Monday, March 30, 2009

Understanding Ontario’s Switch to the HST

Ontario’s 2009 budget included a switch from a retail sales tax separate from the GST to a harmonized sales tax (HST). Superficially, this may seem like a trivial change because the retail sales tax was 8% and the provincial portion of the HST will also be 8%. However, there are two main differences that will affect Ontarians.

The first difference is known to most people: the HST will apply to more good and services than the retail sales tax does. The main change is that services will now be taxed at the 13% HST rate rather than just the 5% GST rate.

If this were the only change, then it would represent a substantial tax hike. But, there is another less well understood difference that changes the equation.

Businesses can now use input tax credits (ITCs) for the HST. A business that collects HST from its customers doesn’t have to give all this money to the government. The business deducts the HST paid on the products and services it purchases to run its commercial operations. This system was used for the GST, and now it will apply to the provincial portion of the HST as well.

The net effect of ITCs is that money cycling through the economy is taxed less often with the HST than it was with the retail sales tax. To summarize:

- Total sales tax remains 13%.
- HST will apply to more goods and services than the old retail sales tax did.
- Businesses only have to pay their net HST.

The overall effect is to lower the sales tax charged to businesses, on average. Of course, some businesses specializing in services (such as my consulting business) will pay more sales tax, but the average business will pay less.

In theory, lowering the sales taxes on businesses should lead to lower prices and a net lowering of costs for consumers. In practice, we’ll have to see how things play out.

23 comments:

  1. This will have a huge impact on an already crippled renovation and building industry. Adding this new mandatory tax on home purchases, construction and renovations will just drive these sectors into the ground. This article explains how most of us feel Ontario HST Attacks Renovators and New Home Builders

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  2. I recently started a small business that was not gst applicable. The Liberals have driven up my fees by 8% by introducing the new harmonized tax. I have fixed fees so I am taking the hit rather than pass it on to the client.

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  3. Other provinces reduced their slice of the pie when moving toward HST. Of course, Ontario would not want to actually be stimulating the economy...that would be ludicrous.

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  4. Better for business? What a crock!
    These HST stories continue to mis-lead the public.
    I am not pleased that these fabricated stories are allowed and continue to be spread.
    Please All News Outlets and Reporters.!!!
    Do some research before allowing the Ont. Liberal Government to spread this lie.
    In Ontario all business that buy and re-sell products or manufacturing companies that produce products plus a host of other exemptions are now already PST free.
    Business in Ontario is alreay set up PST FREE EXEMPT and all that a supplier requires is a blanket PST Exempt Form. Then business can buy PST Free before the raw materials reach the factory or outlet etc.
    Now... The way HST works is that a business must pay the combined HST tax up front then later fill out piles of paperwork to try and claim it back on a quarterly basis. Thus creating more work for the business and putting far more control in the Feds hands on what we do in Ontario. Government will have the control to place more restrictions and rules (hoops) on what business can claim as tax free.
    If you don't believe me visit the Ont. Gov, site.
    This is outlined very clearly on the PST RST act Guide #400
    Here is the link.
    http://www.rev.gov.on.ca/english/guides/rst/400.html

    Don't Fall For The Lies.
    Business will not pass on any savings.
    As it stands now they should pass on savings.
    They are mostly PST free already!!!

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  5. Max: Any change this big will definitely produce some winners and losers. Unfortunately, my small business and home builders seem to be losers here.

    Anonymous: I'm in the same boat you are with my consulting business.

    Connie: It will be interesting to see if the other political parties in Ontario will be able to use this HST change to political advantage. Whether the switch is good for the province or not, the Liberal string of broken promises has made the public suspicious of everything they do.

    Anonymous(2): I read the RST document you pointed to. Businesses certainly get exemptions for certain things, but it seems clear that there will be more exemptions with the HST. On balance, it still looks like an overall tax reduction, but I can't say I'm certain of this. I take your point about having to pay HST up front and get reimbursed later. This would lead to cash flow issues for some businesses.

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  6. Massage Therapy Treatments will also be subject to the new HST. With an aging population, high stress society and recessive economy, this much needed health service will now be made unaccessible to many.

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  7. Virginia Beattie, RMTApril 22, 2009 at 7:58 PM

    This has really riled up Massage Therapists, hasn't it. And for good reason. We take a step forward (new WSIB coverage) and two steps back, with an 8 percent, unabsorbable tax hike. Scott, and anyone else who benefits from, or knows someone who benefits from, please follow this link and send a prewritten email to the Ontario Provincial Parliament. http://www.omta.com/default.asp?id=1338&rid=OTAwMjMy

    Thank you so much for your support.

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  8. The government is spreading a lot of lies about the HST being beneficial.

    I run a consulting company.
    If i charge 30$ per hr + 5% tax, now i will have to charge 30$ + 13% tax. Guess what I will have to charge my customers 33.9$ instead of 31.5$. Even though they will get some of the extra money back otherways , they will not be happy paying more for the same service.

    I may have to reduce my rates , in turn my income to accommodate for the higher tax rates. Canadian govt is notorious for radical tax changes that impact common man without regards to public opinion.

    The dissolution of income trusts 2 years back is another prime example which cost a lot of retirees their retirement savings, as the income trust shares took a beating..

    Guess where the extra tax money is going , Our elected politians and Public sector employee with pay raises and gold plated pensions..

    Guess where the money is coming from , the private sector employees who are struggling to keep their jobs with pay cuts and lay offs..

