Canada: Falling in Line – British Columbia Sales Tax Harmonization

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, July 2009

In March 2009, the Ontario government announced that it would be harmonizing its provincial sales tax with the federal Goods and Services Tax (GST) to create a 13% Harmonized Sales Tax (HST). The Quebec government then subsequently announced that it would also fully harmonize the Quebec Sales Tax with the GST. British Columbia (B.C.) has now fallen into line with its recent announcement to merge the 7% Social Service Tax (SST) with the GST to create a 12% HST. As in Ontario, B.C.'s new HST will take effect July 1, 2010.

The B.C. government waited until after the May election to seriously consider whether to harmonize the SST with the GST. Minister of Finance Colin Hansen indicated that the final impetus to proceed with harmonization was provided by greater flexibility shown by the federal government on the application of the HST. Previously, the federal government had insisted that the HST apply at a rate of 13%, with limited exceptions. That apparently changed when Ontario harmonized and was granted a number of exemptions to the HST by the federal government. Many of these exemptions (e.g., child car seats, books and diapers) have been extended to B.C.

The B.C. government will be given C$1.6-billion from Ottawa to help with the transition to the HST. It is expected that this will save the province an estimated C$30-million annually in administration costs. Unlike in Ontario, the B.C. government will not be passing along the federal transfer money to taxpayers in the form of income tax cuts. It appears to be earmarked for program spending instead.

The B.C. government and the federal government signed a Memorandum of Agreement that commits the parties to use their best efforts to negotiate a new Canada-British Columbia Comprehensive Integrated Tax Co-ordination Agreement (CITCA), together with any necessary related agreements, to have the Canada Revenue Agency and the Canada Border Services Agency administer the new HST. Canada and B.C. will use their best efforts to enter into the CITCA on or before September 30, 2009. The CITCA will confirm B.C.'s flexibility to, among other things, increase or decrease the B.C. HST rate after two years from the date of the new tax's implementation.

With B.C. and Ontario harmonizing, the remaining hold-out provinces (Manitoba, Saskatchewan and Prince Edward Island) will face even greater pressure to follow suit. One issue that will need to be resolved in the latter two provinces, which have provincial sales tax rates of 5% and 10% respectively (the lowest and highest in Canada), is the combined rate of the HST. Saskatchewan would likely prefer a rate lower than B.C.'s while the opposite would be the case for Prince Edward Island. The federal government obviously would like the HST rates to be as uniform as possible across the country.

Made-in-B.C. Components

As in Ontario, B.C. has negotiated a number of unique "made-in-B.C." components to address concerns raised by consumers, municipalities, charities, qualifying non-profit organizations, low-income families and the housing industry.

Automatic point-of-sale rebates will be available for the B.C. portion of the HST for the following items:

• gasoline, diesel fuel, marine diesel and aviation fuel including biofuel components for motor vehicles, boats and aircraft (no other province has this exemption)

• children's clothing and footwear

• children's car seats and car booster seats; books, diapers and feminine hygiene items.

A refundable B.C. HST credit will also be paid quarterly with the GST and carbon tax credit to offset the impact of the tax on low-income families.

There will also be rebates for municipalities, charities and eligible non-profit organizations to avoid tax increases for these sectors. The rebate percentages have not yet been announced.

As in Ontario, B.C. will be providing a partial rebate of the HST for new housing. The rebate will be equal to 5% of the purchase price of a new home, up to a maximum rebate of C$20,000. This is intended to ensure that purchasers of new homes up to C$400,000 will not pay any additional taxes. However, new homes above C$400,000 will only receive the flat, maximum rebate, which will result in increased costs.

As in Ontario, there will be a temporary restriction on input tax credits for large businesses with taxable sales in excess of C$10-million and financial institutions. The restrictions apply to the provincial portion of the HST on purchases of the following items:

• energy, except where purchased by farmers or used to produce goods for sale

• telecommunication services other than Internet access and toll-free numbers

• road vehicles weighing less than 3,000 kilograms (and parts and certain services)

• food, beverages and entertainment.

Impact on Business

B.C. Finance estimated that once the HST is fully implemented, it will reduce sales tax paid on inputs by businesses by C$1.9-billion, as a result of input tax credits being available for the HST (the SST was an embedded expense, since it was not a recoverable tax). The HST eliminates such tax cascading. It is also estimated that companies will save C$150-million in administrative costs. The foregoing are intended to enhance competitiveness, increase investment, productivity and exports, create jobs and generate long-term economic growth.

Impact on Consumers

Consumers will be no worse off on goods already subject to SST. However, there are a number of goods and many services that were previously exempt from, or outside the scope of the SST, which will now be subject to the 12% HST.

Below is a brief summary of what will cost more, or remain the same, for consumers as a result of harmonization in B.C.

We wish to acknowledge the contribution of Robert Kreklewich to this publication.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.