Trying To Find Harmony In The HST

428

On Canada Day, B.C. joins the nation’s other HST provinces: Ontario, Quebec, and the Maritimes. How will it impact Greater Victoria businesses?    

As the oft-quoted Benjamin Franklin saying goes, in this world, nothing is certain but death and taxes. In a bit of black humour, on July 1, people paying for funeral and cemetery services will feel the sting of B.C.’s new 12 per cent Harmonized Sales Tax. Interment and cremation of loved ones both join a long list of goods and services that formerly charged just the federal GST but were exempted from PST.

Not wanting a nail in their coffin before they were re-elected in May 2009, the B.C. Liberals said the HST — a blending of the five per cent GST and seven per cent PST — was not on their radar. But by July, the song changed when Finance Minister Colin Hansen announced the new tax, joining Ontario, Quebec, and the Maritimes.

In an interview, Hansen said B.C.’s “reconsideration” of the HST was triggered by the news that Ontario was moving to the HST. “Every year, we looked at it. Every year, we decided it didn’t make sense,” Hansen says. Only when Ontario came on board and federal enticements were dangled before the cash-strapped provinces did the sense, and dollars, of it reveal itself. As for the remaining Canadian jurisdictions without the HST — Alberta, Saskatchewan, Manitoba, P.E.I., and the three northern territories — Hansen says, “Their economies will certainly suffer if they continue with their archaic systems.”

{advertisement}

To ease B.C.’s transition, Ottawa is handing over $1.6 billion, which Hansen said in his March budget will be directed to health care. Still, he says the HST will cost the province $113 million for the coming fiscal year due to lost tax revenue.

How will this creature perform once let out of its cage on Canada Day? Ever the pragmatist, Greater Victoria Chamber of Commerce CEO Bruce Carter says, “The best way to look at it is, the PST is gone; the GST is 12 per cent. In the majority of cases, what you did with the GST, you’ll do with the HST.”

Despite the simplified explanation, there’s still plenty of confusion and handwringing among businesses and consumers. Because the HST is a federal tax, the Canada Revenue Agency (CRA) will take over tax collection and many of the 400 PST staffers in B.C. will immediately go to work for the CRA.

The B.C. government has a website dedicated to the HST, but as a finance ministry spokesperson put it, the provincial role was to legislate an end to the PST and wind up the old tax. Now the CRA answers all HST questions. At a Chamber of Commerce-hosted information session earlier this year, the room was packed with business owners posing specific and often complicated questions. With business, the CRA has taken the “each question is unique” position. Its website has some information but is in flux and other details are absent. The province’s HST website contains information taken from the federal material, and the rules seem to keep changing. At the CRA information session, one staffer quipped, “You can’t hold us to anything.”

Some things are known. Accounting procedures for business will be streamlined; no more time-consuming remittances to the provincial treasury. Bicycles will cost more, as will a pedicure, a take-out coffee, and a movie ticket. In response, former B.C. premier Bill Vander Zalm has organized the province-wide Fight HST petition which has until July 5 to collect signatures from 10 per cent of the voters in every one of B.C.’s 85 electoral districts. The former Socred premier says that small business is the best job creator in B.C. but its existence is threatened. Once the HST takes affect, people who support small businesses will be forced to spend less because of the tax, hurting those small operators, he says.

This isn’t news for Mark von Schellwitz, western Canadian vice-president for the Canadian Restaurant and Foodservices Association (CRFA). Coming off a recession-hit 2009 when the industry lost 10,500 jobs, he recalled 1991 when the seven per cent GST came in. Sales dropped by 10.6 per cent and never recovered. “The HST is the single worst thing they could have done to our industry. It’s worse than increasing the minimum wage,” von Schellwitz says from Vancouver.

The restaurant and foodservices industry is B.C.’s fourth-largest employer with about 163,000 people working. Fighting to keep them, the CFRA petition drive has gathered more than 200,000 signatures from B.C. residents opposed to the HST. But von Schellwitz isn’t expecting much from the Campbell government. The CFRA remembers the Campbell government’s promise not to impose the HST or change taxation on food without consultation. Once the province put HST on the menu, it suggested mitigation measures such as an exemption for the first $5 of spending or having the HST phased in over five years. The government didn’t bite.

Today, B.C. has about 12,000 restaurants, with two-thirds of those small independents. While fast food and fine dining establishments have severe concerns, the biggest fear is for the middle-of-the road restaurants, usually the first to feel a drop in discretionary spending, Von Schellwitz says. “It’s a very competitive business. People stay in it because they’re passionate about the business, but they’d probably do better in the stock market.”

