HST Tax Alert

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I usually stay clear of anything to do with politics on this blog. The following applies primarily to people living or working in Ontario, Canada. It will have negative ramifications for the IT services industry in Ontario. In addition, it will effect our customers outside of Ontario, to whom the existing provincial sales tax does not apply.

In July next year (2010), the Ontario Provincial Sales Tax (PST) and the Canadian GST Goods and Services Tax will be merged into a single tax. The marginal rate remains the same (PST = 8%, GST = 5%, New HST = 13%). However, the current PST tax applies only to “goods” sold, rather than to services. The new combined tax will apply to both goods and services. The result is that work done for somebody (i.e. a service) will effectively go up in price by 8% instantaneously.

The IT services industry in Ontario is currently suffering from the overall rough economic status in the province. My company – thankfully – has been somewhat cushioned from the worst of it, due to our focus on marketing through channels. However – even in good times – there is intense pressure from offshore vendors who have the ability to leverage cheaper salaries to provide equivalent service at a lower price. A compulsory 8% increase in our pricing to our customers (and it will be more, since vendor’s pricing will also adjust accordingly) is going to provide a further incentive for companies to send their IT requirements offshore. This is the absolute last thing needed by our industry right now.

I’m not certain what the best way to react to this is – my MPP and I already see eye to eye on this, but he’s in the opposition. I think that signing petitions and the like is also an utter waste of time. There are a number of by-elections coming up, and I think that anybody effected by this tax grab needs to be vocally supporting one of the opposition parties on this (I don’t want to make this a partisan appeal of any sort).

The IT industry is doing its darndest to create decent-paying jobs in a rough economy, and its about time that our voice counted for something.

  • Kirk West

    There is nothing to worry about with the HST. In fact, most will be better off. The HST isn’t a cost, per se and therefore will in no way affect the bottom lines of either vendors or customers. If anything, it will reduce costs. For example, under the current system when a company purchases a good or service that is PST taxable, the must fold the cost into the cost of whatever it is they bought. For example, a router costs $100 plus gst and pst, $113. the actual expense applied to the books is $108, because the gst portion is netted against the amount charged on sales. The pst portion simply becomes added expense.

    Not so under HST. The entire tax is mow netted against sales taxed, therefore the actual expense put on the books is reduced to $100.

    I have argued on other blogs that while the HST is crap for consumers, it works out great for business who will no linger have the burden of paying tax on their business inputs.

    • Jeremy Lichtman

      One of my friends is on the board of his condo corporation. They did the calculations. Their average costs are going to go up around 6% – 7% as of next year, which will be passed along as a big increase in condo fees.

      I agree that there are all kinds of cases where this will allow people to write off the taxes at the end of the year. Unfortunately:

      - not all of my customers are businesses
      - not all of my customers are in Ontario (or Canada)
      - people need to deal with cashflow, regardless of what comes back after taxes are calculated

      I’m not fundamentally opposed to integrating PST/GST into a combined tax. I have serious issues with how this is being done though.

  • http://ekochman.wordpress.com Elie

    I have to disagree with Kirk. Your note only addresses those industries which are already charging PST, which is not the topic of this article. In an industry where you are not charging PST at all, the sudden addition of an 8% tax will affect your bottom line, no matter how you cut it. For any industry in which this tax is already being charged, this will, as Kirk points out, make it easier to keep your books.

    In reference to Jeremy’s point about fighting the HST, it will, unfortunately, take a while to cancel the GST-PST amalgamation. So while I agree with you in principle that we should be voting such that this will be canceled, it will likely take in the area of 5 years with the tax before it can get re-separated.

  • Kirk West

    Jeremy,

    (nice site btw)
    Your friends on the Condo corporation are incorrect. Their calculations are wrong. I’ve heard these numbers (6-7%) thrown around before, I have challenged them to show me these calculations, but none can, so until I see hard numbers, I won’t believe it. Besides, how do you get 6-7% on an 8% tax?

    As I mentioned, if you are an end user (the final purchaser) you are screwed. There’s no escaping the fact that HST will cost people 8% more on everything they buy that is not already PST taxed.

    • Jeremy Lichtman

      Thanks Kirk.

      I’ll ask my friend how they calculated the numbers.

      A lot of it has to do with maintenance related stuff – if they pay for somebody to service their elevators or air-conditioning, right now they’re paying GST on service (although they probably pay PST on parts – which is why the difference is less than 8%). So a chunk of their expenses are going to have the PST component of the new tax applied to them. They’re obviously just going to pass this along in the form of an increase in the condo fees.

      I’m totally aware that this has been steamrollered through. Its the same deal in BC as well. Its happening whether we like it or not. I DO think that the government needs to look at putting certain exemptions in place (like we currently have with both PST and GST tax regimes), in order to lessen the impact of this. I also don’t think that either the public or the corporate world was adequately consulted either – this was essentially announced as a fait accompli, which irritates me immensely.

  • Kirk West

    @Elie
    Elie,
    Making a distinction between who currently charges PST and who doesn’t is irrelevant. Currently, you cannot subtract the PST you pay from the amount you charge to customers. Under the HST, you will only pay the difference on what you charge in PST over and above what you pay.

