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ShoppingFernando Morales/The Globe and Mail

Consumers will bear the brunt of the Ontario and British Columbia governments' plans to harmonize their provincial sales taxes with the federal goods and services tax, a new report concludes.

Businesses will be the big winners, as the combined tax reduces their costs by a total of $6.9-billion in Ontario and British Columbia, Toronto-Dominion Bank chief economist Don Drummond says in a report released on Friday.

But the tax burden will shift from businesses to consumers as they begin paying levies on a broad range of goods and services that are now exempt, the report says. Businesses will pass on the majority of their cost savings to consumers, but the lower sticker prices will not fully offset the higher tax rate, the report says. As a result, the effective tax rate on consumption will increase by 1.5 percentage points in both provinces.

Harmonization does not take effect until next July 1 in the two provinces. But it is shaping up to be a major political headache for Ontario Premier Dalton McGuinty and British Columbia Premier Gordon Campbell.

"In response to consumer concerns, we thought it would be worthwhile to highlight what implications the reform will have on Canadian households and inflation," Mr. Drummond says in the report.

The report was released one day after a by-election in Toronto, where the governing Liberals sailed to victory after the opposition candidates failed to turn the race into a referendum on the proposed harmonized sales tax.

The Ontario government announced in March that it plans to combine the 8 per cent provincial sales tax and the 5 per cent goods and services tax into a new value-added tax of 13 per cent.

British Columbia, looking to close a looming tax gap with Ontario, announced plans in July to create a harmonized sales tax of 12 per cent.

Harmonization is aimed at making businesses more competitive as both provinces struggle with slowing economies. But the McGuinty and Campbell governments are under siege for hitting consumers with a tax on everything from haircuts to new home purchases over $500,000. Both provinces have moved to douse a storm of criticism over the harmonized taxes by exempting a number of basic goods, including children's clothing and diapers.