With Ontario and BC making the jump to the Harmonized Sales Tax (HST), we’re bombarded with negative stories about paying more in sales taxes. However, the reality isn’t all bad. What is missed is that often the provincial sales tax (PST) used to be charged more than once on the same item. In these cases the HST is actually less than the combination of GST and PST. I’ll illustrate this with a simple contractor example and give you something to look out for on your next contractor bill.
Let’s look at an example using Ontario percentages (5% GST, 8% PST, and 13% HST). Suppose that you hire a contractor to do some work that involves $1000 worth of parts or materials that were subject to GST and PST before and HST now. After July 1, here is the accounting:
– contractor pays $1000 + HST = $1130 for the parts
– contractor collects HST on the entire job from you
– contractor gets back the $130 HST he paid on the parts in the form of an input credit
This way, the HST is only charged once on the whole job rather than added twice to the parts. This means that if the contractor’s parts charge is intended to reflect his actual cost, your bill should have just $1000 for parts (and one big HST amount calculated on the total bill). If the parts charge is $1130 with an additional HST amount charged on the total, then the HST is being charged on the parts twice, and the contractor is pocketing the extra $130.
No doubt some contractors will just put $1130 on the bill and pocket the extra money. Many contractors mark up the parts they use by even more than this. How this is handled will be determined by the competitiveness of the industry. If it is competitive, then some other contractor will do his billing differently or lower his labour price or make some other change that reflects his lower HST costs.
Under the old PST system, resellers often couldn’t recover the PST they paid on the components they bought. This means that the final price of some goods contained more than 8% PST. There were layers of PST hidden from the consumer.
Now, when your contractor presents you with a bill, you can ask whether the parts and materials charges contain the HST the contractor paid for them. If so, then the contractor is essentially marking up these costs.