HST to hit amid fear over increased cost of living — #Toronto #economy #realestate

HST to hit amid fear over increased cost of living

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Updated: Sun Jun. 27 2010 1:11:02 PM

The Canadian Press

Heidi Graw has decided that after years of feeling helpless as the cost of living climbs in British Columbia, she has had enough: she won’t pay another tax.

As of July 1, when the new Harmonized Sales Tax takes effect in B.C. and Ontario, Graw will boycott purchases of anything beyond the basics.

“We won’t be going out to the restaurants, we won’t be going to the movies, we won’t be going to the rec centre, or all these other little frills,” says the Mission, B.C. resident.

“That’s the only way I can take control over how much tax I’m prepared to pay.”

The HST merges the five per cent federal goods and service tax with provincial sales taxes of seven per cent in B.C. and eight per cent in Ontario. That means consumers will pay 12 per cent on everything from cheeseburgers and haircuts to heating bills, auto repairs and legal and real estate fees in B.C. In Ontario, a 13-per-cent charge applies on the same things.

The cost of driving will go up in Ontario as gasoline sales face the new tax, but there’s an exemption for B.C. drivers.

On July 1, a $100 golf game that used to set you back $105 after GST will now cost $113. A $20 haircut rises to $22.60 from $21, taxes included. In Ontario, a fillup at the gas pumps will cost an extra $5 to $8 or so with the new tax.

Consumers will pay the new tax on about 20 per cent of purchases that had been PST exempt in the past — a main reason many consumers see the changes as a tax grab by government.

The new HST will siphon about $2.5 billion a year in additional taxes out of the economy and shift the tax burden to consumers from businesses. In Ontario, it could pile another $800 in annual costs on the backs of an average family, and critics say it could also spark further growth in the underground — cash only — economy as more and more consumers try to avoid the new charges.

But tax experts and economists generally back the changes, saying they reflect a 20-year effort by Canadian governments to modernize the tax system, cut corporate taxes and boost investment and trade in an increasingly competitive global economy.

Within a few years, they say, the economy will create hundreds of thousands of new jobs as businesses become more competitive and use HST tax breaks they can claim to boost exports, buy new technology or expand.

Those arguments don’t hold much water with Graw, who predicts her boycott will outlast the unpopular HST.

“I have been driven to the brink and now I’m just not going to participate anymore for as long as I can hold out,” she says.

The 54-year-old bookkeeper has been canvassing on behalf of the Fight HST campaign in British Columbia, a drive led by former B.C. Social Credit premier Bill Vander Zalm.

They claim their petition has collected half a million signatures, far surpassing the 10 per cent quota of registered voters in every riding needed to potentially force a referendum to repeal the tax.

But tax experts say abolishing the HST would be a mistake.

The new regime streamlines paperwork for businesses, saving an estimated $125 per filing, and for the first time, refunds millions to businesses in input tax credits for provincial taxes.

The new tax system will attract about $47 billion investment dollars to Ontario, resulting in 591,000 jobs in ten years, according to a report by economist Jack Mintz. His report on B.C. finds that province will see $11.5 billion in investments and 113,000 jobs by the end of the decade.

But for recession-battered consumers, the tax is just the latest new cost in an era of high home prices, rising interest rates, and a looming era of government restraint needed to wipe out Canada’s federal and provincial budget deficits.

“We have to recognize the fact that there is a lot of anger, a lot of frustration on the part of the public,” says B.C. finance minister Colin Hansen.

He attributes the groundswell of anti-HST sentiment in his province to an ill-timed miscommunication. The decision to implement the HST was announced in July 2009, just months after a May provincial election, in which the ruling Liberals had indicated they were not considering the regime.

And while that was true at the time, Hansen says, the short time until its unveiling raised suspicion as to whether the Liberals had been deceptively planning to implement the tax all along.

“That is not the case, but when you start looking at the timeline, I certainly understand why people jump to that conclusion,” he says.

