July 31, 2009

HST Base Confusion

The adoption of the harmonized sales tax (HST) means that BC loses much of its discretion to set tax policy, but the Memorandum of Agreement between Canada and BC states the final agreement will:

"… confirm British Columbia's flexibility, subject to reasonable notice provisions to designate a reasonable number of BCVAT point-of-sale rebates, not exceeding 5%, in aggregate, of the estimated GST base for British Columbia subject to data availability and definitions used in the Canadian System of National Accounts or other mutually agreed upon data sources, definitions and methodologies. For greater certainty, and subject to the foregoing, point-of-sale rebates that Canada agrees to administer for British Columbia will include motive fuels, children's clothing and footwear, children's car seats, feminine hygiene products and books."

That flexibility makes the definition of the words "GST base" very important; it is not included in definitions used in the National Accounts. Since the GST is a tax, we can look up definitions of the words "tax base". While those words are not in the National Accounts glossary, you can simply use any Internet search engine on the words "tax base definition". There you will find tax base defined as "the wealth within a jurisdiction (as in real estate or income) that is liable to taxation."

If the GST base is $155 billion then there is more room to create an exemption for the restaurant industry than if it is $100 billion. I asked the people in the Ministry of Finance who are handling enquires regarding the HST, what are the PST and HST tax bases? I received the following answer:

"The HST base is the expenditures which attract tax after accounting for exemptions, zero-rating (e.g. basic groceries) and input tax credits but before accounting for the major rebates (including point of sale, rebates to public sector bodies and housing). For BC in 2007, this amounts to about $93 BC. Given that the PST system does not have a similar rebate system, we would probably say that the PST base in 2007 was $5B / 7% = $71 million (it would be slightly less than this due to the fact that PST revenue includes the 10% liquor tax rate although this would be a small negative adjustment to the $71 billion). GST revenue before input tax credits cannot be used as a measure of the base because the tax does not stick to businesses that can claim input tax credits."

That answer is inconsistent in that it defines the PST base differently than it defines the GST base. Just as the PST base is defined by dividing PST revenue by the PST tax rate, so also the GST base is defined by dividing its revenue by its rate, not by first adjusting the tax revenue by subtracting input tax credits. That accounts for the difference between a GST tax base of $155 billion and what the Ministry maintains is the much smaller base of just $93 billion (its note mixed millions and billions, but the context is clear).

Understating the GST base unnecessarily limits BC's flexibility as described in the Memorandum of Agreement, but it is politically convenient to make it appear that the HST doesn't really more than double the value of goods and services captured by the tax relative to the PST.

You don't have to be a tax wizard to see how all encompassing the HST will be. Pay careful attention to all your bills and receipts. Whenever you see just one line for tax, a 5% GST, keep in mind that effective July 1, 2010, that line will change to a 12% HST. That applies to everything from your cup of coffee to the purchase of a newly constructed house.

July 28, 2009

HST Tax Grab

BC's harmonized sales tax (HST) will apply to more than twice as many things (by value) than are taxed by the provincial sales tax (PST). That is why some people are calling it a massive tax grab even if input tax credits and low income refunds render it revenue neutral for the government.

Last year the PST raised $4.96 billion for the province. Dividing by 7% gives the PST tax base of $70.8 billion. The most recent GST statistics by province are for fiscal year 2003-2004 when the GST rate was also 7%. In that year $10.87 billion was collected in BC (before input credits), so the BC GST tax base was $155 billion, 120% more than the PST base. A usually reliable source reported that according to the Ministry of Finance, the HST tax base is only $100 billion. Resolving the difference between the easy calculation and the Ministry's claim is important in determining the credibility of a government that promised the deficit wouldn't exceed $495 million and that it wouldn't sell BC Rail.

The BC Restaurant and Foodservices Association is planning a protest with town-hall meetings and an online petition. As supporters of the Campbell government who have donated substantially to the BC Liberals, their protest might be viewed as a beating with a wet noodle. Even in his initial note of alarm, Restaurant Association President Ian Tostenson spoke of the Association's "great working relationship with the Premier", despite evidence that Campbell will show the restaurant industry no mercy. One of the big differences between the harmonization of the GST and PST in BC and Ontario is that in Ontario restaurant meals are already subject to an 8% sales tax. Campbell may feel justified in making British Columbians who eat out suffer just like Ontarians. It would be a useful research project to compare the industry's recent use and growth in each province to see what effect different tax regimes have had. It will be a test of the political power of the industry to see if it moves its online petition to the front counter of every restaurant in the province. That is what it would take to get noticed, but it is doubtful whether the Restaurant Association has the political will to thump the nose of the Campbell government that hard.

Another difference between the July 1, 2010 introduction of the HST in BC and Ontario is the taxation of gasoline and diesel. A 15% HST will be applied in Ontario to both fuels while BC will apply a point-of-sale rebate so as to refund the provincial portion of the tax. The Ontario NDP is organizing a tax revolt based on the new tax but BC has had a debate over its "gas tax", which some think Campbell won. Ontarians will end up paying about the same as BC's carbon tax (7.24 cents per litre in BC by 2012 vs. just under 7.2 cents per litre in Ontario effective 2010 if gas in Ontario averages 90 cents/litre). In other words, Campbell's exemption of fossil fuels under the HST is just a way of maintaining his carbon tax. If he merged the two, there would be room to exclude restaurant meals from the HST rather than wasting the exemption on gasoline and diesel fuel. (There is a limit of 5% of the tax base that can be used for exemptions.) No one ever said that Campbell isn't stubborn; in this case to the detriment of a major industry and its customers.

The HST is much more than the combination of the old GST and PST. It replaces the PST with a tax that is conceptually different, a value added tax that results in exports not being taxed. The effect of effectively exempting exports, as well as applying input credits to all purchases of machinery and equipment, while maintaining the same net provincial revenue, is to shift the tax burden to consumers, particularly to consumers of goods and services not previously subject to the PST.

The Memorandum of Agreement between Canada and BC reveals some details of the change in taxation but there are more questions than answers. For example, companies with more than $10 million in revenues will not be allowed to claim input tax credits until five years after the HST goes into effect, and even then their ability to claim will be phased in over five years. How many such companies exist in BC and what will their input credits represent as a percentage of the tax base? The Ministry of Finance should be able to answer that question since it goes to the heart of some of the economic consequences of the tax shift.

Currently some small charities (those with less than $250,000 in revenue) are exempt from GST, but subject to PST, e.g. hospital gift shops or art councils. Will they be excused from the HST even though they are now registered for the PST? The Memorandum of Agreement suggests that they may end up paying the provincial portion of the HST even though they never had to register for GST.

Accountants can think of dozens of other questions, all of which must be answered if the HST is going to be implemented without causing even more disruption than what is apparent from a massive tax shift.