    If you currently do not charge any PST on anything you sell, you will now have to charge it (as part of the HST), but you will also get to subtract whatever you pay in HST against it.

    The HST is a done deal. It will not be repealed in any way shape or form. It’s coming like a freight train. The Liberals have a majority. There’s no stopping it.

  • http://ekochman.wordpress.com Elie

    @Kirk West
    Kirk,

    If I currently provide a service for which I charge $100, and is PST exempt, then I can charge my client $105 (including the GST), and the GST gets passed on to anyone I have to pay, and ultimately, the government, thus ensuring that this tax is paid once. To my client, however, the bill remains at $105.

    Now, with HST in place, the same service will cost my client $113, which is an 7.5% increase. Granted I can apply the same credit to any HST I pay, so to me personally, my margin has not changed. But to my client, they now see a 7.5% increase as a result of the merge in taxes.

    While I agree with you that the HST is “a done deal”, I would be happy to vote in any way that would remove this merger. While the Liberals have claimed that it will not change the total tax collected, and that might actually be true, it will definitely change which goods and services will contribute to the total.

    As an example in the other direction, currently there is no GST on baby supplies. As a parent, merging the taxes would seem great, because now there will not be any PST either on these products, which lowers the amount of tax I have to pay, and thus affects my bottom line.

    Can you deny that a change in how the taxes are collected has occurred? In the second example I provided, the government will proudly tout the fact that my tax payments have gone down. What they haven’t acknowledged is that for any group currently paying GST, but not PST, your rates will have to go up.

    Now, for an Ontario business, competing against other Ontario businesses, this will not make much of a difference, since all of our fees will be going up by the same 7.5%. However, if, as an Ontario business, I try to acquire clients outside the province, and am competing against businesses outside the province, my prices have just gone up.

  • Kirk West

    @Jeremy Lichtman
    Ah, you see? You proved my point. In fact, their expenses WONT rise, because any additional taxes they must pay gets netted from the HST they will now have to charge on their condo fees. So the condo corp will actually save money because the PST they were paying before, is no longer rolled into the expenses.

    The owners (or renters) of the condo units will bear this cost, not the condo corp. Additionally, the condo corp will also reduce their administrative expenses marginally.

    • Jeremy Lichtman

      Hi Kirk,

      Everybody on the condo board is also an owner of a condo in the building.

      Not only are they looking at a large increase themselves (condo fees in that neighbourhood are currently in the range of $500 – $800 per month), but they also going to have to go up and down the elevators with a large number of angry co-residents.

      At the end of the day somebody has to pay for this – like you said its whomever is at the end of the value chain, which is often the consumer. That doesn’t mean that there isn’t an impact though – both cashflow issues and angry consumers are things that economists may consider externalities, but anyone in the hotseat doesn’t have that luxury.

      J.

  • Kirk West

    @Elie
    Elie,

    You are all missing one simple thing. The extra taxes are not expenses. What you pay gets netted against what you owe. They are inputs against taxes you charge on goods and services.

    Your example about your client now seeing a 7.5% increase is not technically correct, because your client still only sees a $100 expense. The additional money they must pay to cover the HST is simply netted against the additional money they charge in HST. So you see, it all comes out in the wash.

    As far as companies outside Ontario, I’m not sure what the rule is so I can’t really dispute what you say.

  • Kirk West

    @Jeremy Lichtman
    Well, you have a point there. I was just arguing from a financial standpoint that there is actually a positive impact on the bottom line when it comes to the HST for business.

    But as I said earlier, the consumer is going to get screwed. There’s no way around it. I wouldn’t be surprised if real consumer spending takes a hit as a result of the HST further hampering economic growth. As if we didn’t have enough to contend with.

    Politically, that’s why the $1000 bribe will go out.

  • http://ekochman.wordpress.com Elie

    @Kirk West
    Not quite correct. As Jeremy pointed out in an earlier comment, ultimately, someone has to pay. Since my total price just went up 7.5%, my client’s prices will have to go up by the same amount to cancel it out. At the end of the day, someone will be paying that 7.5% and not be able to retrieve it (unless, of course, the final consumer is the government, in which case, we’ve just wasted a large amount of money moving some money nowhere).

    • Jeremy Lichtman

      Let’s preface that a bit: suppose I own a store and I sell widgets that I buy from Acme Widget Co. The issue is that there’s a delay between when I remit the tax to my vendor (who eventually gives it over to the government), and when I get money back from the government, based on my tax return. That probably means that even though I’m billing the additional tax along to the consumer in my store, I’m still going to want to increase my prices a bit to cover the cash flow issue. These are things that economists like to call “negative externalities” and then ignore. My best guess is that we’re going to see real world inflation as a result though.

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  • Kirk West

    Jeremy,

    (nice site btw)
    Your friends on the Condo corporation are incorrect. Their calculations are wrong. I've heard these numbers (6-7%) thrown around before, I have challenged them to show me these calculations, but none can, so until I see hard numbers, I won't believe it. Besides, how do you get 6-7% on an 8% tax?

    As I mentioned, if you are an end user (the final purchaser) you are screwed. There's no escaping the fact that HST will cost people 8% more on everything they buy that is not already PST taxed.