Background
The Ontario budget released on March 26, 2009 announced that the eight per cent Ontario provincial sales tax (PST) will be harmonized with the current five percent federal goods and services tax (GST). If enacted as proposed, the harmonized sales tax (HST) will be implemented on July 1, 2010. The budget did not provide many technical details regarding the HST, but it appears that the GST rate will be increased from five per cent to 13 per cent for taxable transactions in Ontario. This is the same rate as the HST that applies in Nova Scotia, New Brunswick and Newfoundland.
Benefits and Costs
The major benefit of harmonization is that it will eliminate unrecoverable PST for most businesses in Ontario. Currently, businesses pay PST on a broad range of goods (and a limited range of services) acquired in Ontario unless they qualify for a specific exemption such as the production machinery and equipment exemption. The HST will eliminate the non-recoverable PST burden, as the HST will generally be recoverable through the input tax credit mechanism. The budget states that studies have shown that most of these tax savings are passed on to consumers through lower prices.
Financial institutions will be major business losers under the new system, however. The budget documents indicate that financial services will be exempt under the HST, with the result that businesses in the financial sector, such as banks, will have a limited ability to recover HST paid on expenses relating to their financial activities. The increased burden of unrecoverable tax may lead banks and other financial institutions to look at ways to reduce their tax cost, such as relying more on in-house resources than on third party suppliers. Another issue for financial institutions is how Québec will react to Ontario's decision to exempt financial services. When Québec harmonized its sales tax regime with the GST by introducing the Québec sales tax (QST) in 1992,it zero-rated financial services so that financial institutions are able to recover QST. Québec, however, may decide to follow Ontario's lead and remove zero-rating, which will increase the QST burden on financial institutions operating in Québec.
Consumers will also bear a significantly higher tax burden, as the tax base for HST will be much broader than is the case with the PST. As noted, Ontario PST applies to a limited range of services, whereas GST applies to all services other than those that are specifically exempt. In addition, a number of PST exemptions that benefit consumers will no longer apply once the tax is harmonized. The HST will provide only a few point-of-sale exemptions for the provincial portion of the tax (e.g., certain items for children). Another area where the HST will significantly impact consumers is on the cost of new housing. GST applies to the sale of new residential housing (with a partial GST rebate where the price does not exceed $450,000). PST applies only indirectly on the cost of building materials. The HST will now apply to sales of new housing, with a rebate of 75 per cent of the provincial component on housing priced under $400,000 (and a reduced rebate for housing priced between $400,000 to $500,000). The HST will also apply where new housing in Ontario is converted into rental accommodation, triggering a self-assessment obligation on the developer. This may be a significant issue for developers if the current difficult conditions in the housing market continue.
The HST will also apply to professional services such as legal and accounting services. While the five per cent GST currently applies to these services, Ontario PST does not ― although PST is levied on legal services in British Columbia and on legal and other professional services in other PST provinces (Saskatchewan, Manitoba and Prince Edward Island). The implementation of the HST will significantly increase the cost of professional services provided in Ontario, although based on the design of the GST, there will likely be relieving rules for services provided to non-residents of Ontario.
Special Features
The budget papers indicate that the HST will generally follow the structure of the GST. Ontario, however, announced that there will be restrictions on the ability of large businesses (those with annual taxable sales of over $10,000,000) and financial institutions to claim input tax credits on expenses for energy, telecommunication services, road vehicles under 3,000 kilograms, and food, beverages and entertainment. These restricted credits are to be in place for a period of five years, after which the restrictions will be phased out over a three-year period. These restrictions are similar to those that apply under the QST for large businesses. When the QST restrictions were introduced in 1993, they were also supposed to be temporary in nature, but have remained in place.
Ontario will also retain an eight per cent tax on certain types of insurance. Currently, a broad range of insurance coverage is subject to PST. The budget papers indicate that the same type of insurance premiums will continue to be taxed after harmonization. This is similar to the taxes on insurance that were retained by Québec when it introduced the QST.
Issues for Businesses
Businesses that operate in or supply goods and services to Ontario will have to consider the impact of harmonization on their operations ― in terms of both costs and revenues. Generally, the implementation of the HST will be beneficial for businesses, but those that deal directly with commercial customers or with consumers, such as the housing industry, that are unable to recover the tax, may have to take the effect of the HST into account in their pricing.
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