Monday, April 6, 2015

Canadian Taxes A to Z (2015): H is for Harmonized Sales Tax (HST)

Today, H is for Harmonized Sales Tax (HST). Eight down, 18 to go!

Yeah, I know it was only yesterday that we talked about GST. And that HST is a lot like GST, except that H is worth four points in Scrabble, while G is only worth two points. But given the grief that my clients suffer over GST/HST problems, I figured it was worth another post.

For those not in the know, in 1996 Nova Scotia, New Brunswick and Newfoundland & Labrador cut a deal with the feds to blend (and reduce) the provincial sales tax with the federal GST. Provincial sales taxes in Canada were cascading or turnover taxes. Meaning that you got hit with the tax every time ownership of the same items (or their earlier components) changed in the supply chain. The taxes artificially encourage vertical integration of business, rather than sensible organization of business according to sound economics, in order to avoid getting hit with the tax multiple times in the manufacturing process.

Sound economic studies, not voodoo math political smoke and mirrors, show that HST encourages business investment, whereas PST slows economic growth. Most of the western industrialized world has now moved to HST-type taxes (often called VAT - Value Added Tax).

As a tax lawyer, I'm all for a lower tax burden. From both a business and consumer perspective, HST does equal a lower tax burden when combined with its effect on greater economic growth - leading to more money in everyone's pockets at the end of the day.

Most studies show HST to be tax revenue neutral, and some suggest that everyone will pay less tax under an HST system. Certainly life is easier for business - especially small business - in collecting and remitting only one sales tax, and being able to claim input tax credits on business purchases.

In 2010 HST was implemented in both Ontario and British Columbia, but in 2011 a referendum in British Columbia voted 55% in favour of abolishing the HST and reverting back to the GST/PST system, effective in 2013. This resulted in BC having to pay back $1.6 billion in implementation funding to the federal government.

Don't mistake me for some government cheerleader. There are lots of wacky things about our tax system, and unfortunately taxpayers do sometimes need to fight for their rights (either by themselves or through hiring folks like me). But the theory of the HST is good economic and business policy. Full stop. The problems lie in its interpretation and application.

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