The harm in tax harmonization

(Jan. 16/08) CRFA is actively opposing moves to introduce harmonized sales tax (HST) in British Columbia, Saskatchewan and Ontario, and so far the provinces have resisted Ottawa’s calls to harmonize.  Not only would tax harmonization hit consumers with a higher tax bill, it would ratchet up the sales tax on restaurant meals while most grocery food remains tax-free.

Currently, only four provinces have an HST:  Nova Scotia, New Brunswick, Newfoundland and Quebec, where a common tax base applies to both the federal and provincial sales taxes, but the federal tax is applied on top of the provincial tax.  The federal Finance Minister has been pushing the remaining provinces to harmonize, and several business groups and media outlets have endorsed the move.  But very few have taken the time to explain what harmonization will mean for business owners and their customers.

How harmonization hits consumers

A harmonized sales tax (HST), which could range from 10% to 15% depending on the provincial sales tax rate, would apply to all goods and services that are subject to the GST – including those that are currently exempt from provincial sales taxes. Depending on what province they live in, consumers would see the sales tax go up on a host of everyday items, such as heating and utilities, books, children's clothing and footwear, restaurant meals and a long list of services – from car washes to haircuts.

Economists estimate that harmonization in the five provinces that run a separate provincial sales tax system (Alberta has no provincial sales tax) would result in a whopping $7.5-billion shift in taxes from businesses to consumers (1). 

Harmonization is of greatest concern to the foodservice industry in British Columbia and Saskatchewan, where restaurant meals are exempt from provincial sales tax, and in Ontario, where restaurant meals under $4.00 are PST-exempt.  These exemptions would be wiped out under the HST.  Past experience has clearly shown that when taxes on restaurant meals go up, sales go down.  When the GST was introduced in 1991, restaurant sales fell by 10.6% and 42,000 jobs were lost.

Fix the GST flaws first

Ever since the GST was introduced, it has placed foodservice operators at a competitive disadvantage, because products sold in restaurants are subject to the GST, while similar or identical products sold by the closest competitors – grocery stores – are not. 

For consumers, this created an unfair situation in which the bottle of juice they buy at a restaurant is taxed, while the same bottle of juice at a grocery store is tax-free. Pizza ordered from a restaurant is taxed, but a frozen pizza is tax-free.

This tax flaw would be embedded and exaggerated in a harmonized sales tax, unless the federal and provincial governments take the time to first fix the flaws in the GST.  Otherwise, they will simply be extending an already unfair tax across more goods and services that Canadian consumers use every day. 

Related Documents

1. Canadian Tax Highlights, Vol. 15, Number 5, May 2007