With only a month before the dreaded HST kicks in, Warren Ragoonanan offers a more positive take on the looming new tax.
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The Harmonized Sales Tax, which comes into effect on July 1, 2010, may be a cause for concern for consumers, including condo corporations. The HST combines the 5% GST and the 8% PST into a single tax, which means that many consumer goods and services that were PST-exempt will now be subject to the higher 13% tax.
According to the McGuinty government, however, prices of consumer items should actually go down as a result of the HST. Their argument works something like this. In an HST world, Ontario businesses will save money because they will be able to claim the entire 13% HST they pay to their suppliers back as an input tax credit, just as they currently do with the 5% GST. Contrast that with the PST, which businesses cannot claim back from the government and which they simply pass on to their customers. When every business passes PST down the value chain in this way, the price of the final product or service ends up being higher because it reflects these hidden taxes added along the way. According to the government, the HST will eliminate these hidden taxes at each level, resulting in lower prices for the consumer. They have a diagram to illustrate this concept here.
How will the HST impact condo corporations? Condos are in the same position as consumers, which means that, unlike businesses, condo corporations cannot claim HST on their tax returns. Even though, according to the Ministry of Revenue, only 17% of consumer purchases will be affected by the HST, that is little comfort to a condo board because that 17% includes many routine services condo corporations need to maintain their properties. HVAC, plumbing, electrical and cleaning services will all be subject to the HST. Don’t forget necessary services such as those provided by lawyers, auditors and engineers.
The transition to HST is not going to be easy, but it is not all doom and gloom. In fact, the HST can be an opportunity for condos to save money too. The government’s prediction about the HST resulting in reduced prices will not happen automatically. Boards and managers are going to have to negotiate those price reductions with their service providers. Boards now know that their suppliers and service providers are benefiting from a business tax reduction because of the HST. It is only fair that boards and condo owners share some of that in the form of decreased prices. In fact, while the boards are at it they can start scouring other parts of their service contracts as well. A creative board can find plenty of opportunities for suppliers to be more efficient, and therefore cost-effective. But those savings will not happen unless boards demand them.
Boards should start this exercise right now. Directors and managers may have noticed that some suppliers have already started collecting HST. This is because of how the transition rules work. From May 1, 2010, businesses are required to collect HST on goods and services they sell between May 1 and June 30 that are to be delivered on or after July 1. (The transition rules are technical and this does not apply in every instance – for advice on this, speak with your condo corporation’s auditor). HST is already starting to make its presence known. There is no reason why Boards should wait to start renegotiating their agreements with suppliers.
For more information about the HST, visit GMA’s homepage to view a useful chart from the Ontario Ministry of Revenue detailing which products and services are subject to HST. Click the icon marked “Are You HST Ready?”