Hansen acknowledges the feast or famine nature of employment in the restaurant business, particularly the last hungry year. But recent reports show consumer confidence and retail sales are up in B.C., he says. “You’d be hard-pressed to find an industry that will lose jobs,” he predicts of HST-related employment.

One consolation is that the former 10 per cent PST on alcohol will drop to seven and get rolled into the 12 per cent HST. While liquor prices in retail stores will rise about three per cent to keep the price the same as pre-HST, restaurant and bar operators won’t be subject to the price increase, says a ministry of finance spokesperson. Whether the price savings will be poured on to thirsty bar and restaurant customers is another question.

For municipalities, schools, universities, and health authorities, those that qualify have been told they will get rebates for the provincial portion of the HST. And the eight per cent hotel tax has been eliminated, with hotels subject to the same HST as other businesses.
When Nova Scotia (along with New Brunswick and Newfoundland-Labrador), implemented its 15 per cent HST in 1997, the province first spent a year consulting business groups like automobile dealers and homebuilders’ associations, says Fred Bergman, a senior analyst with the Atlantic Provinces Economic Council. He was an employee of the Nova Scotia department of finance until June 2009.

“We met with a lot of industries. We were very up front about it,” he recalls. “But business was not out in the street applauding us. They weren’t clear supporters. They were kind of sitting on the sidelines.”

To lessen the blow for consumers, especially those on low incomes, Nova Scotia reduced the provincial part of the HST from 11.77 to eight per cent. (Such a reduction isn’t happening in B.C.) Additionally, “pass through savings” were counted on to further reduce prices. In the Atlantic province, it was estimated that businesses would pay up to 50 per cent less tax after the PST and GST were harmonized, savings that could be passed to the consumer. Say, one pen cost an office supply store $1.20 wholesale, including tax. After the storeowner claimed the input tax credit, the price paid for the pen would be $1.10, Bergman says.

Following Nova Scotia’s implementation of the HST, some prices did drop marginally, according to a C.D. Howe Institute study in July 2007 by Michael Smart: “Indeed, overall, consumer prices in the harmonizing provinces fell with the 1997 reform, although prices rose somewhat for shelter and for clothin
g and footwear, so that the reform was slightly regressive.

“Reform led to significant increases in machinery and equipment investment, in the short run at least, which should raise the capital stock and labour productivity there in the long run.”

Smart said the change to HST in Nova Scotia left after-tax consumer prices, “on average, slightly lower than before the reform.”
Come July 1 in B.C., each time a business pays HST on purchased goods or services, it can deduct the HST from the tax it has collected on its own sales, lowering what it has to send to Ottawa. And if a business owes the government more HST than it collects from customers, it can claim a refund.

While Hansen agrees that some items will cost more post-HST, the new tax will also lead to a re-evaluation of business practices. “This is an opportunity for business owners to look at how they benefit from costs coming down,” he says. Recall how furniture or department stores offer sales where they trumpet that they’ll pay the GST all weekend. Well, Hansen predicts “We pay the HST” pitches from creative retailers.
The Chamber’s Carter says lower consumer prices will appear but how quickly is debatable. To make up for lost business, some enterprises may not pass on savings, says von Schellwitz. They may use the HST bonus to pay for rising interest rates on bank financing, to cover higher costs of fuel, and to cope with lingering recessionary effects.

Nova Scotia knew it would lose revenue — it dropped $500 million over the first five years — but over the long run, the HST has benefited the province, Bergman says. Exports have increased and businesses have relocated there, attracted by the input tax credits. He predicts the same will happen in B.C. “The HST is clearly the wave of the future,” he says.

Not for Casey Edge, executive director of the Canadian Home Builders’ Association in Victoria. “The HST is a consumption tax, suitable for small purchases, not suitable for capital investment like a house.” New home prices in Greater Victoria have put homes out of reach for many, and now with the HST, new homes previously exempt from PST will be hit by the new tax. To lessen the HST’s blow, B.C. initially offered a rebate of the seven per cent provincial portion of the HST on new homes up to a maximum price of $400,000. The CHBA hammered away at the province and won a raise in the tax-exempt amount to $525,000. New homes costing more than $525,000 will get a flat $26,250 rebate. 

To get an idea of how homeowners will be treated by the HST, if you buy a new $600,000 house — close to the average price in Victoria now — there’s $45,750 in HST ($72,000 HST less the $26,250 rebate). Before HST, it would have been $30,000 GST.

HST will also apply to renovations, and Edge’s fear is that consumers will seek contractors and trades who will cut under-the-table cash deals and avoid paying HST. Some of B.C.’s $7-billion reno industry will move underground, leading to a loss of tax revenue and more complaints about poor-quality renovations done by unqualified fly-by-nighters, he predicts.

