province's civil service. The deal will allow Quebec to continue collecting the tax.

There was also some debate over what could be exempted. Items such as books and baby diapers are currently exempted from the provincial sales tax but not the GST. Taxes paid by businesses were also among the contentious issues.

The deal may contain a small tax break for consumers. Under the 1990 agreement, the province's 8.5-per-cent sales tax is added on to the federal 5-per-cent GST. For each item sold, the GST is applied first to the retail price. The provincial sales tax is then added on to the total.

It is expected that under the new deal, Quebec will no longer be allowed to piggyback its tax on the GST. The move would cost the province approximately $200-million a year. However, the loss will be more than covered when the provincial sales tax is increased to 9.5 per cent on Jan. 1, 2012.

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