On March 26 2009, the Ontario Government announced in its 2009 budget the harmonization of Ontario’s 8 per cent retail sales tax (“RST”) to the federal goods and services tax (“GST”), with a current rate of 5 per cent, into a single value added tax (“Ontario HST”) at 13 per cent. The new Ontario HST is expected to begin July 1, 2010 and will be administered by the Canada Revenue Agency (the “CRA”), in a similar manner as the GST. Businesses will file a single sales tax return with the CRA, comparable to system now existing in Nova Scotia, Newfoundland and New Brunswick.
The intent of the Ontario HST is to harmonize the RST with the GST, thereby changing the Ontario RST from a single-stage sales and use tax to a multi-stage value added tax. It will apply to virtually all property and services sold in Ontario, including new housing (with a rebate up to certain thresholds) certain children’s items, books, feminine hygiene and other products will be exempt. These exemptions will make it difficult for retailers to apply the Ontario HST, particularly if the new Ontario HST is applied on prices that include tax (the federal legislation calls for tax included pricing once enough provinces, that is 50 + 1 per cent of the population, are harmonized.) Currently, though, there are no plans for Ontario to adopt tax-included pricing.
Miller Thomson Analysis
In addition, special provisions will not be implemented for Financial Institutions (“FIs”) similar to those that were implemented in Québec with the Québec Sales Tax (zerorating of FIs services such that FIs were entitled to credits for the tax paid on inputs, then compensated by a special capital tax). Québec passed a bill in the National Assembly stating that it will harmonize “like Ontario in return for 2.3 billion dollars.” If this occurs, it may alleviate some of the pressure on FIs to relocate business operations. The new place of supply rules and imported taxable supply rules for branches may impact this as well.
Significantly large businesses (i.e. those with annual taxable sales of at least $10 million) will not be allowed to claim credits on certain expenses, such as energy or certain telecommunication services for the first five years after implementation.
Insurance is currently subject to RST but not GST, which upon implementation of the Ontario HST would mean that insurance would not be subject to tax. However, Ontario has stated that it will keep a specific 8 per cent tax on insurance premiums. In addition, charities and non-profit operations will be made "whole" and will be eligible for rebates for tax paid. The tourism sector will also be provided with certain incentives and increased funding to compensate for the higher sales taxes on tourists (hotels and other accommodations are currently subject to 5 per cent but will increase to 8 per cent under the new Ontario HST).
However, the primary benefit of harmonizing the RST with the GST is that it would effectively “exempt” almost all business inputs from sales tax and, therefore, alleviate the RST burden on most businesses with operations within Ontario and stimulate business investment. The current common RST “exemptions” of goods purchased for resale, manufacturing machinery and equipment, and research and development equipment, will be extended to all inputs as the new Ontario HST will be fully creditable tax to most businesses. Similar to the GST, the credit would include purchases for desks, computers, office supplies, real property contracts, among others, which were taxable but not creditable. The result of this 8 per cent RST savings to the business community is estimated to be significant and some of the cost savings are expected to be passed onto consumers.