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HST Tax Credits Unevenly Applied: Deferred and Disqualified Contributors Dispute Terms
July, 2009
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ALBERTA POISED TO PROFIT
Many observes question why the Ontario government did not raise the issue of tax harmonization earlier in its extensive consultation process rather than waiting until a few days prior to tabling the budget to float the idea.
“We sent a note to the government saying: Please don’t do this quickly. Take your time and do some consultation on it,” reports Chris Conway, Vice President, Government Relations, with the Real Property Association of Canada (REALpac). “But, of course, that didn’t happen and it was in the budget. Obviously, the federal government was involved too because it had to approve this.”
“Usually there is a lot of consultation on major tax reform but this was very, very different,” concurs Dan Cowin, Executive Director of the Municipal Finance Officers Association (MFOA) of Ontario. “This was done as a fait accompli.”
British Columbia has subsequently announced plans to adopt HST on July 1, 2010 and pressure appears to be mounting for the remaining holdout provinces – Manitoba, Saskatchewan and Prince Edward Island – to follow suit.
Alberta’s status as the only Canadian province without provincial sales tax could potentially lure more head offices of financial services companies to Calgary or Edmonton since financial services are not eligible for input tax credits and will face a straightforward 8% increase for many costs in jurisdictions adopting HST. An Alberta address could also potentially provide a competitive edge for service provision.
“We are waiting for place-of-supply rules. This will determine if the tax is applied where the service is received or where it is rendered,” says Cyndee Todgham Cherniak a lawyer with Lang Michener LLP’s international trade group.
Those rules have been promised for September of this year. Meanwhile, real estate industry advocates continue to consult with government officials.
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By Barbara Carss
Large commercial landlords will have to pay more than smaller real estate providers for electricity, gas and telecom services for at least eight years following the adoption of harmonized sales tax (HST) on July 1, 2010. Meanwhile, all rental housing landlords will permanently take on added costs for those commodities, as well as for all professional services that were previously subject to the federal goods and services tax (GST) but not the provincial sales tax (PST).
The Ontario government unveiled the largely unexpected plan to consolidate the 8% PST with the 5% federal GST in the March 2009 provincial budget. (Quebec, New Brunswick, Nova Scotia and Newfoundland have a harmonized tax in place now, while British Columbia recently announced it will adopt HST at the same time Ontario does.) As a result, all services and some goods that had previously been exempt from PST will be taxed at a rate of 13%.
On the plus side, most corporate taxpayers will be able to claim input tax credits on purchases and expenses related to commercial activities and be compensated for the full amount, whereas previously the rebate applied only to the GST. Several other tax reform measures will also go into effect in sync with the introduction of HST, including the launch of phased reductions to the corporate tax rate, elimination of the small business surtax, and cuts to the manufacturing tax rate. Once fully implemented, reforms are projected to cut the provincial tax rate on new business investment by 50%.
The federal government has committed $4.3 billion over two years to support Ontario’s implementation costs. Among transition measures, the Province will dispense $1,000 in three installments to all families with incomes less than $160,000 and $300 in three installments to all singles with incomes less than $80,000. Personal income tax cuts will also be implemented.
Ontario Finance Minister Dwight Duncan promotes the harmonized tax as a means to cut administrative costs for Ontario businesses by more than $500 million per year. “Every other country in the Organisation for Economic Co-operation and Development save the United States has a value-added tax – as do four other Canadian provinces. It is the way modern, globally competitive jurisdictions do business,” he stated in the budget speech.
Nevertheless, analysts and advocates from a range of sectors have raised some points of contention. The tax reforms are envisioned to be value-neutral across the entire economy, but individual taxpayers or categories of taxpayers will feel the impact differently. Financial institutions, large companies, rental housing landlords and public sector entities such as municipalities, hospitals, school boards, universities and colleges could or will assume new costs.
SECTOR-SPECIFIC COST IMPACTS
During the transition to the new system, large businesses with annual taxable sales greater than $10 million will be unable to recover any of the PST portion of their costs for energy, telecom services other than internet access or toll-free numbers, road vehicles weighing less than 3,000 kilograms and related fuel, or food, beverages and entertainment until July 2015. After that, the rebate will be phased in over a three-year period.
