In the Ontario Budget released on March 26, 2009, the Minister of Finance announced that Ontario will eliminate the Ontario Retail Sales Tax effective July 1, 2010. The Retail Sales Tax is to be replaced with a single value added tax that will be combined with the existing federal Goods and Services Tax ("GST").
The Minister was careful not use the term Harmonized Sales Tax ("HST") in his Budget speech and materials. However, the proposed mechanics for the new tax suggest that it will be very similar to the HST that has been in place in New Brunswick, Nova Scotia, and Newfoundland and Labrador since those provinces harmonized their sales tax regimes with the GST in April 1997.
The rate of the new HST is to be set at 13% and it is to be administered by the Canada Revenue Agency. The HST likely will be imposed under the existing Excise Tax Act (Canada) subject to the necessary amendments.
The relatively late date for harmonization means that Ontario businesses should have adequate time to cope with the systems changes that will be required to cope with the new collection and remittance regime. Some of the anticipated changes are noted in this article.
The Benefits of the HST
The change from a single incidence retail sales tax to a multi-stage value added tax in the form of the HST should be to the benefit of many Ontario businesses. The harmonization with the existing GST regime will allow businesses to comply with only one transaction tax, rather than two, saving millions in compliance costs for business and in administration costs for the Ontario government.
Moreover, most businesses that currently make GST-taxable supplies or supply goods or services on a GST zero-rated basis, should be entitled to recover the HST they will be required to pay on inputs into their businesses. This will eliminate the currently unrecoverable cost of the Retail Sales Tax from purchases of goods and the limited range of currently taxable services.
The computer software and computer services industry should be a significant beneficiary of the new regime as its supplies will no longer be subject to the unrecoverable Retail Sales Tax.
The Costs of the HST
Although the Budget materials were light on technical details, they did include announcements on some aspects of the new HST that would be costly to certain businesses.
Restricted Recoverability for Medium and Large-Sized Businesses
All businesses with greater than $10 million in GST/HST taxable sales will be unable to claim input tax credits to recover the 8% provincial component of the HST paid on certain inputs that are partially or fully creditable under the GST regime:
- telecommunications services, other than internet access or toll-free numbers
- road vehicles under 3,000 kg, including parts, services and fuel
- food, beverages and entertainment.
These limitations are similar to restrictions found under the Quebec sales tax regime.
The relatively low threshold for this limitation to apply will mean that medium- and large-sized businesses in Ontario will not have the ability to claim input tax credits on the HST component of these inputs into their businesses.
The restriction on recoverability for inputs of energy will have the most significant impact as these same inputs of energy are currently fully exempt under the Retail Sales Tax. This will be challenging for manufacturers and other large users of energy in Ontario. By contrast, telecommunications services and road vehicles are already subject to an unrecoverable Retail Sales Tax, so there should be no net change to businesses.
Regardless, businesses will need to adapt their accounting and computer systems to cope with the restricted recoverability of the HST component in respect of these inputs. The Budget stated that these restrictions on recoverability are only intended to be temporary lasting five years and then being phased out over the following three years. If these restrictions are phased out, then accounting and computer systems will have to adapt to these changes as well.
Additional Tax on New Housing
GST has always applied to sales of new residential housing, though there is a rebate of 1.8 of the 5% GST charged on sales of new homes and condominiums. Similarly, the HST will also apply to these sales. The federal rebate will remain the same, while there will be a further rebate of 6 of the 8% HST component. Where both rebates apply, the total unrecoverable HST on new construction will be 5.2%.
However, the rebate for the HST component is to be scaled back on sales of residences between $400,000 to $500,000. Moreover, it will be entirely unavailable for houses over $500,000. Accordingly, a new home worth $500,000 will be subject to 13% or $65,000 HST. This is in addition to a maximum rate of 1.5% of Ontario land transfer tax and the similar Toronto municipal land transfer tax.
The MUSH Sector
As with the current GST regime, there will be partial rebates of the HST component for the so-called MUSH sector (municipalities, universities, schools and hospitals) as follows:
- Municipalities 78%
- Universities and Colleges 78%
- School Boards 93%
- Hospitals 87%
- Charities and Qualifying Not-for-Profit Organizations 82%
These rebates were set at rates intended to leave these entities in the same position as under the current Retail Sales Tax system. These rebates are at different levels than the rebates for the existing GST and that will apply to the GST component of the HST, most notably for municipalities which can receive rebates of 100% of the GST.
The financial services sector is currently not required to charge GST on its supplies of exempt financial services. However, businesses providing financial services do not have the ability to recover the GST on inputs into these services. As a result, such businesses become the end consumer of these inputs and are required to bear the economic costs of the applicable GST.
These tax costs will be raised from 5% to 13% of the value of the inputs, which amounts to a significant increase in tax cost. This higher rate of tax will apply to goods and services sourced in Ontario, as well as from outside of Ontario and Canada on a self-assessment basis.
Insurance providers may be doubly affected, as the Budget materials indicated that Ontario would maintain some form of tax at a rate of 8% on the same kinds of insurance as are currently subject to Retail Sales Tax, generally property insurance other than automobile insurance. The Budget materials do not note that insurers will have an entitlement to recover the HST they pay on inputs as a consequence. Indeed, when Newfoundland and Labrador maintained a similar 15% unrecoverable tax on insurance, they did not provide corresponding relief to insurers, though Newfoundland and Labrador did recently repeal this additional tax on insurance.
Other Consequential Issues
It is likely that Ontario will agree to begin paying the 13% HST following harmonization. Ontario does not pay the GST at present as it is not required to do so under the Constitution. However, the other HST provinces agreed to begin paying the HST following their harmonization, and Ontario will likely do the same. Ontario would recover the GST component of the HST through a rebate mechanism that will be claimed either on an entity by entity basis, or on a central basis, depending on the choice of the government of Ontario.
Contractors with the Ontario government should consider the HST in making bids for new contracts.
Transitional Assistance Payments
The Budget contemplates a one-time transition credit of up to $1,000 for businesses with less than $2 million in annual revenues from GST/HST taxable sales. It also contemplates a one-time transition payment of $1,000 to single parents and couples earning less than $160,000, and of $300 for single individuals earning less than $80,000.
There will also be an annual rebate for low-income individuals and families with the relief of up to $260 being extended to families earning less than $25,000 in income, as well as individuals earning less than $20,000 in income.