Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Tax, April 2009
As was widely expected ahead of time, the centrepiece of Ontario's 2009 budget, released March 26, 2009, is a proposed harmonization of the retail sales tax (RST) with the federal goods and services tax (GST). The new single value-added tax is to be implemented, effective July 1, 2010. It will be federally administered and have a combined rate of 13%, with the provincial portion remaining at a rate of 8% and the federal portion at a rate of 5%.
To sweeten the deal, the federal government will provide Ontario with C$4.3-billion in cash transfer payments in two stages: C$3-billion upon implementation of the new combined tax on July 1, 2010 and C$1.3-billion on July 1, 2011.
This is the first major overhaul of the RST since it was introduced in 1961. It will make Ontario the fifth province in Canada to harmonize its RST with the federal GST, and undoubtedly puts more pressure on the remaining hold-out provinces (British Columbia, Saskatchewan, Manitoba and Prince Edward Island) to do the same with their provincial sales tax regimes.
Quebec was the first province to pursue harmonization and did so in stages from the early 1990s. In August 1995, the Quebec Sales Tax (QST) was substantially harmonized with the federal GST. Nova Scotia, New Brunswick and Newfoundland and Labrador combined their provincial sales taxes with the federal GST to create a fully harmonized sales tax (HST) effective April 1, 1997.
Ontario seems to have chosen a hybrid of the Quebec and Atlantic provinces' models. Ontario's single value-added tax will (like Quebec) have a number of unique, "made-in-Ontario" components (discussed below). Some of these parallel the Quebec model (e.g., temporary restrictions on input tax credits for large businesses in certain areas). However, Ontario has also followed the Atlantic provinces in fully harmonizing its RST in key areas such as financial services, which will remain exempt after harmonization; whereas, in Quebec, financial services are zero-rated for QST purposes.
Business groups have long advocated for a single value-added tax on the basis that it will enhance Ontario's competitiveness by lowering the tax burden on investment and removing embedded RST on exports and on business inputs, which can often result in tax cascading (consumers paying tax on hidden tax). The Ontario government estimates that replacing the two sales taxes with one will save businesses more than C$500-million a year in compliance costs (i.e., by reducing the burden of complying with two separate sets of tax rules). Harmonization to a value-added tax is also in line with trends internationally. Canada is the only OECD member country that has both a value-added tax and a retail sales tax; all other countries of the OECD (other than the U.S.) have implemented value-added taxes.
When the single value-added tax takes effect on July 1, 2010, consumers will be paying the new combined 13% tax rate on many items (particularly services) that are currently only subject to the 5% GST. These include: electricity, new homes (there will be no rebate of the tax for homes over C$500,000), real estate commissions, fitness club memberships, newspapers, magazines, Internet access fees, live theatre admissions, taxi fares, and professional services provided by accountants, architects, engineers, graphic designers, commercial artists and lawyers.
Financial Services To Remain Exempt
Financial services will remain exempt from the single value-added tax. As a result, financial institutions will continue to be restricted from claiming input tax credits. This will likely result in an increased tax burden for banks, insurance companies, investment dealers and pension plan trusts, as they will be required to pay (or self-assess, when recipients of cross-border supplies of services) the higher single value-added tax on a broader range of inputs (e.g., administrative services provided by third parties). These increased costs will either have to be absorbed or passed on to consumers through higher fees for financial services.
The same applies to residential rents which remain exempt from the single value-added tax. As a result, landlords of residential properties will continue to be restricted from claiming input tax credits and will face an increased tax burden that they will either have to absorb, or pass on to renters.
The new 13% value-added tax will not be extended to insurance premiums (which will remain an exempt financial service). However, Ontario intends to retain the current 8% sales tax on insurance premiums that are currently taxed under the RST (e.g., group insurance).
The single new value-added tax will likely have less of a psychological impact on consumers if tax-inclusive pricing is adopted (i.e., if the sticker price is the final sale price). In this connection, there are special provisions in the Excise Tax Act setting out rules relating to tax-inclusive pricing in areas under federal jurisdiction. These areas include: inter-provincial advertisement and "specified supplies" such as services made by a bank, passenger transportation services made by a railway or airline regulated under the Canada Transportation Act or by an extra-provincial bus company and supplies of telecommunication services under federal jurisdiction.
The new provisions requiring tax-inclusive pricing were to have been effective April 1997, with parallel rules to have been enacted by Nova Scotia, New Brunswick and Newfoundland and Labrador for sales within those jurisdictions. The Senate, however, refused to pass the legislation to implement the HST in the three Atlantic provinces without an amendment to postpone the requirement for tax-inclusive pricing until provinces with at least 51% of the population (excluding Alberta, which does not have a sales tax) had passed legislation requiring tax-included pricing. It should be easier to reach this 51% hurdle with Ontario now agreeing to create a single value-added tax.
