HST Backtrack Could Create Headache for BC Businesses
June 23, 2011
By Barbara Carss
Advocates for British Columbia’s commercial real estate and rental housing industries are in agreement that the harmonized sales tax (HST) should be retained even though the tax affects the two sectors very differently. They’ll be onside with the British Columbia government and dozens of other business organizations as voters in the province determine the HST’s fate via mail-in ballot this summer.
Since HST went into effect in July 2010, most corporate taxpayers have been eligible to recoup the full 12% tax rate on most of their business-related purchases and expenses. Previously, they received input tax credits (ITCs) only for the 5% federal goods and services tax (GST) with no compensation for British Columbia’s 7% provincial sales tax (PST).
“It was an unrecoverable tax that got buried into costs and passed through to consumers,” says David Schlesinger, head of KPMG’s Commodity Tax Practice. “In the past year, a lot of that buried PST has already moved out of the cost of activities like construction. If BC goes back to a PST environment, contractors are going to have to incorporate it back into their costs.”
Commercial landlords are among the beneficiaries of the wider ITC payout, although larger companies with annual revenues greater than $10 million now face extra costs for energy and telecommunication services. Previously, gas, electricity and telecom services were subject only to the 5% GST, but are now taxed at the HST’s 12% rate. Larger companies have been promised tax credits for these commodities and services on a phased schedule, but won’t be eligible for any rebate of the provincial portion of the tax until July 1, 2015.
Yet, unlike BC’s rental housing landlords who operate in a rent controlled environment, commercial landlords have flexibility to raise rents to offset new costs. Most of their tenants will also be eligible for a 12% ITC on their rents. Tenants that are banks are an exception since the tax rules exclude financial institutions from ITC eligibility.
Likewise, rental housing landlords have not been eligible for ITCs since the GST was introduced in 1992. They are now paying 12% tax on a range of services that were previously subject only to 5% GST.
“It makes it a very difficult situation for our industry. Costs have significantly gone up with no offset available at all,” observes Al Kemp, Chief Executive Officer of the Rental Owners and Managers Association of British Columbia. “We would welcome lower costs, but we also know it is going to cost a lot of money to go back to the GST and PST.”
DISMANTLING COSTS
Those costs would include $1.6 billion to repay the federal government for the special transition funding it provided to help ease in the HST, plus the cost of rehiring and continuing to employ 400 revenue administrators who have been transferred to the federal payroll. The provincial and municipal governments, other public sector agencies and businesses throughout the province would also have to adjust accounting systems they’ve only recently revamped to accommodate the HST.
“There were very, very complex rules relating to the transition from the PST to the HST and companies had to put systems in place to deal with those rules. How do they reverse those? How do they make IT changes? They don’t know what transition rules the government will put in place so there is a level of anxiety about all that,” Schlesinger notes. “Then there are the people and companies that have negotiated contracts based on cost structures that have removed the PST. Would they now have to renegotiate?”
The BC government recently passed legislation to introduce a phased reduction of the provincial portion of the HST that would lower the overall tax rate to 11% on July 1, 2012 and to 10% on July 1, 2014. There has been no promise to reduce the PST should it make a comeback.
“I think that’s an appeal to Joe Public,” Kemp speculates.
“That was an inducement,” concurs Paul LaBranche, Executive Vice President of the Building Owners and Managers Association (BOMA) of British Columbia. “I think, on its merits, it wasn’t really needed. In general, we are satisfied that the HST is good for business. It’s generally good for our industry and it’s good for the economy, long-term.”
UNCERTAIN CIRCUMSTANCES
Nevertheless, many onlookers perceive that supporters and opponents are somewhat evenly matched so the referendum results could be close. “It’s pretty tight right now,” LaBranche acknowledges.
“I know my sector and my members and I know that, in principle, they are supportive [of retaining the HST],” says Marg Gordon, Chief Executive Officer of the British Columbia Apartment Owners and Managers Association. “We were making some headway and government officials were listening to us about the need to mitigate the impact on our sector and find some made-in-BC solutions, but with the move to the new leadership, everything has been in a holding pattern.”
Meanwhile, postal service labour strife and delivery disruptions have already complicated the referendum’s schedule. The original plan called for the mail-out of ballots June 13-24, while returned ballots would have to be received no later than July 22 in order to count toward the official results. For now, that deadline for the vote cut-off remains in place despite the lock-out of Canada Post workers that halted national postal service on June 14.
A posting on the Elections BC web site states: “Elections BC is continuing production of the HST Referendum Voting Packages to the effect that there should be no delay in getting the packages to registered voters once Canada Post service resumes.”
A simple majority of cast ballots will determine the outcome.
For more information, see www.hstinbc.ca
|