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Why PST in B.C. marks return of a 'profoundly stupid tax'

As if someone was playing a bad April Fools' joke on an entire province, British Columbia disbanded the harmonized sales tax on April 1, and reverted back to a 7-per-cent retail sales tax regime based on the results of a 2011 referendum, when the B.C. public voted to abandon the HST and return to a provincial sales tax.

Had the HST forces secured approximately 76,136 more votes out of the 1,610,125 votes cast, the HST referendum would have passed, albeit by one vote.

In my view, there isn't a public policy initiative in modern Canadian history that was more poorly implemented, more poorly sold and more poorly managed than the introduction of the HST in B.C. It will be in public administration and political science textbooks as an example of how not to do it. And the chapter will be titled 'Fail.'

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The HST's failure in this province was the result of a number of reasons. I'll pick four:

  1. The tax was introduced immediately after a provincial election, during which it wasn’t campaigned on or debated, creating a political backlash that led to the referendum.
  2. There was a referendum campaign where the ruling B.C. Liberals chose the wrong statute to govern the rules, thereby playing to lose. (They could have conducted it under the Recall and Initiatives Act, which would have likely resulted in a vote to retain the HST, but they chose the Referendum Act, where 50-per-cent-plus-one wins).
  3. There was a campaign of disinformation by opponents.
  4. Having a referendum at all (name one government that has won a referendum on a tax increase!).

If they'd asked me, I'd have told them to establish a lower provincial portion of the HST (to, say, 5 per cent, not 7 per cent), so that the combined tax was 10 per cent, not 12 per cent, and to continue the provincial-sales-tax-based exemptions, such as children's clothing and bicycles, until after the next election.

Alas, nobody asked me.

So, where are we, a week after the conversion back to PST?

Well, businesses in B.C. have been trying to deal with the conversion based on regulations and transition rules that were only recently released. They've been scrambling to get their invoices out before March 31, which will bear 5 per cent goods and services tax and 7 per cent HST.

Invoices dated after March 31 must bear GST at 5 per cent and PST at 7 per cent. Although B.C. businesses will continue to receive the input tax credit (ITC) on the 5-per-cent GST component, B.C. businesses large and small will no longer receive the 7 per cent HST ITC on a going-forward basis.

In my industry, we had to bill out all of our clients as of March 31; otherwise, those clients would not be entitled to claim the ITC on the 7-per-cent component of the HST. In many cases, this was an artificial time to bill matters that shouldn't have been billed until they were finished, affecting cash flows of clients and lawyers.

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While the PST amount remains the same on virtually all goods (and pre-HST exemptions remain largely the same as before the HST was implemented), the PST applies almost exclusively to goods, as opposed to services.

If you're a government in need of revenue for health care, education and social services, you want to tax services. This is because the proportion of personal income spent on goods is declining, whereas the portion of personal income spent on services is increasing. In some ways, the boomers have all the 'stuff' they need, so they won't be paying tax on goods in the future. But they will be buying services, which aren't taxed provincially under the PST.

Legal services are among the few under which the PST will apply. An NDP-led provincial government extended the application of PST to legal services in the1990s. There are many people and organizations that believe there should be no tax at all on legal services. On family law, poverty law and criminal law, where a sales tax on legal fees can be a real barrier to accessing justice, I wholeheartedly agree.

But the argument for no tax on any legal services is disingenuous when it comes to commercial litigation, mergers and acquisitions, securities law, commercial transactions, franchising, insurance and other matters where the invoice amounts can be in the thousands or, indeed, the hundreds of thousands of dollars. I'm all for funding health care, education and the justice system, but unless you have oil gushing from the ground, or diamonds on the soles of your shoes, you have to pay for your valuable public services through taxes.

The PST is a profoundly stupid tax for dozens of reasons and it may well create a giant sucking sound of legal work flowing off the desks of B.C. lawyers and onto the desks of other legal service providers who don't have to charge the 7 per cent PST.

Let me explain: There's some tax work that can be done by lawyers or accountants. As of April 1, accountants no longer have to charge the extra 7-per-cent tax that they charged on all accounting services within the HST regime. But tax lawyers must charge 7 per cent PST, making tax advice from accountants less expensive than tax advice from lawyers, and effectively giving accountants a 7-per-cent competitive advantage for much of the same work.

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Putting lawyers at a competitive disadvantage with accountants is one thing,  but if I were the B.C. minister of finance, I might want the tax dollars that the accountants were charging (and collecting) in the HST days.

Lawyers in Canada now have mobility rights, which permits them, under certain conditions, to practice another province's laws from their own province.

For example, I regularly draft franchise disclosure documents for use in Alberta, Ontario, Prince Edward Island, New Brunswick and Manitoba from my offices in Vancouver. However, even though the work has no B.C. application (we have no franchise disclosure legislation), I will have to charge 7 per cent B.C. PST if my client operates in B.C. The client receives no ITC on the 7-per-cent PST portion of the account as it would under HST.

If the client chose one of my competitors in Ontario, that client would pay Ontario HST and be able to get the tax back in the form of an ITC. This means I risk losing clients to my colleagues in Ontario and other provinces unless I make a straight 7-per-cent reduction to the account.

There is also a disincentive for clients in Ontario and other HST provinces using B.C. lawyers to perform transactional work that relates to B.C. (even if B.C. lawyers are within the same national firm in the Vancouver office), if there is no ITC available.

And last, because the HST and the PST rules differ in terms of where the tax is applied, it is also possible that an Ontario client that carries on business in B.C. may be subject to both Ontario HST (where an ITC can be claimed) and B.C. PST (where it cannot).

In short, the people voted to return to the PST and this has to be respected. But many will discover that the HST wasn't so bad after all because the PST, which former B.C. finance minister Kevin Falcon once called a "stupid tax," is, any way you look at it, a profoundly stupid tax that may drive businesses to use service providers, such as  lawyers, in another province.

Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp. in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.

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