Three-in-four British Columbians recently told Angus Reid pollsters they would vote to strike down the controversial tax if the issue went to referendum. Meanwhile, Ontario taxpayers have been far less resistant.

Ontario revenue minister John Wilkinson believes Ontario residents are more accepting because they understand the HST is part of a larger tax reform package that also includes income tax cuts, new tax credits, and transition cheques of up to $1,000 per household.

And while Ontario cushioned the HST blow by using some of the $4.3 billion in transition funding from the federal coffers for the rebate cheques, B.C. decided its $1.6 billion would be better spent to pay down its deficit.

Kevin Gaudet, president of the Canadian Taxpayers Federation says Ontario’s nonchalance has little to do with its government’s ability to sell the regime.

Instead, B.C. has a storied history of populist politics and citizens feel bewildered by their Premier Gordon Campbell, he says, while Ontarians feel beaten down, and are more sympathetic to Premier Dalton McGuinty.

Gaudet questions the timing of the new tax system just as the economic recovery is gaining strength. And he expects the HST will have a short-term negative impact on the economy as consumers feel the hit to their wallets and rein in spending.

Restaurateurs and small business owners worry they’ll have to cut costs to continue to attract customers. Others fear that a new tax on their services will drive customers underground–to those who promise the service tax-free.

A lack of understanding about the complex HST, combined with taxpayers’ fundamental mistrust of business and government, has bred resentment toward the new tax regime, says Queens University business professor Kenneth Wong.

The gains will be felt by the economy as a whole, while the hit will be felt at the individual level– a tough sell to consumers.

“If you are part of the cognoscenti, the in-crowd that knows these things, HST strikes you as a no-brainer,” he says. “If you’re the person on the street who doesn’t understand these things, it’s just not coming across. And for some reason (governments) don’t feel the need to explain it.”

The Ontario government has estimated that 51 per cent of families will pay more in taxes under the HST, as much as $480 more a year by 2012 for households that earn between $150,000 and $300,000.

The government also estimates it will take roughly a year before businesses begin to pass on their tax savings in lower consumer prices.

Gaudet is among the taxpayers who doubt whether businesses can be trusted to pass on the benefits.

“If we’re lucky, businesses will trickle down these savings some time in the distant future. All right well I guess I’ll hold my breath for five years while this tax kicks me in the wallet, waiting for that to happen,” he says.

But Wilkinson, a former businessman, says the desire to pass savings on is driven by competition, not goodwill.

“Those companies that pass along those savings will gain market share and those that don’t will lose market share. It doesn’t take too long for the marketplace to sort out the need for lower prices because of lower costs.”

Meanwhile, Wong’s “cognoscenti,” economists and tax experts, have long lobbied for a shift toward harmonization, which converts provincial tax collection from a convoluted retail sales tax (RST) system into a simpler value added tax system, like the GST.

VATs tax consumer spending, but RSTs tax both consumer and business spending, meaning the RST system often charged businesses for goods as if they were the end consumers.

The businesses then passed on taxes paid on equipment and other goods to consumers, raising the shelf price by three or four per cent.

That meant consumers paid provincial tax twice, once at the checkout, and again hidden in the purchase price, says Andrew Dunn, senior tax partner at Deloitte Canada.

“There was a double counting effect because businesses paid sales tax and then got no input credit and then when the good was sold to the consumer, the consumer also paid sales tax so there would be that element of inefficiency,” Dunn says.

Under the HST businesses will receive input credits for the entire blended tax on most purchases. Like the GST, they’ll pay the provincial tax up front, but can recover the costs when they report their returns.

The PST was designed to apply to “tangible personal property,” but its reach has been expanded through a series of amendments over the year, to include taxes on everything from parking to computer software.

The uneven exemptions distorted the system to the point where music CDs are PST taxable, but downloaded music is not.

A jurisdiction with the single tax system is more likely to attract an international corporation looking for a place to invest because it reduces operating costs, Dunn says.

