The Ontario government announced in its March 26, 2009 budget that it plans to harmonize the 8% Ontario retail sales tax (RST) with the 5% federal goods and services tax (GST) to form a 13% harmonized sales tax (HST), effective July 1, 2010. With certain exceptions, which are set out in more detail below, the HST will generally apply in the same manner as the GST to goods and services provided in Ontario. Like most tax policy changes, the harmonization of the RST with the GST has created some winners and some losers.
Administrative Relief: Many businesses and economists have been pushing for a single, harmonized sales tax for years. The primary benefit of the harmonized tax is a decrease in the administrative costs of having to comply with two separate sets of tax laws. According to the Ontario Government, the harmonization of Ontario's sales tax will result in compliance cost savings to companies of more than $500 million per year (although other commentators have pegged these savings at $100 million). Ontario has also agreed to provide a one-time only transition credit of up to $1,000 for small businesses with less than $2 million in annual revenues from taxable sales. It should be noted that these savings and credits will likely be offset by the removal of the compensation of up to $1,500 per year that Ontario currently pays to vendors for collecting and remitting the RST, which will be effective as of April 1, 2010.
Decrease in Taxes on Businesses: Companies considered to be engaged in commercial activities for GST purposes and that are currently entitled to claim input tax credits for GST will be better off under the harmonized system. After the sales taxes are harmonized, these companies should be able to claim input tax credits for the Ontario portion of the HST on purchases on which they previously paid unrecoverable RST (such as on office equipment, furniture, computer software, etc.). This will remove the RST, which presently is embedded in these companies' costs. The Ontario government is hoping that most of these cost-savings will be passed on to consumers.
Sales Tax Transition Credits: In order to make the changes more palatable to low-income and mid-income families, Ontario has proposed a one-time only transitional benefit of up to $1,000 to families (including single parents or couples) earning under $160,000 per family, with $330 being payable in June 2010, $335 payable in December 2010, and $335 payable in June 2011. The benefit phases out once a family's income hits $160,000, and is completely phased out if the family's income is $166,700 or more. The benefit is also available for single individuals earning under $80,000. For these individuals, the maximum benefit is $300 (payable in three instalments of $100), and this benefit begins to phase out at $80,000, and disappears when the individual's income hits $82,000.
Exemptions for Household Goods: Ontario has asked the federal government to provide point-of-sale exemptions for the Ontario portion of the HST on certain basic household goods that are currently exempt from RST, including children's clothing, diapers, books, and feminine hygiene products.
New Homes: New homes worth over $400,000 will be subject to a significant increase in tax under the harmonized sales tax. While RST currently applies to building materials used in the construction of homes, real property is not subject to RST. Thus, a builder building a new home currently must pay unrecoverable RST on many of its supplies (which Ontario estimates to be 2 to 3% of the final sale price of a new home), but does not charge RST on the sale of the new home. Under the HST, while the cost to build a new home will decrease, since builders can claim credits for the sales tax on their inputs, new homes will now be subject to an additional 8% tax. Ontario has proposed a rebate of 75% of the Ontario portion of the HST (i.e. 6%) for new homes sold for under $400,000. This, combined with the decrease in the building costs, which Ontario assumes will be passed on to customers, means that new homes sold for under $400,000 should be effectively taxed at the same rate under the HST as they were under the RST system. However, the rebate begins to be phased out at $400,000, and disappears entirely at $500,000. Thus, assuming again that the builder passes the 2% savings on to the purchaser, under the new system new homes sold for more than $500,000 will be subject to an additional 6% tax. This does not include the additional taxes that will now be payable on the legal fees, inspection fees and real estate agent fees.
Commercial Real Estate: Both the purchase and rental of commercial property will also be subject to an increase in tax under the HST regime. Businesses that can claim input tax credits will likely remain tax neutral as they should be able to claim the credits for the additional tax. However, the additional tax is a significant issue for businesses engaged in GST exempt activities (i.e. banks and insurance companies), as these businesses are generally unable to claim input tax credits. It is worth noting that exempt businesses and individuals will not necessarily face the full brunt of the tax on commercial property, as the effective cost of building new commercial properties will decrease as builders can claim additional input tax credits.
Restrictions on ITCs: Ontario has created a "temporary" restriction on large businesses (those with annual taxable sales in excess of $10 million). These large businesses will be unable to claim input tax credits on expenditures relating to energy, telecommunication services (other than internet access and toll-free numbers), road vehicles weighing less than 3,000 kilograms, food, beverages and entertainment. These restrictions only apply to the Ontario portion of the HST and after five years, full input tax credits on these supplies will be phased in over a three-year period. As these supplies are all generally taxable under the current RST regime, the restriction on claiming input tax credits for these items should not increase costs for these large businesses, but rather will delay some of the benefits of harmonization.
Tax on Insurance: Ontario has also stated that it will retain the current 8% RST, which applies to premiums for some types of insurance (such as group insurance).
Financial Companies: Companies engaged in exempt activities (i.e. banks, insurance companies) that are not entitled to claim credits will see a significant increase in respect of many of their costs. Most notably accounting fees, legal fees, other service fees and commercial rent will all be increased by 8%.
Services to Individuals: Individuals will see an increase in tax on their costs of purchasing services, including personal services (haircuts, dry cleaning, etc.) membership fees (gyms, golf fees), taxis and limousines, internet access fees, postage and shipping, accounting and legal services, and home renovation services.