In its 2009 budget, the Ontario government proposed that, effective July 1, 2010, its Retail Sales Tax (RST) be converted to a value-added tax structure and combined with the federal GST to create a federally administered single sales tax. The single sales tax would have a combined tax rate of 13 per cent (eight per cent provincial and five per cent federal).
The federal government would provide Ontario with $4.3 billion in cash transfer payments — $3 billion upon implementation of the combined sales tax on July 1, 2010, and $1.3 billion on July 1, 2011, to support the transition to the new value-added tax.
Businesses pay RST on many inputs, including capital goods, related to the production of goods and services. The prices consumers pay reflect these embedded taxes. In contrast, businesses are able to recover VAT on the materials and services that they buy to make further goods or services directly or indirectly sold to end-users; thus, they are able to price their products, including those that are exported, more competitively.
RSTs in British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island significantly increase their respective marginal effective tax rates (METRs) on new business investment. In Budget 2009, the federal government stated: “If all five provinces currently imposing an RST were to adopt harmonized value-added taxes, the METR for Canada on new business investment would be reduced by more than seven percentage points.” A reduction of this magnitude would have a significant positive impact on the competitiveness of Canadian businesses.
According to the C.D. Howe Institute, more than one-third of RST revenue collected in Ontario is from taxing intermediate and capital goods. The Institute estimates that Ontario’s RST on capital investment increases the province’s METR on capital from 28.2 percent to 37.0 percent. Removing it in favour of a tax system that does not bear on business inputs would boost capital investment in Ontario by $36 billion. This would serve to increase productivity and economic growth.
Harmonization would also simplify the tax system. It would reduce compliance and administrative costs on businesses by combining paperwork and related efforts into one system instead of two.
With a harmonized sales tax, consumers could pay tax on certain goods and services currently exempt from RSTs, but are subject to the GST. If provinces decide to mitigate the impact on consumers by reducing the provincial component of the harmonized sales tax, provincial government revenues will be reduced. Some provinces could see reduced government revenues by switching from an RST tax base to the GST tax base, while keeping their RST rates the same.
The federal government could provide relief directly to individuals – a tax rebate to lower-income individuals similar to the GST rebate to ensure that they are not adversely impacted by the change to a more broadly-based tax.
Winnipeg Chamber of Commerce Recommendation:
That the federal government:
- Redouble its efforts to persuade provinces that currently level retails sales taxes (RSTs) to switch to a value-added tax (VAT)
- Provide transitional financial assistance to convince the provinces to switch to a VAT.
Adopted by the Winnipeg Chamber of Commerce board of directors, June 2009