The Harmonized Sales Tax, by Ross Wilson

When it comes to the Harmonized Sales Tax, (HST), there appears to be more misinformation than fact out there. Accordingly, what follows is a summary of what this measure entails.

The TD Economics Special Report, September 18, 2009, which can be found at http://www.td.com/economics/special/dp0909_hst.pdf, provides an excellent in-depth analysis. While I have attempted to be accurate in my comments, this paper is not an official OLP document and should not be treated as such.

What is the Harmonized Sales Tax?

With harmonization, the rules that govern the provincial retail tax are integrated with those of the federal goods and service tax to create one final tax – the HST.

Changes in Taxable Items under a Single Sales Tax

The Ontario Government’s tax reform package is good policy

Without question!

First, businesses must currently comply with separate provincial and federal tax systems. The Canadian Federation of Independent Businesses says harmonization will save businesses $100 million a year in reduced red tape and a further savings of $500 million a year thanks to administering a single tax. Further, the federal government will foot the HST’s administrative costs.

Second, the HST is a value-added tax, which only taxes the marginal increase in value added by the business providing the good or service. This avoids the situation, as currently exists with the PST, where a product may be taxed multiple times at different stages of production before being taxed one last time when purchased by the consumer. The cascading tax-on-tax effect of the PST hides a lot of the tax currently paid. Because 130 other countries have a value-added tax, Ontario goods subject to the cascading provincial sales tax are at a disadvantage.

When the HST was implemented in the Atlantic Provinces, business investment in new products, technologies and markets rose by 12 per cent while consumer prices fell as business savings were passed on.

In addition to the HST, the government’s comprehensive tax reform package includes other changes, such as eliminating capital taxes, cutting the corporate income tax rate, and exempting more small and medium sized businesses from the corporate minimum tax. These initiatives will lead to job creation, a more competitive economy, and a resulting increase in prosperity. (Canada ranks 26^th among 30 OECD countries in productivity growth and second to last in the G7 in advanced, high value-added manufacturing.)

Some of the tax burden, as a result of these changes, will shift from businesses to consumers. Beginning July 1^st, 2010, the HST will apply to the same goods and services as taxed by the GST. This is a larger tax base than the current PST. The TD Report predicts that, while businesses will pass on most of their cost savings to consumers, the lower prices will not fully offset the higher taxes. It predicts that 80% of the cost savings will be passed along in the first year but it may take up to 6 years for the full savings to flow through to consumers.

To help individuals and families adjust to the increased tax burden with the HST, the government is providing $10.6 billion in tax relief for people over three years including:

• A refundable Ontario Sales Tax Credit of up to $260 a year for low-to middle-income individuals and families

• An enhanced refundable Ontario Property Tax credit to low-to middle-income homeowners and tenants

• A 16.5 per cent cut in the tax rate on the first $36,848 of taxable income earned by all Ontarians.

93% of Ontario tax payers will pay less personal income tax.

As well, eligible families with an income below $160,000 will receive three payments from the provincial government totalling $1,000 and eligible individuals with an income below $80,000 will receive three payments totalling $300.

The government has indicated that, overall, the tax reform package is revenue-neutral, not the “tax grab” that the opposition parties accuse it of being.

What is the Overall Impact of the harmonized tax?

According to a TD Bank report, Ontario consumers will experience an 8 percentage point increase in the posted tax rate on about 19% of their expenditures leading to a 1.5 percentage point increase in the effective tax rate on their overall purchases. Partially offsetting this increase, the report predicts that the majority of the tax savings by businesses will be passed on and consumers could see a 0.8 percentage point drop in the pre-tax price of their overall purchases. The net effect will be a permanent 0.7% increase in the consumer price index in Ontario.

“Informed opinion” says HST will encourage investment, make us more competitive

Mainstream economists generally agree that combining the provincial and federal taxes will encourage investment and make Ontario more competitive. The C.D. Howe Institute and Fraser Institute both support the change as do major business groups such as the Canadian Federation of Independent Business and the Ontario Chamber of Commerce. Following some other comments by knowledgeable Canadians:

“The most positive feature is the impact it (the single sales tax) will have on the new business investment and therefore, jobs and wages. We need more investment by Ontario business to improve prosperity for the average Ontarian.”

Roger Martin, chair

Institute foe Competitiveness and Prosperity

“...Sales tax harmonization will reap large benefits to the Ontario economy. The McGuinty government will go down in history for its leadership in moving ahead with a major tax reform that will only help the Ontario economy in the long run.”

Jack M. Mintz, Palmer Chair in Public Policy

School of Public Policy, University of Calgary

“These cost-saving measures for businesses will enable them to invest in machinery and equipment and ultimately pass on lower costs to consumers in lower prices.”

Len Crispino, President and CEO

Ontario Chamber of Commerce

“It isn’t often that political leaders take policy actions that they know will be highly unpopular. The decisions by Ontario Premier Dalton McGuinty and B.C. Premier Gordon Campbell to harmonize the provincial sales tax with the federal goods and service tax are rare shows of political courage.”

Gwyn Morgan

Retired and founding CEO of EnCana Corp.

Federal Finance Minister Jim Flaherty has been reluctant to support his Ontario Conservative cousins in their strong criticism of HST. Instead, he has described the harmonization as the most important thing provinces can do to improve their competitiveness.

Not everyone is on side

It’s also fair to say not all businesses are on side.

The construction industry opposes the treatment of new housing which, under harmonization, will be taxed an additional 8%. They’re concerned this will also drive up the prices of existing homes as demand shifts to the resale market to avoid paying additional tax.

But there are mitigating factors that may actually see a price-drop on a new home valued under $500,000, (about 90% of new homes in Ontario). New home buyers will get a 75% rebate on the provincial portion of the HST on the first $400,000 they spend. Homebuilders also currently pay a significant amount of provincial tax on inputs – everything from lumber to nails. It’s estimated that being able to claim such input tax credits with the HST will mean a 3.2 per cent cost savings for builders.

Harmonization will add 8 per cent to mutual fund management fees. Mutual fund companies will likely pass on the increase to investors, although two of Canada’s largest fund companies are considering setting up funds in sales tax free Alberta. In the low-fee exchange-traded fund (ETF) market, billions of dollars of business could potentially leave Ontario. These funds cater to very price-sensitive investors and, if fees are higher in Ontario, the same ETFs could be purchased in the U.S. This area requires further consideration.