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  9. Anonymous: I do consulting work as well, and the HST will hurt my business. Opinion seems split on whether the HST will be a net benefit or not. One thing for sure is that there will be both winners and losers. You and I seem to be on the wrong side.

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  10. Everyone is at a loss, joe public will simply be paying more tax for many items and all services. The real winnners will only be the government and probably big corporate business(greater write offs).

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  11. I don't have the same intelligent level as our beloved Liberals leader. I am one of the condo board members in Toronto. At present, we only need to pay GST to most of our service providers. From a test run of our 2008 annual budget, we are looking at 5 to 6 % increase in expenses once the HST bill is passed. Together with the normal CPI adjustment, the condo owners would be lucky to have their management fee increase below 8% next year. What am I going to response for that? I will try to use all my influence to convince others not to vote Liberals in the next election. In fact, I have already changed my vote since last time Liberals told us “no tax increase” but then they increase the OHIP contribution.

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  12. I am an owner of a manufacturing company. Just about everything is currently PST exempt.
    The HST will cripple my company's cash flow. And who is going to pay for the filling out and filing of all the forms?
    It's just going to cost my company more money.
    I have some clients that are very large corporations. Do you think that they will except price increases? Not a chance.
    Thanks for another bad money decision Liberals!
    Makes me sick.

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  13. Well, looks like BC is harmonizing its taxes too. Looks like a runaway train now.

    In 1988 when the GST was introduced (by a conservative government no less), people thought the economy would tank. Yet, it survived.

    No one likes change, no one likes taxes but if governments said "ok, no more tax increase but you are losing another chunk of health care, we will eliminate child care allowances and cut back on OAS since we have only have enough tax revenue for x, y and z" we would have a similar hue and cry.

    I see both sides of the argument and I am neither for or against it since I both collect and pay GST and its too early to forecast either sunny skies or doomsday forecasts.

    However, it brings up a much larger point when it comes to taxes. What we have to do is clearly tell our elected officials what we want. More taxes for more services or less taxes for less services. We can't have our cake and eat it too.

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  14. So I guess I, another small business, will also get hit by this HST. Currently I sell a software product out of province so I don't charge PST. Since I make less than 30K per 4 quarters I also don't charge GST. Does this now mean I will be forced to charge the HST?

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  15. Anonymous: I'm not sure what the new rules will be for collecting HST on low revenues. It looks like you need to either ask an expert or do what I do which is to hunt through CRA documentation yourself.

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  16. Could be worse. My wife just got back from Sweden and the VAT there is 25%

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  17. Below is a note from my MPP who is also a cabinet minister. Looks like he is trying to pin this on the Feds.


    Thanks for your note Mike - appreciated.

    There is much confusion about the HST. The new tax will only be
    initiated when the federal government passes federal legislation making
    it so.

    From Ontario's perspective (and unlike other provinces) the HST is but
    part of a broad package of tax reforms that will see 93% of Onarians
    actually end up with more money in their pockets. I can tell you that
    this new set of reforms will cost the provincial government about $2.3
    BILLION is LOST revenue.

    Mike - unless you have a family income in excess of $160,000 per year
    the series of reforms will put money in your pocket.

    Hope this helps..........kindest regards......ted

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  18. At least we have imported food from US, Mexico, Peru.
    They don't have HST on gas, hydro, water, their prices will not rise. Forget about Canadian farmer, baker, or other producer.

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  19. I'd like to see how "the series of reforms will put money in my pocket"
    I'm doing taxes.
    Ontario Liberal government is giveing close to nothing.
    You won't get credit for housing expenses if you make more than 32K
    This is ridiculous.

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  20. Great post!

    In practice, I think this could work for new businesses. I don't really see existing Ontario businesses passing anything to consumers but price increases, especially for services.

    Poor Vancouver who already has an inflated Real Estate Market, with B.C. also introducing HST, buying a new house over $400,000 will kill you.

    As a business owner myself, it is tough raising fees for clients in this recessionary environment. I don't want to do it.

    We have posted an article on this:

    http://mastermindgrowth.com/headline/harmonized-sales-tax-hst-will-businesses-pass-6b-tax-savings-on-to-consumers/

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  21. Plain and simple, anything the government does will never take money from the government's coffers. HST allows them to tax money more often. HST will screw us all, unless of course if you are on welfare or EI, you will receive a larger HST rebate check for your diligent job aviadance. Paid for of course by those of us who bust our ass every day...the only losers.


    Anyway, all of you who are bitching, stop bitching unless you are willing to unite, stand on parlament hill in the hundreds of thousands and say enough is enough. Anything else if fruitless.

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  22. In a perfect world, reducing the multi-step taxation would indeed lower costs for everyone. However, by the very nature of humanity, we do not live in a perfect world.

    How many business owners does anyone honestly see passing on their tax savings at the consumer retail level pricing? In my opinion, what we will most likely see at best are pre-tax prices at the end consumer level remaining static. I highly doubt I will find any evidence of businesses passing on their savings in the form of lowered end-user prices. I will keep my eyes open though, and try to remember to come back and give an update on my observations about 6 months after this all goes live.

    (And this reply doesn't even touch on those businesses that will actually see increased overhead costs due to the changes - but yes, I am aware of those as well.)

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  23. @Sethra: I agree that businesses won't want to pass on any savings to consumers. Businesses always prefer to increase their prices if it doesn't affect sales. Whether or not future savings are passed on to consumers will depend on how competitive the industry is. In an industry where there is constant pricing pressure due to fierce competition, consumers will get the savings. When there is little effective competition, businesses will pocket any savings.

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