Who Benefits When HST Takes Effect In 2010

Touted as a panacea for Ontario’s ailing economy but condemned by others as the biggest cash grab in the province’s history, the harmonized sales tax will likely have more than a few people scratching their heads when it takes effect next July.

Merging the eight per cent Ontario sales tax with the five per cent federal GST will increase the cost of many items that were previously exempt from the provincial levy: from gasoline to Internet bills, haircuts and real estate fees.

It’s also part of a larger package that includes one-time relief cheques, new credits and income tax cuts, which makes the math more complicated. So who will be the winners and losers?

Lower and middle-income earners, as well as anyone buying a home for less than $500,000, will benefit the most from the changes, experts say.

Wealthy people will end up being taxed more because they tend to spend more money, and First Nations say they’ll be worse off because they can’t keep their point-of-sale exemption from the provincial portion of the new 13 per cent tax.

Ontario’s move toward the merged tax, bitterly opposed by the Progressive Conservatives and New Democrats, sees the province join Quebec, New Brunswick, Nova Scotia and Newfoundland and Labrador in the national HST club. British Columbia is also set to harmonize its tax on July 1.

Ontario’s opposition parties point to the cost hike of items like gasoline in arguing the HST is going to kick people when they’re already down because of the recession.

But if you look at how the HST will make businesses more competitive, the argument could be made that everyone will end up a winner, said TD economist Don Drummond.

Many businesses that have long advocated for harmonization say it will slash costs by reducing red tape and will eliminate goods being taxed multiple times at different stages of production.

Instead, businesses would get a rebate on the taxes paid at each stage along the supply chain, which would lower the costs and pre-tax prices of many goods.

“It will boost capital spending, particularly in machinery and equipment, and that will raise productivity and that will come back to higher wages and more jobs for everybody,” Drummond said.

“It’s a bit more of an indirect route, but I would argue that would end up as a win-win for not just business, but for households as well.”

TD predicts businesses will likely pass the majority of the tax savings on to consumers. It could take a while in some cases, as businesses with over $10 million in annual sales can’t claim the credits for five years.

But those reductions won’t be enough to fully offset the impact of the tax, which will apply to a broader array of goods and services. As a result, the effective tax rate on consumption will rise by 1.5 percentage points and the overall level of consumer prices in Ontario will increase by 0.7 per cent, he said.

Consumer prices in Canada have increased one per cent in the 12 months to November, according to the latest data from Statistics Canada.

While businesses figure out how to adjust their prices, consumers can receive government cheques of up to $1,000 for families and $300 for individuals in the first year of the HST to offset the pain, said Revenue Minister John Wilkinson.

The cheques will be funded primarily by the $4.3 billion that Ottawa is kicking in over two years to ease the transition.

But there’s a caveat: you must file a 2009 tax return.

“Under the law, if you don’t owe any income tax, you don’t have to file,” Wilkinson said. “But if you don’t file, then you can’t get the credits.”

It’s particularly important for low-income individuals and families to file their tax returns and get the relief cheques, even if they don’t make enough money to pay income taxes, he said.

The benefit gets scaled back for singles who make more than $80,000 a year and families who earn more than $160,000 a year.

Residents will also get a personal tax cut starting Jan. 1, when the provincial rate on the first $37,106 of taxable personal income will fall from 6.05 per cent to 5.05 per cent.

For low-and middle-income adults, there’s a permanent sales tax credit that will provide a maximum of $260 per person annually, and a property tax credit that will maintain existing benefits and extend it to more people.

Still confused? There’s a government website (www.rev.gov.on.ca/en/taxchange) that tries to explain the tax package, and even includes a calculator designed to help consumers figure out how much money they could get back.

Overall, Ontario residents will receive $10.6 billion in tax relief over the next three years, Wilkinson said.

But the HST will help replenish provincial coffers once economic conditions improve, said one tax expert.

“I think it’s a huge revenue engine, potentially,” said Brian Pel, a tax lawyer with McCarthy Tetrault law firm in Toronto.

“That’s got to be the reason why they’re doing it. Why would they brave the clearly obvious downside of introducing a tax like this if there isn’t going to be a huge windfall for the government over the longer term?”

The governing Liberals, who were quick to react to criticism about the HST, deserve credit for bringing in measures to offset its impact that B.C. wasn’t willing to do, said David Docherty, a politics professor at Wilfrid Laurier University.

But that may not be enough to save Premier Dalton McGuinty from paying a political price in the 2011 election.

“If some of my friends who are very bright and work in economics departments think it’s tax grab, he’s lost that battle,” Docherty said.

“I’m not too sure if it’s going to really haunt him or be the cause of his downfall, but that was one I don’t think he saw coming.”

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How The HST Affects Items You Buy

Ontario will create a 13-per-cent harmonized sales tax next July by merging the provincial sales tax with the five-per-cent GST.

Here is a list of items and services that were previously exempted from the PST, but will now rise eight per cent because of the HST:

-Electricity, home heating fuels, gasoline, tobacco, Internet access fees, professional services such as legal accounting and real estate fees and personal services such as hair cuts and dry cleaning.

Here is a list of items that are ex
empt from the HST:

-Basic groceries, child care services, municipal water, most health-care services, certain medical devices, most educational services, municipal public transportation, auto insurance, mortgage interest costs, residential rent, prescription drugs, pharmacist dispensing fees, music lessons, and adult incontinence products.

Here is a list of items that will be exempt from Ontario’s eight-per-cent portion of the HST:

-Books, children’s clothing and footwear, child car booster seats, diapers, feminine hygiene products, print newspapers, and prepared foods costing under $4.