Ontario has negotiated, or provided for, a number of unique, "made-in-Ontario" components to address concerns raised by consumers, small businesses, the MUSH sector, the housing industry and the tourism industry, concerning the impact of a single sales tax on essential goods like children's clothing, purchases of new homes under C$500,000, and transitional assistance.
Children's clothing and footwear, children's car seats and car booster seats, books, diapers and feminine hygiene products will be exempt from the provincial portion of the single sales tax. However, retailers will be entitled to claim input tax credits in respect of supplies of such goods.
Purchasers of new homes worth up to C$500,000 will receive a housing rebate on the provincial portion of the single sales tax. The rebate for new primary residences under C$400,000 will be 75% of the provincial portion of the tax (or 6% of the purchase price). The rebate amount will be reduced for homes priced between C$400,000 and C$500,000. Used residential homes and long-term residential rents will remain exempt from the single sales tax.
Small businesses will be provided with a total of C$400-million in one-time transitional support in the form of a transitional credit to help defray the costs of changes to point of sale and accounting systems necessary to collect the single sales tax. The Ontario government forecasts that most businesses, other than financial institutions with less than C$2-million in annual revenue from taxable sales, will be eligible for a transition credit of up to C$1,000.
Municipalities, hospitals, universities, colleges, school boards, charities and qualifying non-profit organizations will be able to claim rebates for the provincial portion of the single sales tax. Rebates (as a percentage of the tax paid) will be as follows: municipalities (78%), hospitals (87%), universities and colleges (78%), school boards (93%), charities and qualifying non-profit organizations (82%). Federal GST definitions of these public service bodies will apply.
The RST rate on transient accommodation, such as hotel rooms, is currently 5%. With the new single value-added tax, the provincial portion would increase to 8%. The Ontario government will allocate C$40-million of annual net revenue associated with the difference in these rates to support destination marketing in Ontario tourism regions.
Ontario will also retain a sales tax on private transfers of used motor vehicles. This is intended to ensure a level playing field between used vehicles sold through dealerships and those sold through private sales.
RST is currently collected on alcoholic beverages sold through licensed establishments at a rate of 10% and on alcoholic beverages sold through retail stores at a rate of 12%. Under the single sales tax, the provincial rate of these products will fall to 8%. To maintain socially responsible consumption and to protect existing revenue, the Ontario government intends to make adjustments to current alcohol fees, levies and charges when it introduces the single sales tax.
Transitional assistance will be also be provided for eligible individuals and families. Eligible families with an income of C$160,000 or less will receive three payments totalling C$1,000. Eligible single individuals with an income of C$80,000 or less will receive three payments totalling C$300. The first payments will be made in June 2010, with subsequent payments to follow in December 2010, and June 2011.
The budget also proposes a new ongoing refundable sales tax credit for low- to middle-income adults and children. The sales tax credit will be paid quarterly starting in July 2010, when the new sales tax comes into effect. The new sales tax credit will provide annual relief for up to C$260 for each adult and each child.
Input Tax Credit Restrictions for Large Businesses
Large businesses (those with annual taxable sales in excess of C$10-million) and financial institutions will be restricted from claiming input tax credits in certain areas. These areas are:
- energy, except where purchased by farms or used to produce goods for sale;
- telecommunication services other than Internet access or toll-free numbers;
- road vehicles weighing less than 3,000 kilograms (and parts and certain services) and fuel to power those vehicles; and
- food, beverages and entertainment.
The restrictions are intended to be temporary and would apply only to the provincial portion of the tax. After the first five years of implementation of the single sales tax, full input tax credits are to be phased in over a three-year period. Quebec implemented similar restrictions for large businesses that were also intended to be temporary, but have yet to be completely removed.
Businesses that are entitled to claim full input tax credits, may wish to defer purchases of taxable tangible personal property (e.g., computers, software, office furniture and equipment, vehicles) until after July 1, 2010. Even though such items would be subject to the higher single sales tax of 13%, the tax would be fully recoverable as an input tax credit, whereas if such items are purchased prior to that date, the RST would not be recoverable. The reverse is the case for taxpayers with restricted input tax credits (e.g., financial institutions, residential landlords, consumers), who have an additional incentive to make such purchases prior to July 1, 2010. Purchasers of new homes over C$500,000, for example, will likely want to accelerate their purchases prior to July 1, 2010.
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