Deep in the Heart of Taxes

I took part in an interesting webcast today on Ontario’s transition to a harmonized sales tax (HST).

In July 2010, Ontario will phase out its 8% PST and add 8 points to the GST (currently at 5%). The result will be lower taxes to business (since the GST is a flow-through tax for business), but a tax increase for consumers (since PST was charged mainly on products, and rarely on services, such as manicures or electricity).

The goal is a laudable one – to reduce business paperwork by instituting a single sales tax regime. I have written before that this is a good thing. The change will also reduce the costs of investing in business equipment, helping Ontario manufacturers modernize at a lower cost than their U.S. competitors.

My concern is that the transition could be handled better. But mine was a lonely voice on today’s panel, which included Harinder Takhar, Ontario’s minister of small business, an ADM of the federal Finance department, two accountants, and the owner of a manufacturing business which is looking forward to reduced investment costs under the HST.

But I believe the consumer-service sector could be hurt by this change. When the price of haircuts, couriers, renovations, landscaping, lawyers and real-estate fees (not to mention new homes valued above $500,000) shoot up 8% next July 1, a lot of consumers will be forced to make tough choices. And those entrepreneurs will have to determine whether their markets can absorb that increase, or whether it will have to come out of their profit margins.

The provincial government will get their 8% - even if it reduces the entrepreneur’s take-home pay.

Ontario is lowering other taxes to make up for this increase – but of course your business has to make a profit before you can benefit from lower business tax rates.

The other problem: the federal government has offered Ontario more than $4 billion as an incentive to harmonize. Ontario has chosen to distribute most of it in the form of a $1,000 grant to every family in the province. So it’s a giveaway to a lot of people who won't need it, and not much help to those who will.

Yes, the HST will be good news for many businesses, especially exporters and B2B players. But the trusty, unsexy B2C sector will take a hit.

You may be able to view the video of the panel discussion at www.directengagement.com.

NOTE to Ontario entrepreneurs: Will your company benefit or suffer under the HST? Ask your accountant to work you through it. Now is the time to start planning your transition – and tightening up your systems to make sure no input credits will go unclaimed.