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FROM: MAR-APR 2008 ISSUE | BY R. JASON RICHE
On Halloween 2007, the federal government, as part of its promise to reduce the GST/HST by two per cent, announced that the rate would once again be decreasing, this time from six per cent to five per cent (14 to 13 per cent for HST) effective New Year’s Day 2008 – on Canada Day 2006 the rate dropped from seven per cent to six per cent (15 to 14 per cent for HST).
Businesses
Those that are GST/HST taxable are able to recover the GST/HST that they incur. However, the reduction means increased compliance costs for most businesses, as various systems and pricing information require updating. The expectation is that the experience from the first rate reduction will result in less costs this time around.
As for transitional rules, GST will apply at five per cent (HST at 13 per cent) if tax is paid or becomes payable after December 31, 2007. GST is at six per cent (HST at 14 per cent) if tax is paid or becomes payable before January 1, 2008. Generally, GST is payable on the earliest of the date the consideration is paid and the date a supplier issues an invoice for the supply (or the date payment is due under an agreement). Special timing and other rules apply in certain situations. For example, there are special rules for sales of real property, imports, and financial institutions that are required to self assess on certain cross-border transactions (pursuant to proposed legislation released on January 26, 2007).
And the “factors” used to claim input tax credits on certain employee expenses will be decreased. For example, for reimbursements paid on or after January 1, 2008, a person can use the factor of 4/104, if 90 per cent or more of the expenses are taxable at five per cent GST or 12/112 if 90 per cent or more of the expenses are taxable at 13 per cent HST. Not to be forgotten, special anti-avoidance rules will also prevent non-arm’s length parties from entering into transactions solely to obtain a tax benefit as a result of the rate reduction.
From a purely tax savings perspective, just like July 1, 2006, the only real winners are likely to be those who are generally unable to recover the tax that they incur (e.g., financial institutions and certain public sector bodies).
Consumers
While the one per cent reduction means $5.5 billion less in GST/HST going into federal government coffers per year, this amount is disbursed so broadly that the effect of the decrease is virtually meaningless to your average Canadian. Putting it into perspective, assume that an average Canadian family spends $20,000 annually on taxable goods and services (rent, basic groceries, health care, and education are not taxable), the benefit would be $200. The new housing rebate will be reduced in accordance with the rate reduction but the credit for low-income earners will not be altered. Purchasers of new residential housing where ownership and possession are transferred after December 31, 2007 but who pay tax at a higher rate, may apply for a transitional rebate.
Government
At the federal level, there is no doubt that this rate reduction illustrates the current government’s mandate to decrease taxes. The tax revenue (as noted above) foregone is not insignificant. And while less tax is generally perceived by the populous as being a good thing, it is questionable whether the GST/HST is the best place to swing the axe. Many would argue that the GST/HST is the country’s most effective and efficient tax and it is interesting that while many other countries are instituting their own value-added taxes (or increasing their VAT rates), Canada is moving in the other direction. However, at the provincial level, these rate reductions could spell opportunity. These PSTs have long been viewed as being inefficient and, moreover, damaging to the economic health of their provinces – mainly because they tax business expenditures and thus increase provincial marginal effective tax rates (i.e., the calculation of the tax burden on new investment). The decrease in the GST rate could give these provinces a chance to harmonize (while maintaining or perhaps increasing their current rates). If there is a change in the federal government, it is possible that the rate could increase again – making harmonization (or the imposition of a provincial VAT) a more arduous undertaking for these provinces.
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