The value added system is favoured in most countries around the world, as well as in Nova Scotia, New Brunswick, Quebec and Newfoundland.

Canada is the only country in the OECD to impose both a value added tax and a retail sales tax, and is one of two countries, along with the U.S., to maintain a retail sales tax at all, according to a report from the Fasken Martineau corporate law firm.

But Canada has been particularly slow to adopt an HST– likely due to our provinces’ historic reluctance to cede authority to the federal government, Dunn says.

Quebec was the first province to heed the federal government’s call to incorporate provincial taxes when the GST was introduced in 1991.

However, Quebecers phased in the harmonized system and maintained some control over tax collection. B.C. and Ontario are turning that job over to Canada Revenue Agency,which will return the provincial portion to the regional governments.

The Atlantic provinces implemented a harmonized structure in 1997 after the federal government agreed to provide $1 billion in transitional assistance to each of New Brunswick, Nova Scotia and Newfoundland & Labrador.

Several studies have showed the transition in those provinces was smooth. They have seen a slight decreases for consumer prices, and a significant boost to investment in the province, according to a 2007 C.D. Howe Institute report.

But there’s one key difference. In the provinces that have so far adopted the HST — mainly Atlantic Canada — the new tax was lower than the previous combined GST and PST.

In Newfoundland, which had a 12 per cent sales tax, the 15 per cent HST in 1997 was the biggest tax cut since that province joined Confederation in 1949.

Dunn notes that the magnitude of any savings passed on in B.C. and Ontario will be more modest because the tax rate is staying put.

Ontario and B.C., two of Canada’s largest economies, had been major holdouts in converting their tax structures. But they began to re-examine the regime when the recession hit and crushed their economies.

Ontario lost thousands of manufacturing jobs and B.C.’s forestry industry was devastated. The provinces racked up huge deficits to stimulate the economy and now need to generate revenue to pay down their debt.

In March 2009, the Ontario government decided it was time to reform the province’s tax legislation as it emerged from the recession and faced a restructured manufacturing economy and higher dollar, which put pressure on the province’s export sector.

Ontario believes that the province’s companies will attract more investment and productivity-enhancing technology with lower corporate taxes and a more efficient HST system, where companies can get tax credits for tax they pay.

The B.C. government, not wanting to lose out on millions of dollars in potential investments, began examining the potential benefits of the HST regime shortly after winning the provincial election, Hansen says.

“If Ontario was to have an investment environment that was … more attractive that British Columbian then we would be put at a significant disadvantage,” he says.

The three remaining PST provinces, PEI, Manitoba and Saskatchewan are likely to come around to the HST shortly, lest they too lose out on more investment dollars. And, a decade from now even Alberta, which doesn’t have a PST, will jump on board, Dunn predicts.

Experts compare the HST implementation process to the GST experience in 1991. In ten years, Dunn says, not only will people be accustomed to paying the tax, rates could be even higher.

Consumption taxes around the world range between 20 and 25 per cent in many countries.

Meanwhile, Hansen says his government would consider lowering the tax rate in two years if the economy turns around.

But, the July 5 deadline for that anti-HST petition approaches, when a Select Standing Committee must decide on recommending a referendum. If it does, the HST could very well be abolished. If it recommends against one, the Liberals could face the ire of the anti-HST campaign, which vows to use the province’s unique recall legislation to depose some of the politicians who implemented it.

Graw doubts whether the new harmonized sales tax will live to see her 55th birthday–in October.

She believe her boycott and the voices of her fellow “high-spirited” British Columbians will force politicians to kill the HST in its infancy.

“I’m going to live as frugally as possible, which doesn’t do local business any good,” she says.

“But hey, we’ve got to get things in line here and make this province more affordable to live in, and sometimes you have to pull things apart to rebuild.”

 

Source: CTV Toronto – The Canadian Press

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One Response to HST to hit amid fear over increased cost of living — #Toronto #economy #realestate

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