After nearly 15 years of bickering, Quebec and Ottawa have finally agreed to a harmonization deal on their sales taxes that includes a federal compensation package of $2.2-billion to the province.
Under the agreement, the province will continue to collect the federal goods and services tax as well as the Quebec sales tax. The province will also have the flexibility to amend tax policies and deviate from the GST up to a certain range.
In a rare appearance together, Prime Minister Stephen Harper and Premier Jean Charest made the joint announcement on Friday, delivering what amounted to be a plea for more "open federalism" during uncertain economic times.
Several technical points still have to be negotiated before the deal takes effect on Jan. 1, 2013 when Quebec gets its first payment of $733-million. Final payment will be delivered on Jan. 1, 2014.
"The [compensation]money will be used to reduce the deficit and the debt," Mr. Charest said. "We are not going to go around spending this money left and right.…We will manage these funds with a great deal of caution."
The deal took years to negotiate largely because Quebec wanted the right to enforce tax exemptions, which other provinces were not allowed to do under the harmonization deals they had signed with Ottawa.
But Quebec believed it was in a unique position. Long before any other province had agreed to harmonize its sales tax with the federal GST, Quebec signed an agreement with Ottawa in 1990 that allowed it to collect the two taxes beginning in 1992. At the time, Quebec agreed to change its retail sales tax system, gradually shifting to taxing all goods and services, which over time allowed for the harmonization to a large degree of the two taxes.
"The difficulty was they [Quebec]did not have a harmonization deal that was essentially the same as the other provinces," Prime Minister Harper explained on Friday. "And there were certain elements of Quebec's arrangement that we were not prepared to extend to other provinces. So we had to find … an arrangement that would satisfy Quebec's needs but one that we felt comfortable extending to other provinces. And that's the deal we have today."
Mr. Harper added that the unique elements in the Quebec deal, such as allowing the province to administrate the harmonized taxes, were not something he believed "other provinces will be interested" in.
Under the agreement, Quebec will continue to apply several exemptions. For instance, there will be no QST on books, baby diapers or interprovincial air ambulance services. Quebec will also continue to offer tax rebates for certain items. The deal requires that the value of the exemptions or rebates does not exceed 5 per cent of the total GST base.
In return, Quebec was required to make some concessions. The provincial sales tax will no longer apply on the GST – in other words, there will be no more taxing the tax. But that doesn't mean consumers will be getting a break.
The province said it will further increase its sales tax by slightly less than 0.5 per cent on Jan. 1, 2012 to compensate for the drop in revenue. The tax would have risen by 1 per cent to 9.5 per cent in the new year, but it will now be increased to 9.975 per cent.
The deal also requires Quebec to harmonize tax treatment of financial services with that of the federal GST. For instance, financial institutions will no longer get a refund of the GST on their purchases.
There are significant changes for businesses as well. Under the current system, large businesses could not get a full refund of taxes on their purchases of certain goods and services such as vehicles under 3,000 kg and the gasoline they consume. Refunds were also excluded for the purchase of electricity, natural gas, some telecommunications services, meals and amusements.
The deal will now allow refund of the GST paid by large businesses on all their purchases. This will take effect over a three-year period starting in 2018.
When fully implemented, this will represent a loss of revenue for the Quebec government of about $945-million a year in 2020-2021. The QST on purchases of financial institutions will generate $310-million a year in 2020-2021. That will still leave the government short $635-million a year.
Finance Minister Raymond Bachand said the province had no choice but to make the concession. It was part of the HST agreement Ottawa had signed with Ontario in 2010, which would have given it a competitive edge over Quebec and jeopardize future investments and jobs in the province.