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An Ontario Harmonized Sales Tax: A time for reform?

Canadian Indirect Tax News, March 2009 (09-1)

The upcoming March 26, 2009 Ontario Budget may pronounce the beginnings of a significant tax reform exercise: the harmonization of the Ontario retail sales tax and the Goods and Service Tax (GST).

Ontario Premier Dalton McGuinty has made recent statements that signal such reform is under serious consideration.

“There seems to be an emerging consensus around harmonization. I’m not committing to doing it, but I just think we owe it to ourselves to take a good, long hard look.”

“The Ontario Chamber of Commerce has put forward a position that says you absolutely must harmonize the GST and PST. That is a tough thing to do politically, and we take a revenue hit. All previous governments have shied away from that. We need to give that a very serious look…”

(Toronto Star, February 8, 2009)

Indeed, the Premier’s revenue concern has been a major reason for not harmonizing in the past. Perhaps the revenue concern is no longer the deal breaker it once was. The January 27, 2009 federal budget addressed harmonization by stating that if those provinces that still impose a retail sales tax were to adopt a value-added sales tax and provide an input tax credit on the tax paid on the acquisition of goods and services, the marginal effective tax rate on new business investment would be reduced by more than 7%. The truly noteworthy subsequent statement read: “The Budget suggests that in its efforts to achieve this result, the Government will show some flexibility in its negotiations with the provinces that still impose an RST”. Does “flexibility” translate directly into revenue loss offset? This may well be the case as the federal government provided such assistance for the eastern provinces of Newfoundland, Nova Scotia and New Brunswick when those provinces harmonized their retail sales taxes in 1997 and did the same with Quebec when Quebec harmonized its sales tax in 1992.

While various organizations have supported harmonization in the past (including the C.D. Howe Institute and the Conference Board of Canada), citing significant positive economic benefits, the Ontario Chamber of Commerce (OCC) commissioned a study released on January 22, 2009 seems to have caught the right ears at the right time.

“Made in Ontario: The Case for Sales Tax Harmonization”, presents an analysis that supports harmonization as “an essential element” in a strategy to confront the province’s current, serious economic challenges.

The OCC study proposes three options for harmonization:

  1. HST: Harmonize the 8% Ontario sales tax with the 5% GST.
  2. Ontario Sales Tax - a (OST-a): Harmonize the 5% GST and 8% Ontario sales tax. However, Ontario would exempt children’s clothing, ‘clean’ electricity, labour intensive services and the, purchase of goods and services from the municipal, academic and hospital sectors.
  3. Ontario Sales Tax - b (OST-b):  The same as option 1 (HST) except that financial services would be zero-rated, as the Quebec sales tax (QST) system provides, rather than exempt services(thereby providing input tax credits/refunds to this sector on taxable inputs). In addition, similar to the QST reform, a new tax on the financial services sector would be levied in order to compensate the government for foregone sales tax revenue.

As evidenced by the QST and the HST, Ontario could introduce various tax preferences (e.g., children’s clothing), Ontario–only rules (e.g., “place of supply”) and offsetting income tax credits to address the political concern regarding expanding the tax base to consumers for the benefit of business.

“Get ready” considerations
The possibility of major sales tax reform in Ontario entails several significant general considerations for businesses’ operations including:

  • Computer software system changes to account for differences in the treatment of expenses, revenues and changes in prices;
  • Registration, collection and remittance requirements for numerous additional tax collectors;
  • Planning for transitional provisions (including existing contracts) affecting real property, tangible personal property and services; and
  • Tax planning for affiliates which may now be required to register for Ontario’s HST under new broader carrying on business rules.

One thing is clear in the recent Ontario sales tax harmonization dialogue: the Ontario government is considering the reform in a far more serious manner than ever before.

Business, in general, has been more vociferous in supporting an HST for Ontario as a means of assisting in the long term economic recovery. Further, and perhaps most importantly from Premier McGuinty’s view, the federal government appears ready to assist in subsidizing the negative financial consequences associated with such reform.

Stay tuned for a possible tax reform announcement as Finance Minister Dwight Duncan delivers his Budget on March 26, 2009.

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