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FROM: JUL-AUG 2009 ISSUE | BY R. JASON RICHE
In its provincial budget tabled on March 26, 2009 the Ontario government announced that effective July 1, 2010 it will harmonize its eight per cent PST with the federal GST, resulting in a brand new sales tax regime in that province – an Ontario Harmonized Sales Tax. This new tax will be administered federally and will be imposed at a rate of 13 per cent. This marks one of the biggest changes to Canada’s sales tax landscape since 1997, when New Brunswick, Nova Scotia, and Newfoundland and Labrador harmonized their respective PSTs in a similar fashion.
Winners and Losers?
The GST/HST is a value-added tax, so tax is remitted all the way through the supply chain and is only unrecoverable when consumers purchase goods and services for their own consumption, or when businesses purchase goods and services for use in the provision of exempt activities. In comparison, unrecoverable Ontario PST often results in a cost for businesses when they acquire taxable inputs.
Many businesses will see a drop in the unrecoverable tax that they incur and the overall impact should be a reduction or elimination of tax cascading (tax imposed multiple times on the same set of inputs), resulting in a more tax efficient supply-chain. Over time, this should result in lower prices. However, the budget noted that credits will be restricted on the eight per cent provincial component of the OHST for certain business inputs, similar to the Quebec Sales Tax.
This must be balanced against the fact that the GST/HST regime imposes tax on a broader base of property (tangible, intangible, and real) and services. PST applies to a much narrower base that generally includes tangible property and some services. The result is that consumers and businesses engaged in exempt activity will likely see a rise in tax costs under the new regime.
To ease the burden on individual consumers, Ontario is instituting several initiatives, including: a monetary transitional benefit for some Ontario families; increased sales and property tax credits; an income tax rate cut on the lowest marginal rate; and relief from the OHST on new home purchases. Ontario has asked the federal government to allow point-of-sale exemptions on certain items that are currently not taxable under the PST regime such as books and children’s clothing. For businesses there will be decreases in corporate income tax rates. While some argue there will be losers as a result of the OHST, it is likely this new regime will benefit the economic health of all Ontarians.
Too Soon To Prepare?
Given all the changes that need to occur, there is not much time to prepare. Businesses will need to consider the following:
- Financial and budgeting implications. The potential decreases in operating costs need to be balanced against the potential impact increased consumer cost may have on pricing and buying patterns. The cash-flow considerations of collecting, remitting, and incurring more tax need to be considered along with the costs related to updating tax codes, invoicing changes, etc. In addition, it will be crucial to review operations for overpayments of Ontario PST and to ensure refunds are claimed before the ability to claim them expires.
- Existing contracts with suppliers and vendors. It is necessary to review existing contracts to clarify whether the wording and terms are appropriate for an OHST regime. Transitional rules (not published at the time of writing) should be considered and addressed in this context, particularly contracts that will straddle the implementation date.
- Timing arbitrage. The tax payable on large purchases of equipment, software, etc. that is unrecoverable today may be recoverable post July 1, 2010. Conversely, in certain cases it may make sense to accelerate a purchase. Businesses may want to analyze the pros and cons of purchasing versus leasing with this timing in mind; however, use caution as the transitional rules are still unknown.
There are many other considerations, but these points may help businesses start the discussion. Any business with operations in, doing business with, or serving customers in Ontario should consider the impact of the OHST.
Who’s Next?
B.C., Saskatchewan, Manitoba, PEI, and arguably Quebec and Alberta remain with an unharmonized sales tax regime. I speculate that a couple of them may jump on board in the near future. The Canadian sales tax landscape is changing – stay tuned as the harmonization train rolls into a station near you.
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