As readers will be well aware, the HST is being scrapped, and we are bringing back the provincial sales tax on April Fool’s Day, 2013. We thought it might be entertaining, and hopefully even useful, to review the history of this whole escapade, and its players . . .
First, Some Sales Tax History: BC’s former provincial sales tax had its origins in the 19th century. In those days, BC’s economy was far more dependent on the production of tangible goods. In those days, it was far easier to administer a tax that was based on tangible things, such as barrels of whiskey or piles of lumber, because they could be seen, and counted.
Over the decades the economy evolved to become much more dependent on services– an area not generally taxed under a sales tax system. A desire to see such extensive economic activity taxed led to several amendments to the provincial sales tax over the years, extending it to lawyers’ fees and auto repair facilities, as a couple of notable examples. Some social policy objectives were also worked in, perhaps most obviously in the “luxury tax” for expensive automobiles, wherein BC sales tax was set at 10%, rather than the regular 7%, for an auto costing more than a certain retail price.
The sales tax became awfully cumbersome and complex, with hundreds of special rules and exemptions. This was a major burden for business, which had the obligation to charge, and account for, the tax, and deal with auditors.
On the Federal side, the only tax based on sales was the “Federal Sales Tax”, which was levied on manufacturers, only – thus very few Canadians were even aware such a tax existed.
In the 1980’s, Prime Minister Brian Mulroney made reform of the Federal Sales Tax one of his principal objectives, because that tax was claimed to hinder the manufacturing sector’s ability to export competitively. That led to the introduction of the much-broader “Goods and Services Tax (GST)” on January 1, 1991. Its principal feature was a system of exemptions, zero-ratings, and credits, whose basic intent was to restrict application of the tax to Canadian domestic consumers, and to exempt certain areas of the economy where it was considered good public policy to do so. Businesses, while of course being made generally responsible to charge, and account for, the tax, were (importantly) able to recover whatever GST they were charged by suppliers (i.e., on their “inputs” in GST terminology), by simply claiming those charges as a credit against the remittances of GST due, when filing their returns. With such a system, the GST gets charged to, and refunded by, each element in the distribution chain until it finally reaches the end consumer, who ends up paying it.
Not all businesses need to participate – “exempt” businesses can avoid all involvement with GST (except of course to pay it, if charged to them). “Exempt” businesses include health care providers, financial services, sales of used residential housing, and residential rentals. Exempt businesses do not need to register with the Canada Revenue Agency regarding this tax – they simply do not charge GST on such services. They are, however, forced to accept that any costs incurred that bear GST become an additional expense of doing business.
However, some industries were favoured under the tax, by getting a “zero rating”. That meant that they did not have to charge GST to their customers, but still enjoyed the benefit of recovering whatever GST they were charged, just as would ordinary, fully-registered businesses. Industries that are zero rated generally include the production and sale of basic groceries and agricultural products, drug dispensing, medical supplies, and all exports (including services) to customers outside of Canada. Zero-rating exports was a principal policy objective of the GST, so as to give Canada’s exporters a competitive advantage in the world marketplace.
The GST “broadened the base” of the old Federal Sales Tax significantly, resulting inmillions of new registrants – a bonanza for the tax authorities, of course. One of the “benefits” of the computer age for the tax man.
As things transpired, the GST, which began in 1991 at 7%, was reduced twice, to 6% on July 1, 2006, and to 5% on January 1, 2008 (its present rate).
GST and its “Visibility”:
Other jurisdictions, notably in Europe, developed “Value-Added Taxes (VAT)”. These taxes, which apply to just about everything, including tangible goods and services, are quite high, with rates generally ranging from a low of 15% (Cyprus), to 27% (Hungary). Most are in the low 20%’s, including the main countries of the European Union. A significant feature of the VAT that fools many consumers (tourists included) is its hidden nature. That is, posted prices for goods are generally inclusive of VAT, so it is rare for people to be made specifically aware of the VAT component of the total price of the item. But otherwise, the system works very much like the GST.
Canada explored the option of “GST-included pricing”, but it was apparently considered not possible to do, since the provinces have jurisdiction over most price-posting policies, and all provinces chose to require prices to be posted exclusive of the GST, similar to their provincial sales taxes. Perhaps they did so to avoid confusion by Canadian consumers. In any event, virtually all prices in Canada are shown “pre-GST”.
Consequently, Canadians are very aware of the GST they are charged. It sits “side by side” with the provincial sales tax, so that a $100 item would be charged an additional $5.00 GST, plus $7.00 PST (in a province that charges PST at that rate), for a total bill of $112.00.
The Move to “Harmonize”:
The Federal Government knew they had a good thing going with the GST, and they invited the provinces to abandon their sales tax systems, by simply adding their tax to the GST base, into what became known as the “Harmonized Sales Tax” (HST). The Feds pointed out that adoption of the HST would permit provinces to terminate their own expensive administrative bureaucracies, to be replaced simply by the Canada Revenue Agency, which is already familiar with the tax. The CRA’s own systems would hardly be affected, since the addition of the provincial tax was relatively simple.
And of course, HST was not just a cost-saving for the provinces. Businesses would save, too, since they would no longer have to keep records for, and file separate tax returns for, the provincial sales tax. And eliminate an entire layer of auditors.
This concept appealed to several provinces early, and on April 1, 1997, three of them “harmonized”: New Brunswick, Nova Scotia, and Newfoundland & Labrador. But there were no other takers, for about a decade.
