On July 1, British Columbia and Ontario joined Newfoundland, New
Brunswick and Nova Scotia in eliminating current provincial sales taxes
and implementing a Harmonized Sales Tax (HST).
On July 1, British Columbia and Ontario joined Newfoundland, New Brunswick and Nova Scotia in eliminating current provincial sales taxes and implementing a Harmonized Sales Tax (HST).
The HST is a value-added tax, or VAT. Similar to a sales tax, a VAT is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. The Canadian Restaurant and Foodservices Association (CRFA) has voiced concern that the HST will negatively affect restaurant operators in terms of lost sales.
News coverage of the HST has tended to focus on the effects on consumers, rather than the effects on retailers. Whether or not the HST will be a good thing for the general public is still being debated, but there are some anticipated positive effects for those in the retail sector.
- There will be one tax to deal with, rather than two. This means less paperwork and more time. This can provide real benefit to any business, but it is an especially useful benefit for a small business.
- Retailers will have lower expenses due to input tax credits. This should lead to stronger bottom lines for retailers. However, the Canadian Restaurant and Foodservices Association (CRFA) says the input tax credits will be of little benefit to restaurant operators because their two biggest costs (labour and food) don’t qualify.
- Fewer exemptions at the point-of-sale mean there will be fewer complications, and therefore less potential for audit.
Mark Shoniker is director of commercial banking for BMO Bank of Montreal. He believes that the implementation of the HST will provide a net benefit to retailers.
“If you’re a retailer, then the HST should be a big help to you,” says Shoniker. “The biggest investment you should have to make will be during the transition, and the province of Ontario has set up a transition fund to help take the bite out of that.”
Many businesses will be eligible to tap into this fund. A business that has less $2 million in annual revenue from taxable sales will be eligible for the Small Business Transition Credit of up to $1,000.
“I genuinely believe businesses will be better off,” says Shoniker. “You’re going from a two tax regime, with all the paperwork and processing that involves, down to one. You won’t have to remit two separate sales taxes anymore.”
You will also likely see a reduction in costs, as you will no longer have to pay provincial sales tax on goods you purchase to operate your business. The current provincial sales tax may be called a “retail” sales tax, but about a third of it is actually paid by businesses. Businesses pay them both when making investments and purchasing goods, either for direct sale or to use in manufacturing.
It could be argued that there is no such thing as a tax on a business. Every dollar that a business must pay out, whether it’s for raw materials, staff or taxes, becomes part of the cost of doing business. Since the cost of any particular item is based largely on what it costs to produce, any tax on business essentially adds to the final price to the consumer.
“There are only so many constituents to draw money from,” says Shoniker. “If you’re going to lower the tax burden on the business community, which this will, you’ve got to make it up somewhere else.”
Some economists have argued that taking part of the tax burden off of businesses will in turn lead to more business investment. This is essentially what has played out in the provinces that have already switched to HST.
“When you take a look at Atlantic Canada, most of the feedback from businesses was quite positive,” says Shoniker. “If you have a vibrant business community, you create a friendlier atmosphere for business. Consumers may pay more in the short term, but they may be better off in the long term.”
For restaurants, it may mean customers dine out less or turn to the tax-free grocery aisles more as they are paying more in that short term. This could result in a permanent shift in spending. The CRFA has forecasted a nearly $50,000 per year permanent loss in sales using an econometric model from the Conference Board of Canada.
Shoniker isn’t just talking about the potential for a more robust economy opened up by a friendly attitude towards business investment. While consumers will definitely take a hit from the new tax, prices should eventually start to come down. Since businesses will experience reduced costs under the HST regime, it should only be a matter of time until some of them begin to lower prices to become more competitive. At that point, consumers may begin to benefit as well.
“A VAT regime is a better business environment, and by and large, to date the verdict has been on the positive side,” says Shoniker. “Right now, it would appear that the two sectors who are going to benefit the most are retailers and manufacturers, in part because of their ability to acquire equipment and materials with no input taxes. The retail sector will unequivocally benefit.”
That’s not to say that Ontario and British Columbia have somehow stumbled upon a painless (and therefore magic) formula for maximizing tax revenues. No system is perfect.
“With the introduction of any big change, there are going to be pros and cons,” says Shoniker. “I think, in the end, that this will be a positive step towards a healthier business economy. It may end up actually being a tax-neutral exercise for provincial governments, but it will benefit both business and the competitive nature of business.” •
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