On July 1st, a series of tax reforms will come into effect in British Columbia and Ontario. They include a reduction in corporate and personal income taxes, and a merging of the PST and GST into a Harmonized Sales Tax (HST). Some argue that these are effective measures to help stimulate the economy, while others are claiming that the move hurts Canadians by essentially shifting the taxes off of businesses and onto consumers.
Ontario Minister of Finance, Dwight Duncan, explains the benefits, stating that “once fully implemented, the reform would cut Ontario’s tax rate on new business investment in half, making Ontario one of the most competitive jurisdictions in the industrialized world for new investment”.
In a recent paper, policy analyst Jack Mintz praises Ontario’s 2009 budget. He reported that, after the HST and tax reductions take effect, Ontario will benefit from increased annual incomes, more capital investment, and the creation of 591,000 new jobs.
A recent report by TD Bank stated that the HST alone would reduce the cost of doing business in Ontario and B.C. by $6.9 billion. However, this attractive investment environment shifts the tax burden onto consumers. It is predicted of the reforms to cause a 0.4% increase in the Consumer Price Index (CPI).
Lower income consumers are expected to be disproportionately affected by the HST, as they pay a higher proportion of their income on goods and services that were exempt from PST. The budgets of Ontario and B.C. address this by providing income tax reductions and tax credits for low income Canadians.
Large business will benefit from the improved tax environment and lower costs; for small and medium size businesses, however, this benefit may be offset by lower retail sales, as consumers feel the pinch of higher prices.
With the HST, consumers will effectively pay both GST and PST on many items which are currently exempt. Products including hearing aids, movie or theater tickets, heating fuel, rent and food, in addition to many other goods and services currently exempt from PST will cost 7% and 8% more in B.C. and Ontario, respectively.
Mutual funds will become a relatively less attractive investment vehicle, as their PST exemption will not been maintained under the HST.
However, some exemptions will continue to apply. Newspapers, prepared food, and drinks under $4.00 will be exempt, as will books, children’s clothing and footwear, diapers, and feminine hygiene products.
It will not be clear whether the decision to change to a Harmonized Tax Regime was a wise choice until we see if the optimistic predictions of job creation and increased capital investment come to fruition. The forecasts are mainly predicated on an expected increase in the attractiveness of Ontario and B.C. to global markets, and the resulting increase in the level of foreign investment. However, this factor is highly influenced by changes in global economic performance, and so the accuracy of the prediction is doubtful.
The tax reforms taking place in the provinces of Canada represent an important shift to a more internationally focused economy. The governments of Ontario and B.C. have bet that the increased economic performance resulting from lower business costs and greater global competitiveness will assure their province’s economic future, and justify additional consumer costs. How this gamble will play out is yet to be seen.