The Federal Government continued to push for harmonization. The 2008 Federal Budget referred to harmonization as “the single most important step provinces with retail sales taxes could take to improve the competitiveness of Canadian business”. And finally, Ontario and B.C. were enticed to make the transition – with a large cash transfer included in the bargain.
British Columbia’s Experience with Harmonization:
Readers may recall that BC Premier Gordon Campbell was re-elected to a third term on May 12, 2009. During that campaign, one of the promises he made was that the province would not accept the standing invitation of the Federal Government to scrap our existing provincial sales tax, in favour of harmonizing with the Federal GST.
Following his Government’s re-election, Mr. Campbell apparently had a change of mind, and in July 2009 announced the Government’s intention to join with Ontario, and adopt the HST.
Amidst a torrent of publicity, mostly negative, it was discovered that, in fact, the BC Government had been considering the HST (along with Ontario) well prior to the election. This revelation, along with general dissatisfaction with the general base-broadening nature of the HST, caused a furore of public criticism, led by former Premier Bill Vander Zalm (returning, as it appeared, from the political graveyard). This dissatisfaction continued even beyond the introduction of the HST, which was implemented on July 1, 2010.
Ontario also harmonized its sales tax on the same date, but with apparently very little resistance.
Amidst the ongoing furore over the HST, in September 2010 Gordon Campbell yielded to the protesters, and decided to put the whole issue to the public, in the form of a referendum, to be conducted in the summer of 2011. The people would be given the option to reverse the HST.
It was very unusual for a Government to put a tax, of any kind, to a public vote. And in this case, more unusual still in that the threshold for passage of the referendum was set at the lowest level possible: a simple majority (50%-plus-one) of the votes cast.
Many states that have referendum laws on the books require “super majorities” to effect a change, often determined to be two-thirds of the votes cast. A simple majority rule is not unknown, however.
The referendum campaign began, and in an even more bizarre twist, on November 2010, Campbell announced his intent to resign the Premiership – and to be gone from office before the referendum was held. Christy Clark then succeeded him as Premier in March, 2011. That left the matter of defending the “pro-HST” point of view to a brand-new premier. A rather tepid Government campaign in favour of the HST ensued, and the “anti-HST” forces seemed to enjoy all the momentum, and most of the publicity.
Elections BC conducted the referendum by mail-in ballot, throughout June and July of 2011. The question on the ballot was: “Are you in favour of extinguishing the HST (Harmonized Sales Tax) and reinstating the PST (Provincial Sales Tax) in conjunction with the GST (Goods and Services Tax)? Yes or No”. By a margin of 55% of those who voted (1.6 million people, of the approximately 3 million registered voters in BC), the HST was defeated. The Christy Clark Government accepted this result, and began a process of re-instating the old system, which it planned to achieve within approximately 18 months.
What with the fact that the entire Provincial Sales Tax Ministry had been dismantled, and its staff either laid off or reassigned to other departments, the conversion turned out to require more time – the changeover is now scheduled to happen on April 1, 2013.
When the HST came in, the BC Government received $1.6 billion from the Federal Government as “transition funding”. Now, this has to be paid back – over 5 years, without interest.
The situation in other provinces:
It seems the citizenry of Ontario have accepted the HST with little fuss, and all indications are that Ontario will keep it.
Alberta has no provincial sales tax, and has no plans to introduce one.
Only Saskatchewan, Manitoba, Quebec & Prince Edward Island continue to administer their own provincial sales taxes.
None of the 3 territories has its own sales tax.
However, ironically, on the very same day that B.C. will abandon the HST (April 1, 2013), Prince Edward Island will adopt it.
. . . . “only in Canada”, you say ?
The Plan to Transition back to PST:
So, unfortunately, we all have to learn the system again.
Here are some highlights of the PST – more details will be forthcoming, as we get closer to implementation date.
The basic rate will be 7% (as it is now, under the HST: 5% Federal plus 7% Provincial = 12% HST).
The PST will apply to the same goods and services that it applied to prior to the HST. Permanent exemptions will include:
- All food for human consumption (including basic groceries and prepared food, such as restaurant meals)
- Real property, whether it be residential or commercial
- Most services (accounting fees included, but not lawyers – their fees will be taxed !)
- Admissions and memberships
- Children’s clothing
- Bicycles and transportation fares
- Newspapers and magazines
- All permanent exemptions for business (recall that, under the PST, it was possible for a business to be “licenced”, and thus to acquire goods which are to be consumed in qualifying activities without having to pay PST – for example, to purchase raw materials or parts to be manufactured into a finished product)
The PST is applied at the time of sale, and is payable on goods brought into BC, for use in BC (so there is a requirement to ‘self-assess‘ for BC sales tax in situations where an item is purchased elsewhere). We note that BC’s former sales tax auditors were keen to audit areas such as fixed asset acquisitions, where expensive items are often acquired outside of BC – and we expect the new auditors to be no different.
Clients can expect to be contacted by the newly-reconstituted BC Sales Tax Department by mail in December 2012. That will include information on ‘how to register’. Online registration will commence January 2, 2013. Surely, everyone affected will be more than eager to register early ! And when you do, you will be rewarded with an assigned PST registration number, which will have the format “PST-1234-5678“. But nothing else, unfortunately . . .
Online services will be available for companies choosing to file and remit in that method.
And yes, the luxury vehicle “surtax” will return, for cars with an MSRP of $55,000 and higher. The brackets separating the 7/8/9 & 10% brackets are ridiculously narrow – at just $57,000, you get to the maximum rate of 10% PST.
Perhaps they’ll “fix” that. But we doubt it. So now would be an excellent time to ask Santa for a new Porsche.