HST in Effect but Effects are Unclear.

In the weeks following the Harmonized Sales Tax’s appearance in Ontario and British Columbia, consumers, retailers and economists are still trying to understand exactly what its impacts are.

While the overall effect seems negligible to consumers, some industries are going to be harder hit than others; and some experts point out that consumers’ perceptions are what will drive changes in their spending patterns, which may or may not be in line with the HST’s actual effect.

Ontario and BC Join Eastern Provinces on HST

On July 1st, both Ontario and British Columbia joined the ranks of Canadian provinces to adopt the HST, along with New Brunswick, Nova Scotia and Newfoundland, which implemented it in 1996.

The HST merges the 5% GST, a federal tax, with the province’s sales tax, to form a single tax (12% in B.C., and 13% in Ontario). However, under the new program, some goods and services that were previously only taxable at 5% under the GST will see the provincial portion added to the total tax. These include diverse items such as lawyer’s fees, haircuts, and of course, newly built housing.

Some Gains, Some Savings

However these gains are offset by the fact that some goods and services are subject to fewer taxes, under the new rules; as a result, consumers in Ontario and British Columbia are facing a modest average increase of 0.4% across the board, according to a report by Toronto Dominon.

And while this figure may seem slight – adding just $75 to the average annual household bill – the mere mention of tax increases has BC voters in an uproar, where opponents are gearing up for a legal battle to have the tax declared unconstitutional.

BC Faces Legal Battle to Repeal HST

The basis of the opposition to the HST centres on the fact that the new tax was decided without first passing through provincial legislature; this, combined with a petition made up of more than 700,000 signatures asking for the tax’s repeal, has led to lawsuits by anti-HST groups against BC’s leading liberal government.
Consumers Feel the Hit

Sticker shock was felt first at places like the gas pump, where prices jumped from about 96 a litre to 104 cents per litre, overnight.

However it is the housing market that is expected to show a marked shift in response to the new HST, as ‘nearly new’ housing takes the forefront to escape heavier taxes on new construction.

Both provinces have rebate programs effect for lower and mid-priced new housing, but homes upward of $400,000 in Ontario and $525,000 in BC receive gradually reduced rebates.

New Homes Show New Price Tag

The construction industry in British Columbia, in particular, is likely to feel the effects of the HST most deeply, as average house prices in urban centres like Vancouver and Victoria start around the cut-off mark for the rebate. A $800,00 new home, for example, will see nearly $70,000 in HST added to the final bill – after the partial rebate – which is $30,000 more than it would have been a month ago.

To further complicate matters, rebates on the GST portion of the HST behave very differently from rebate on the PST portion – with different thresholds, and different policies for new homes that price in over the threshold. For example, the rebate on the PST dwindles on the amount of the sales price over $400,000, but the GST rebate completely disappears on homes worth more than $450,000 – no dwindling, just gone.

Now admittedly the process of building a home is ostensibly cheaper under the new system, which should allow builders to pass on the savings to buyers, but there are many who aren’t convinced this will actually transpire.

Construction Contractors Confused Under New System

Furthermore, many builders themselves are somewhat confused as to the implications of the merged tax. An Angus Reid poll of business owners regarding the HST showed that construction contractors in both provinces are poorly prepared for the changes brought about under the new system.

Materials bought for residential construction became PST exempt with the introduction of the HST, for example, which should lower building costs and in turn the final price tag. However, contractors with revenues of more than $10 million will not get a full HST rebate on certain expenses, further complicating the issue.

Home renovations are also taking an early hit, and some stores are resorting to cash-back offers to lure customers in.