The HST and you!

If approved, effective July 1st, 2010, the Province of Ontario will combine the 8% Ontario sales tax and the 5% GST into a single 13% value-added sales tax (HST) that would be federally administered by the Canada Revenue Agency (CRA).  

 As part of the proposed sales tax reform, cash payments would be provided to Ontario tax filers, in each of June and December 2010, and June 2011.

ADDITIONAL POINT-OF-SALE REBATES (EXEMPTIONS)

In addition to the point-of-sale rebates of the provincial component of the HST proposed in the 2009 Budget, the government intends to provide further targeted sales tax relief for consumers. Additional point-of-sale rebates from the eight per cent provincial component of the HST are proposed for the following:

  • Print newspapers that contain news, editorials, feature stories or other information of interest to the general public, and that are published at regular intervals, typically on a daily, weekly or monthly basis, but not flyers, inserts, magazines, periodicals and shoppers.
  • Qualifying prepared food and beverages that are ready for immediate consumption and are sold for a total price (for all qualifying items purchased, excluding HST), of not more than $4.00. Qualifying items would include:
    • food or beverages heated for consumption;
    • salads;
    • sandwiches and similar products;
    • platters of cheese, cold cuts, fruit or vegetables and other arrangements of prepared food;
    • cakes, muffins, pies, pastries, tarts, cookies, doughnuts, brownies, croissants with sweetened filling or coating, or similar products where they are not prepackaged for sale to consumers and are sold as single servings in quantities of less than six;
    • ice cream, ice milk, sherbet, frozen yoghurt or frozen pudding, non-dairy substitutes for any of the foregoing, or any product that contains any of the foregoing, when hand-scooped or machine dispensed and sold in single servings;
    • other food items that are excluded from zero-rated GST/HST treatment as basic groceries solely by virtue of the types of sales made at the establishment where they are sold, such as the sale of a bagel or a plain croissant in a restaurant;
    • non-carbonated beverages, when dispensed at the place they are sold; or
    • when sold with a qualifying food item listed above: other beverages except if the cans, bottles or other primary containers in which they are sold contain a quantity exceeding a single serving; cakes, muffins, pies, pastries, tarts, cookies, doughnuts, brownies, croissants with sweetened filling or coating, or similar products where they are pre-packaged for sale to consumers in quantities of less than six items each of which is a single serving; ice cream, ice milk, sherbet, frozen yoghurt or frozen pudding, non-dairy substitutes for any of the foregoing, or any product that contains any of the foregoing, when packaged and sold in single servings; or other snack foods, such as chips, salted nuts, popcorn, candies, fruit bars, granola bars, etc.
  • Wine, spirits, beer, malt liquor or other alcoholic beverages would not be a qualifying beverage for the purpose of the point-of-sale rebate of the Ontario component of the HST.

DETAILS ON POINT-OF-SALE REBATES (EXEMPTIONS)

The 2009 Budget proposed to provide targeted relief for consumers on the provincial component of the HST on many items important to Ontario families by providing point-of-sale rebates for books, children’s clothing, children’s footwear, children’s car seats and car booster seats, diapers and feminine hygiene products.

The following information provides additional details for consumers and retailers:

  • Books, including:
    • a printed book or an update of a printed book,
    • an audio book (i.e., all or substantially all of which is a spoken reading of a printed book),
    • a bound or unbound printed version of a scripture of any religion,
    • a printed book and a read-only medium (e.g., CD-ROM) whose content is related and integrated with the book’s content and when sold together as a single package,
    • a printed book and a read-only medium and/or a right to access a website when sold together as a single package, and if specifically designed for students enrolled in a qualifying course, such as educational courses of elementary or secondary schools.
  • Children’s clothing designed for babies,, girls and boys up to and including girls’ Canada Standard Size 16 and boys’ Canada Standard Size 20, or clothing designated for girls and boys in sizes small, medium or large if the clothing does not have a designated Canada Standard Size. Children’s clothing eligible for the exemption would not include costumes or clothing like sports protective equipment. These are the rules that exist for current PST exemption, and are similar to other provinces with these exemptions.
  • Children’s footwear designed for babies and girls and boys up to and including girls’ size 6 and boys’ size 6, including footwear without a numerical size that is designated for girls or boys in size small, medium or large. Children’s footwear eligible for the exemption would not include skates, rollerblades, ski-boots, footwear that has cleats, or similar footwear. These are similar to conditions that exist in other provinces that have a similar exemption.
  • Children’s car seats and car booster seats that are restraint systems or booster cushions that conform with Transport Canada’s safety requirements for Standards 213, 213.1, 213.2 and 213.5, as described under the federal Motor Vehicle Safety Act.
  • Diapers, including cloth and disposable diapers designed for babies and children, and diaper inserts and liners, rubber pants and training pants. Incontinence products would be zero-rated under HST, in accordance with current GST rules.
  • Feminine hygiene products, including sanitary napkins, tampons, sanitary belts or other products marked exclusively for purposes similar to the purposes for which sanitary napkins, tampons and sanitary belts are marketed.

ELIMINATING HIDDEN TAX

Replacing the provincial sales tax would help eliminate the hidden sales tax that many products carry. Currently the PST is charged on various business costs throughout the production of an item. This hidden tax is ultimately added into the cost the consumer pays at the cash register.

Under the proposed HST, most taxes paid on business inputs would be refunded to the business — savings that can be passed on to consumers in the form of lower prices.