“We just had to increase the budget for all those costs by another 8%,” says Keith Major, Senior Vice President of Property Management for Bentall Capital’s Eastern Canada portfolio. “Small landlords will get an immediate benefit, but big landlords won’t. Most of the tenants in our buildings are small companies that would be able to claim input tax credits if they were in their own buildings, but as tenants they’ll have those costs passed through to them.”
Large commercial property owners and their tenants face a similar delay in Quebec. “The rationale for that wasn’t really clear. The rationale [in Ontario] seems to be that Quebec is doing it,” notes Chris Conway, Vice President, Government Relations, with the Real Property Association of Canada (REALpac).
Financial institutions and rental housing owners do not qualify for input tax credits and will be unable to recover any of the 8% tax on goods and services that were previously exempt from PST. However, industry representatives do commend the Ontario government for correcting an oversight that would have required developers to pay heightened taxes upon completion and occupation of new rental housing buildings.
Under current tax rules, developers of rental housing and seniors’ long-term care facilities are required to self-assess the value of the building upon completion and remit the equivalent GST. Likewise, developers of new homes and condominiums charge the GST to homebuyers. Imposition of HST would increase the current 5% tax rate to 13%, but compensating Provincial rebate structures have been adjusted to ensure that neither homebuyers nor developers/owners of residential investment properties will have to pay extra taxes on units valued at less than $400,000.
“We are happy the rental housing issue was addressed, but we have some concerns about the $400,000 benchmark and whether it could be a disincentive for green development, which typically has higher upfront costs,” Conway says.
Rental housing operating costs will climb, but passing the new expenses through to tenants will not be as straightforward as in commercial buildings. The Ontario government dictates the annual allowable rent increase for sitting tenants and other cost recovery processes are regulated through the Ontario Rental Housing Tribunal.
“We don’t have input tax credits as an industry so on July 1, 2010 there are going to be a lot of new costs that go directly to the bottom line,” says Vince Brescia, President and CEO of the Federation of Rental-housing Providers of Ontario. “The biggest cost impacts will be gas, hydro and all the maintenance contracts.”
Newly designated tax collectors also have concerns about adding an extra 8% to their invoices. This will be the case for numerous services that the real estate industry regularly employs including legal, planning, engineering and accounting services, as well as all labour related to maintenance and capital upgrades. Early proponents of the HST such as the Ontario Chamber of Commerce had called for exemptions for labour intensive industries.
“For us, the issue is the potential chilling effect on the consumer,” says Tony DiGiovanni, Executive Director of Landscape Ontario. “That’s where the problem lies for sectors that have never collected the PST and all of sudden will have to start billing for it. We are encouraging our members to send letters to the government.”
UNIVERSAL FISCAL NEUTRALITY UNATTAINABLE
The provincial government has pledged that HST will be fiscally neutral for public sector and non-profit organizations. Four different rebate levels have been set for the affected categories of taxpayers, ranging from a 93% rebate for school boards to a 78% rebate for municipalities, universities and colleges.
Public sector and non-profit/charitable bodies will receive a 100% refund of GST and the provincially stipulated percentage of the remaining tax expenditures. This is meant to ensure the Province can still collect revenue that those organizations formerly paid as PST on items such as office supplies, computers and furniture, while providing a rebate of the provincial portion of taxes that will be newly applied to energy costs, professional services etc.
Municipal budget crafters are still assessing the potential impact, but have already concluded that the so-called fiscally neutral program will still result in cost increases for some municipalities, particularly in relation to fuel costs for public transit systems and consulting fees. Analysts also want more evidence that the proposed 78% rebate is the accurate adjustment.
“It hasn’t been explained to us why the things we [municipalities] acquire are so different from what school boards acquire that leads to a much higher rebate for school boards,” observes Dan Cowin, Executive Director of the Municipal Finance Officers Association (MFOA) of Ontario. “But even if 78% is the right number for the sector, it is still not going to be revenue neutral in all jurisdictions. It is going to depend on the nature and mix of things they spend money on.”
Municipalities will also be HST collectors for programs and services for which they charge fees – licenses, permits, inspections, recreational programs, facilities rental etc.. Program providers have some concerns about consumer backlash or hardship, particularly when fees for popular sports programs increase 8%. However, from an administrative perspective, municipalities are already set up to collect and pay the GST.
“The HST is just going to be applied at this new rate for everything that would have attracted the GST,” Cowin says. “This should be easier than when we had to deal with the issue when GST was first introduced.” |
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