The savings forecast by government for the residential construction industry don’t comfort Edge. “What will actually happen in the real world? Who knows?”

That uncertainty is shared by Kyle Reagan, spa owner and founder of the stophst.com website. He too wonders if the benefits — his ability to reduce the taxes he pays when he buys a treatment bed — will outweigh any loss of business due to higher prices. Pre-HST, customers pay only GST, so on a $100 facial and massage, the bill is $105. On July 1, it will be $112. Reagan expects customers will continue spa treatments but less frequently. Tax breaks won’t outweigh skinnier customer revenue. “The bottom line is, people have to eat but they don’t have to go to the spa.”

At the Victoria office of website designer Atomic Crayon, CEO Dale Campbell says,

“I haven’t seen a push, last-minute to get into line to avoid paying the tax. There hasn’t been a big flurry of business,” he says. Services like his used to pay just GST, but come July 1, prices will increase by seven per cent.

His customers are cautious, which Campbell attributes more to the general economy not the imminent arrival of the HST. As to the savings promised from input tax credits, he says his business, like many in the service sector, only makes major purchases every two to three years, so the savings won’t be substantial.

It will be big businesses, which invest heavily in capital improvements, such as equipment and those with long supply chains, that will truly benefit, Bergman says. Already in B.C., the logging, mining, oil and gas, transportation, manufacturing, and heavy construction industries are on side based on provincial figures that tout $2 billion in decreased costs to those sectors.

As for last-minute clients, Keith Owen expects he’ll be busy in June. He operates Owen Business Systems, founded by his grandfather six decades ago, which supplies cash registers and debit and ATM terminals. Businesses don’t seem to be sweating the new tax. Over a two-month period early in the year, he had only 15 inquiries from business clients looking to make sure their cash intake systems were ready for July 1. “Closer to the date, we’ll get more calls.”

Fortunately, cash registers run on programmable software and most businesses merely need to reprogram their equipment to shift from the PST and GST to the HST. When the GST arrived in 1991, most tills only had one feature for tax so they couldn’t accommodate a second, separate tax. Owen rang up a lot of cash register sales then. Today, a basic cash register costs about $500, while software can be priced up to $40,000. And don’t forget the HST.

HST exemptions — Consumers won’t pay the seven per cent B.C. portion of the HST on the following products

  • Gasoline, ethanol, diesel, and biodiesel for motor vehicles; locomotive fuel for trains; marine diesel for boats; aviation and jet fuel for aircraft
  • Books
  • Children’s clothing, footwear, and diapers
  • Children’s car seats and booster seats
  • Feminine hygiene products
  • Residential energy: all forms of home heating fuel, although solar is still uncertain

No more exemptions for these — Goods and services which were PST-exempt will now pay 12 per cent HST

  • Professional services such as accounting, consulting, and real estate commissions
  • Taxi fares and domestic airplane tickets
  • Personal services such as hair styling, manicures, dry cleaning, and vet treatments
  • Labour such as home cleaning and auto towing
  • Telephone and Internet services
  • Magazine subscriptions
  • Restaurant meals

Zero-rated goods and services

  • Basic groceries
  • Agricultural products such as grain, raw wool, and dried tobacco leaves
  • Most farm livestock
  • Most fishery products such as fish for human consumption
  •  Prescription drugs and drug-dispensing fees
  • Medical devices like hearing aids, heart-monitoring devices, hospital beds, breathing apparatus, asthmatic devices, prescription eyeglasses, and contact lenses

Exempt goods and services

  • Imports of zero-rated goods
  • Goods imported by a charity or public institution that have been donated to the charity or institution
  • Used residential housing
  • Long-term residential accommodation (one month or more) and residential condominium fees
  • Some sales of vacant land or farm property
  • Most health, medical, and dental services performed by licensed physicians or dentists for medical reasons
  • Child-care services (day-care for less than 24 hours a day) for children 14 years old and younger
  • Personal-care services for children or underprivileged or disabled individuals, when provided by a person operating a
    n establishment for these individuals
  • Bridge, road, and ferry tolls (ferry tolls are taxed at zero per cent if the ferry service is to or from a place outside Canada)
  • Legal aid
  • Many educational services such as courses from a vocational school or tutoring services
  • Music lessons
  • Most food or beverages sold in a school cafeteria primarily to students of the school and most meal plans provided in a university or public college
  • Most services provided by financial institutions
  • Arranging for and issuing insurance policies

— B.C. Ministry of Finance