How it is intended to impact businesses in Ontario:

Benefits for Business

Increased Competitiveness = Greater Investment, More Jobs

  • The HST and cuts to business taxes will cut Ontario’s marginal effective tax rate on new investment in half.
  • Ontario will join more than 140 countries and four other provinces that already have a value-added sales tax like the HST – because it is modern, efficient and necessary to compete in today’s changing world.
  • Report: Changes Mean More Jobs For Ontario

Cuts to Business Taxes

Ontario will be providing $4.5 billion in tax relief over three years, including Corporate Income Tax (CIT) cuts starting July 1, 2010:

  • The CIT rate will be lowered from 14% to 12% then further reduced to 10% over the next three years
  • The CIT rate for manufacturing and processing will be lowered from 12% to 10%
  • The small business CIT rate will be cut from 5.5% to 4.5%
  • The small business deduction surtax will be eliminated
  • Fewer small and medium-sized businesses will have to pay the Corporate Minimum Tax, and the rate will be cut from 4% to 2.7% in 2010.

This is in addition to the existing plan to eliminate the capital tax . Capital tax was already eliminated for firms primarily engaged in manufacturing and resource activities in 2007.  For all other businesses, the capital tax rate will be cut by 33% on January 1, 2010 and then completely eliminated on July 1, 2010.

Reduced Business Costs

  • Most businesses will receive input tax credits (ITC’s) for sales tax they pay on many of their business purchases and capital investments, providing significant savings.
  • The HST is eliminating cascading layers of PST–embedded tax hidden in the purchase price, making inputs cheaper.
  • Businesses also save from the reduction of embedded tax in supplier prices.

Lower Compliance Costs

  • Businesses will save over $500 million a year in administrative and compliance costs alone.
  • Administration of a single tax instead of two means one set of forms, one payment and one point of contact for audits, appeals and taxpayer services.
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HST Impact on Canadian Investments

So how does the HST impact this industry?

Agreed that a single federal-provincial harmonized sales tax is better for Canada. It eliminates paying tax on top of tax; helps make Canadian businesses more competitive; and frees many businesses from the costs of having to manage two separate tax systems.

However, there are some concerns, around three themes:

First, the inequity that exists within the financial services industry in Canada. The GST and therefore a harmonized sales tax (the HST) – on services provided to funds is four to five times the sales tax on services of equal value that are provided to non-fund investments, such as a GIC, a bond, or buying individual securities.

Second, Canada is an outlier, when compared to other countries that have GST or value-added tax regimes. In the European Union, Australia and New Zealand, funds are not treated differently from other financial products – so the inequity that exists in Canada does not exist there. Another issue that is unique to Canada (and only four other countries) is that the sales tax is applied at two levels –federal and provincial.

Because funds are pooled products sold across the country, regional differences in the HST adds significant complexity and cost from an administration point of view, both for the industry and tax officials – but delivers no value to the end buyer.

Third, the GST, and therefore the HST based on the GST – is a tax on savings – and more specifically a tax on retirement savings.

Background:

When the GST was being studied in the late 1980s, the investment funds industry was very small – around $30 some odd billion dollars in assets, whereas today it is $700 billion dollars in assets. In those early days fund holders tended to be more sophisticated and well-off; today they are average Canadians who use funds as a primary form of savings in their retirement savings plans. Fund holders now include many smaller investors who rely on funds as a way to save small amounts on a regular basis and to affordably diversify risk and to get advice on planning for their future.

In 1991 when the GST was introduced, Canada chose to treat funds differently than it treated other financial products – and that was the beginning of the inequity that we have today with funds.  100% of the labour involved in providing mutual funds under the HST will be taxed at 13% along with the computers, telecommunications and stationery that all financial firms pay tax on and use to supply their offerings.

With respect to a GIC, which has no advice and a lower return in most cases, 0% of labour is taxed and it is only the tax on computers, telecommunications and stationery that is passed to the client. As three-quarters to four-fifths of fund costs is labour, mutual fund-holders are taxed at effectively 4 to 5 times the rate that GICs, equities and other non-fund financial vehicles are. This is where we get the inequity where fund holders pay 4 to 5 times more tax for a fund product than another financial product.

So while mutual fund services are taxed, they are taxed at a disproportionally higher level than non-fund financial products, making them more expensive proportionately for Canadians, even though Canadians have come to regard funds as another financial product they can choose to build a portfolio.

 

How does Canada compare to other jurisdictions:

KPMG looked at several key leading jurisdictions that Canada usually looks to because they are comparable either in size or political and economic structure.

Their findings showed investment funds in the European Union, Australia and New Zealand are taxed on an equivalent basis to non-fund financial products – whether through sales tax exemption or credits – and thus they do not have the inequities in their jurisdictions that we have.

International GST models have gone more and more towards exemption for financial products – including funds. We have suggested to the federal government that it’s time for Canada to modernize its GST regime to align with these other jurisdictions.

Fast forward to July 1, 2010, the expected date of the HST implementation in Ontario.  

With that harmonization announcement by B.C. and Ontario fund holders face a significant increase in tax. The four already harmonized provinces – Quebec, Nova Scotia, New Brunswick and Newfoundland – have not applied the higher harmonized level of tax to funds. All funds and to keep the businesses in their provinces competitive with those based in other jurisdictions.

How fund holders will be impacted by harmonization:

Mutual fund products are primarily owned by middle–class Canadians – 67% of fund holders earn under $100,000 and of the funds held by Canadians are held in retirement savings vehicles. Essentially, the HST impacts the retirement savings of Canadians. An outcome that is quite undesirable given that we have a collective public policy concern about whether we are saving enough for retirement.

In 2008 Canadians paid an estimated $450 million more in GST on their mutual funds investments.

The solution:

The federal government needs to modernize the GST policy to bring it in line with other VAT and GST regimes globally to remove the inequity across products.

An immediate review is needed to adjust the current GST policy to facilitate a level playing field for investors in Canada, to bring Canada in line with other countries, to create a workable implementation solution for businesses operating across the country and to reduce the long-term burden HST will have on retirement savings of Canadians.