Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



The Canadian Government is Considering Harmonization of GST/HST Again

The rumour mill is turning that the Government of Canada may be preparing a plan to harmonize the federal goods and services tax (also known as harmonized sales tax in some provinces) (a value-added tax) with the unharmonized provincial sales taxes (which are single stage sales taxes).  In the 2007 Budget, the federal Government promised to harmonize the GST with the provincial sales taxes.  If the Government of Canada moves forward with this plan and is successful, it will simplify the Canadian sales tax regime for businesses and consumers and place Canada as a better destination for foreign direct investment.  The Canadian business environment should become more competitive.

In the 1990s, the Liberal Government made attempts to harmonize the goods and services tax (GST) with the provincial retail sales taxes in order to fulfill an election promise to scrap the GST.  Only New Brunswick, Newfoundland and Labrador, and Nova Scotia agreed to harmonize at that time.  At the time of the implementation of the GST, the province of Quebec enacted the Quebec sales tax, which it harmonized for the most part with the GST.

The provinces of Ontario, British Columbia, Saskatchewan, Manitoba and Prince Edward Island have not harmonized with the GST and Alberta does not impose a sales tax.  It will be an up hill battle for the federal Government to convince the non-harmonized provinces to harmonize.  The reason is simple, consumers will have to pay more sales tax.  Under the provincial sales tax regime, certain goods are exempt from sales tax and most services are not subject to sales tax (only services that are statutorily defined as taxable services are subject to sales tax).  For example, a haircut is not subject to provincial sales tax, but is subject to GST.  If the sales taxes are harmonized, the GST rate of tax and the provincial sales tax rate of tax would be applied to the supply of a haircut.  Another important example is that new homes are subject to GST, but are not subject to provincial sales taxes.

The past discussions on this issue fails to recognize that some businesses are at a competitive disadvantage to their foreign counterparts and provincial counterparts as a result of the application of sales tax to a particular transaction.  For example, many medical services are exempt from GST (so the consumer does not pay GST to the service supplier), but the suppliers cannot claim the input tax credits on business inputs.  As a result, if harmonization occurs, the cost of doing business will increase.  The same problem exists for the financial services industry, education industry, real estate industry, nursing home industry, ferry and bridge and other transportation industries, etc. 

There are also problems relating to the collection of GST at the border.  Currently, GST is collected of the duty-paid value of goods imported into Canada.  The Canada Border Services Agency (CBSA) enforces the Excise Tax Act for the Canada Revenue Agency.  In many situations the policies are not adequately connected (lawyers have been working for years to resolve issues concerning wash transactions for GST purposes) and errors made by CBSA officials or disagreements over the application of customs duties will become more costly and the effective harmonized sales tax rate increases.

However, the rumour mill is that the federal Government is aware of the problem for consumers and is planning to take steps to ensure the change is as neutral as possible for consumers.   There is no mention thus far about exempt  and other businesses.  It is possible for the drafters to consider and account for this problem by creating exemptions (GST is charged at the rate of 0%, but the provider is not allowed to claim input tax credits to receive a refund of GST paid on business inputs) or zero-rating certain supplies (GST is charged at a rate of 0%, but the provider is allowed to claim input tax credits to receive a refund of GST paid on business inputs).  These problems are not insurmountable - but, the federal Government may make mistakes (due to lack of knowledge) and it will take time to correct the mistakes with legislative amendments.  As a consequence, it is more important than ever for businesses to carefully consider how harmonization would affect their business and should lobby the Canadian and provincial governments to make sure the negotiators are aware of the problems that they will face if their business is not considered.

If you would like to read the National Post Article about the plan to harmonize Canadian sales taxes, please click on the following link.  http://www.canada.com/nationalpost/news/story.html?id=4584cde7-7459-4bb2-b155-ea514cf8f9b0&k=78740

There are fewer sales tax experts in Canada than income tax experts.  Please consider whether a sales tax expert can help you protect vital business interests. 

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