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HST Havoc
November, 2011
B.C. Backlash Creates Financial Fallout for Corporate Taxpayers
By Barbara Carss
Few observers express surprise at the results of British Columbia’s recent referendum on the fate of the harmonized sales tax (HST). Even supporters acknowledge that it was implemented clumsily after the incumbent government had promised in an election campaign that no such tax would be forthcoming.
“The way the government instituted it in a sleight-of-hand way annoyed enough people that they voted in protest,” says Jamie Bleay, President of the Vancouver chapter of the Canadian Condominium Institute (CCI).
“This was a taxpayer uprising,” concurs Al Kemp, Chief Executive Officer of the Rental Owners and Managers Society of British Columbia (ROMS BC). “They voted with their ‘we hate government’ hats on.”
B.C.’s failed deployment now leaves the province with $1.6 billion to repay to the federal government and a host of logistical details to work through to undo the short-lived streamlined tax regime. B.C.’s Minister of Finance, Kevin Falcon, has estimated it will take about 18 months to reinstate a separate goods and services tax (GST) and provincial sales tax (PST) with the switchover likely occurring in the spring of 2013.
Nearly 55% of cast ballots favoured eliminating the 12% HST. In doing so, the majority rejected the B.C. government’s pledge to reduce the provincial portion of the HST if voters opted to keep the single tax system, which would have cut the overall tax rate to 10% by July 2014.
Corporate taxpayers will also lose the expanded 12% tax rebate – known as the input tax credit (ITC) – they’ve received on most business-related purchases and expenses since the HST went into force on July 1, 2010. ITCs will once again be reduced to just the 5% GST with no compensation for the 7% PST.
BURDENED SECTORS
On the consumer side of the equation, however, HST brought new taxes on services that were previously subject only to the GST and additional taxes on newly constructed housing priced at more than $525,000. Although new home rebates neutralize the effect of HST for many entry-level homebuyers purchasing lower priced dwellings, the added tax burden equates to an extra $20,000 on the price of a $650,000-home or an extra $33,000 on a home priced at $850,000.
Larger corporations with annual revenue in excess of $10 million also faced extra costs as they paid a 12% tax on gas, electricity and telecom services that were previously subject only to the 5% GST. As in Ontario, these larger companies were promised they would eventually receive ITCs for the provincial portion of those energy and telecom costs, but on a phased schedule that would not begin until July 1, 2015. (Large businesses in Quebec can now look forward to receiving a full tax refund on these commodities following a recent agreement between the federal and Quebec governments. See sidebar.)
Canadian tax laws exclude multi-residential landlords and financial institutions from receiving ITCs so they, too, began paying a straightforward extra 7% with the arrival of HST. Nevertheless, rental housing industry organizations lined up with other B.C. business groups to support retention of the HST.
“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,” Kemp observed last summer while mail-in voting was underway.
TRANSITION LIMBO
For now, the HST remains in place – an interim that is expected to discourage new home sales in the move-up market, but possibly spur some corporate taxpayers to make capital investments while they can reap the 12% tax credit. The Vancouver chapter of the Urban Development Institute (UDI) is urging the B.C. government to immediately discount its share of the HST on new homes, arguing that a lengthy transition period will have an even greater impact on provincial tax revenue if sales drop and employment plunges in the construction sector.
“Some projects that were in pre-sales are in a difficult position,” reports Maureen Enser, Executive Director of UDI, Vancouver. “Why would purchasers pay the extra money now if they can hold off for another year or so?”
Although it’s not likely that commercial building owners/managers will replace big-ticket items before the end of their life cycles or launch any renovation/retrofit projects that aren’t already in the short-term capital budget, there is now added incentive to move forward with projects near the top of the to-do list.
“If you’re thinking about purchasing something in the next year to 18 months then you’d obviously want to do that when you can still take advantage of the full rebate,” notes Paul LaBranche, Executive Vice President of the Building Owners and Managers Association (BOMA) of British Columbia.
MULTI-RESIDENTIAL COMPLEXITIES
New HST costs in the twelve months between July 2010 and 2011 underpin a 4.3% allowable rent increase guideline for 2012, which is one the highest rent increase ceilings residential landlords have had to work with in several years. The annual guideline, which takes effect January 1, is based on inflation in B.C.’s consumer price index (CPI) in the 12 months ending July 31 plus 2%. In comparison, the 2011 guideline is 2.3%, based on the CPI in the period from July 2009 to 2010.
The 2012 rent increase guideline would have been a one-time adjustment even if the HST had stayed in place, but landlords are now wondering what the 2015 rent guideline will look like as it reflects the first year of the return to GST/PST. “That could take it down below 2%,” Kemp says.
Across B.C.’s rental housing industry, it’s estimated the HST has increased operating costs by 1.5 to 2%. This is still a more modest increase than Ontario’s rental housing landlords have absorbed because B.C.’s residential sector has been exempted from HST on heating and hydro costs.
“Theoretically, our costs will go back down in 2013 by 1.5 to 2%, but as taxpayers in general, landlords will be on the hook to pay the money [$1.6 billion in transition funding] back to the federal government and carry all the other transition and ongoing administration costs,” Kemp says.
Meanwhile, B.C.’s condominium sector has been somewhat on the sidelines of the debate – unlike in Ontario where organizations like CCI’s Toronto chapter and the Association of Condominium Managers of Ontario voiced opposition to the introduction of the HST.
“It has not been on the radar as a good thing or a bad thing as far as condos are concerned. I think a lot of strata corporations weren’t concerned about it because they don’t pay it on their fees,” Jamie Bleay reflects. “In this transition period, I would definitely think there is going to be more negative than positive impact when it comes to pre-sales of new condo units.”
RETURNING & ONGOING COSTS
The provincial and municipal governments, other public sector agencies, and businesses throughout the province will have to adjust accounting systems they’ve only recently revamped to accommodate the HST, but no directions have yet been released to guide this process. The B.C. government will also have to rehire tax administrators that had been transferred to the federal payroll, while corporate taxpayers will once again require two sets of paperwork for two separate governments.
Enser points to the frustration inherent in long-term or phased development projects that span the entire pre- to post-HST period. “We’re going to have a blend of old, new and old-again rules,” she says.
“A more streamlined tax is lost, and the restructuring that businesses had done to prepare for this now has to be reversed. All that is a huge, huge headache,” LaBranche agrees.
Nor is it certain that readopting the GST/PST will mean a return to the pre-HST tax environment since the provincial government has the legal flexibility to continue taxing services. It also has financial headaches of its own.
“The return to the PST creates significant pressure on the government budget,” Finance Minister Falcon warned in a statement following the release of the referendum results. “In May, I outlined the approximately $3-billion hole created in the fiscal plan over the coming years if we return to the PST.”
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