New 12% HST Tax – Replaces 7% PST in British Columbia on July 1, 2010 – Part 2

So how is the impending HST that is arriving to British Columbia on July 1, 2010 different from the existing two-component 7% PST and 5% GST tax regime and how will it affect British Columbians?

Well, the biggest change coming to BC with the implementation of the 12% HST is that it will apply to a greater number of goods and services that were exempted under the previous PST and GST combination. This is in effect a tax increase of 7% on a range of expenditures.

Under the old system the 7% PST was handled and administered by the BC Provincial Government. The 5% GST was a Federal tax handled and administered by the Federal Government by the Canada Revenue Agency under the Federal Excise Tax Act.

The GST or “Goods and Services Tax” is a multilevel value added tax introduced in Canada in 1991 by then Prime Minister Brian Mulroney and Finance Minister Michael Wilson.

GST was originally conceived in 1989 by the Conservative Government as a proposed National Sales Tax of 9% to replace the hidden 13.5% Manufacturers Sales Tax (MST) on wholesale manufactured goods and the 11% Federal Telecommunications Tax (FTT) that were in place at the time. The new tax proposal drew instant controversy from the liberal opposition and disdain from the Canadian public even though the proposal was lowered to 7% to sell it to the public.

In order to get the legislation passed Prime Minister Brian Mulroney used a little known constitutional move to increase the number of Conservatives in the Senate Chambers by eight members in order to get the legislation through the house and passed into law. Under severe pressure and opposition the new 7% GST National Sales Tax came into full force on January 1, 1991.

The 7% GST was heavily promoted by the Government as “revenue-neutral” in relation to the outgoing 13.5% MST. The new tax was meant to increase Canadian manufacturers international competitiveness and create jobs by removing the 13.5% MST tax, which was seen as a barrier to Canadian exports. However, the public viewed the new 7% GST as a tax shift away from manufacturers and onto consumers.

With the Canadian Government Budget Deficits in a surplus position, the Conservative Government reduced the tax by 1% bringing the GST down from 7% to 6% on July 1, 2006. Then as part of an election promise, the tax was reduced further to 5% on January 1, 2008.

GST is currently levied in Canada at 5% on specific categories of taxable or exempt goods or services. Businesses can claim the GST they paid on their purchases of goods and services that are consumed, used or supplied in the course of their commercial activities as “input tax credits”. These credits are then offset by the GST that they have collected during their course of business. This avoids the application of tax several times as it passes from business to business on its way to the final consumer, therefore removing a “cascading” tax effect.

The biggest advantage to Canadian businesses with the GST was that any exports from Canada were effectively tax-free. These “zero-rated” sales allowed the exporter to recover the cost of any GST paid on purchases used in making or supplying the exported item or product through the “input tax credits” they received.

On July 1, 2010 the Province of British Columbia will introduce a new 12% HST tax to replace the current two-component 7% PST & 5% GST taxes. HST will use the same tax base and structure as the past GST and work on the same “input tax credit” basis for businesses. It will also offer all the same advantages to businesses that the GST offered.

The actual HST in BC will be a 12% tax. Of this 12%, the Federal component will be the same as the GST at 5% and the Provincial component will be 7% as it was with the PST. This breakdown has nothing to do with the way a consumer or company will see the tax on any bills. It only has to do with the responsibility of assignment of the tax portion in relation to the Federal or Provincial Governments having control or responsibility.

The BC Provincial Government effectively has the ability to control its portion of the HST by designating a limited number of point-of-sale rebates for its 7% Provincial portion of the HST to BC individuals. It can also mandate certain restrictions to allowable business “input tax credits” on BC companies.

For big business in BC, the HST is actually an advantage because they will now be able to use the full 12% HST as “input tax credits” for their companies. Businesses that used to only have an “input tax credit” of 5% under the previous GST will now have 12% under the HST.

This is not a benefit in every business case though. A lot of small businesses in certain sectors of the BC economy will find that their goods or services offered will now be subject to a 12% HST which they will have to charge. In a lot of cases this means a “price increase” of 7% that they suddenly have to collect from their customers.

The BC Government recently setup a website where the headline reads “Jobs And The Economy: Facts About The HST” and on the front page they state that “most of the products we use will see no change in price under the HST.”

You can then go through their lists comparing items that will not change in price under the HST. You will also see a theme developing and may even come to the same conclusion that I have. In a majority of the cases where a product or service was previously exempt from Provincial Sales Tax (no PST), you will now have to pay HST. This basically results in a 7% price increase.

To explain this correctly, you have to understand that the 12% HST is replacing the 5% GST & 7% PST so anything that was previously not subject to the PST (no PST) and is now subject to HST will go up in price by 7% after tax.

The following is a list of items that will now be subject to the new 12% HST that were “Non-Taxable” under the previous PST tax. This list is what is currently available from BC Government sources and doesn’t cover every item or category.

Things that go up in BC by 7% after July 1, 2010 include:

• Newspapers
• Magazines
• Certain School Supplies
• Restaurant Meals
• Tickets to Sporting Events (hockey, football, etc.)
• Movie Tickets
• Music Concert Tickets
• Live Theatre Tickets
• Museum Admission
• Art Gallery Admission
• Golf Membership Fees
• Camping Site Fees
• Driving Range Fees
• Gym and Athletic Fees
• Ballet Lessons
• Karate Lessons
• Trampoline Lessons
• Hockey Lessons
• Soccer Lessons
• Safety Helmets for Sports (hockey, snowboarding, etc.)
• First Aid Kits
• Bicycles
• Over the Counter Medications
• Food Producing Plants (tomatoes, plum trees, etc.)
• Vitamins
• Massage Therapy Services
• Fitness Trainer Fees
• Adult Size Clothing for Children
• Used Adult clothing (less than $100)
• Hair Stylist Fees
• Barber Fees
• Esthetician Services
• Snack Foods (chips, pop, etc)
• Cigarettes
• Cigars
• Chewing Tobacco
• Nicotine Replacement Products
• Shoe Repair Services
• Tailoring Services
• Dry Cleaning Services
• Basic Cable Services
• Local Residential Phone Service
• Repair to Household Appliance Services
• Domestic Air Travel Originating in BC
• Domestic Rail Travel Origination in BC
• Domestic Bus Travel Originating in BC
• Domestic Ship Travel Originating in BC
• Taxi Services
• Hockey Rink Rental Fees
• Hall Rental Fees
• Electronic Music or Video MP3 Downloads
• Accounting Services
• Wedding Planner Services
• Veterinarian Services
• Funeral Services

The new HST will also directly impact the BC Real Estate, Construction, Building and Home Improvement industries by being applied to the following items:

• New Home Purchases over $525,000
• Real Estate Commission Fees
• Interior Design Services
• Household Moving Services
• Energy Star Windows
• Thermal Insulation, Weather Stripping and Caulking
• Residential Smoke Detectors (less than $250)
• Repair Services to Real Property (plumbing, electrical, etc.)
• Maintenance Services to Real Property (plumbing, electrical, etc.)
• Renovation Services to Real Property (plumbing, electrical, etc.)
• Landscaping Services
• Lawn Care Services
• Private Snow Removal Services
• House Cleaning Services

You can find the complete list of what’s taxable under the HST by clicking here.

The BC Government touts the HST as being good for “Jobs and the Economy.”

However, some people will argue that the HST is a further tax shift onto consumers, that each additional layer of taxes erodes a person’s disposable income and reduces their ability to save for a home or spend on products and services.