The Ontario government has announced that it will follow several other provinces in blending the provincial sales tax with the federal Goods and Services Tax, or GST. What this means is that the 8% Ontario tax will be added to the 5% GST for a total of 13%.
On the surface this sounds like good housekeeping. Consumers and storekeepers will have an easier time keeping track of one transaction than two in place now. In addition, the GST was really a tax-on-a-tax because it was applied after the Provincial Sales Tax, or PST. So if a product was $10, and the total with the PST was $10.80, then with the added 5% GST the total should be $11.30. However, it is actually $11.34, so this would be a good thing, right? On the surface the answer is yes but if one looks deeper the compounding effect on the building and renovation industry could be staggering in an already depressed marketplace.
The federal sales tax was originally put in place to replace the 13% federal tax on manufactured goods. It was meant to help exporters of finished Canadian goods compete more fairly in the world market. Hidden from the consumer it was added to product after it left the factory. The Goods and Services Tax (GST) was patterned along the lines of Britain’s VAT, or value added tax, in that it was a visible addition. Although the manufacturers’ tax was lowered from 13% to 7% it was spread out to include services renovation labour and accountants’ fees. Provincially, however, Ontario did not tax these activities and so this industry was spared the 8%.
With historical data that leaned against meddling with the taxation structure the Ontario provincial government of Dalton McGuinty is presently more interested in getting a “silver bullet” for the revitalization of the current economy of his province. On the surface the influx of so much cash into the coffers of the province seems like a good idea. However, like a shot of an addictive drug the effect may be brief and the long-term effects devastating to the renovation industry. This is because there were many exemptions under the present system including actual renovation services, legal fees, real estate agent commissions, landscaping, land survey reports, home inspections and cleaning. Within the realm of renovations includes the cost of labour, both for installations and repairs.
When looked at in term so remodeling this means that the tax will include additions, kitchen renovations, bathroom remodeling, driveways, putting in roads, fences, swimming pools, spas and patios. In an industry already on shaky ground many renovation companies believe that the new taxation structure would stagnate or push back any recovery in the industry for many years. Because of the added tax many of these renovations could be put on hold by a homeowner already nervous about the present state of the economy.
So what about the new home market? Building and development associations have already warned the government that the Harmonized Sales Tax will end any chance for a recovery for the industry for the foreseeable future. BILD (Building Industry and Land Development Association) and the Ontario Home Builders' Association have already performed studies into the ramifications of the HST plan and are adamant that the new tax will kill an already-faltering industry. Not only will the added taxes on the labour and closing costs dissuade many new home buyers but others actually wanting to buy new homes may not be approved under the new and stricter financing rules of the bank. In fact, because of the constriction of money flow, $3,000 less because of taxes can mean the difference for qualifying for a mortgage.
BILD president Stephen Dupuis pegs the hike at about 5% and this means $10,000 more for a modest $200,000 semi outside of the major areas. Since new home building take the biggest hit in any tax increase Dupuis is asking for a level playing field, the same one allowed under the PST system. He claims that if home buyers are stuck with what amounts to a $2.1 billion dollar hike across the board then home buying will cease. This will be even harder on prospective home-buyers in Toronto who are still smarting from the new land transfer tax imposed on them last year.
Renovators deserve the same attention as their counterparts in new home building. Because much of the resale market depends on renovations and this extra taxation can dissuade these home buyers as well. Therefore a fixer-er-upper may not be the bargain it was last year.
Ontario has always been a manufacturing hub but this is slowly being eroded away. Once a lion in manufacturing the car industry is still on the ropes and the verdict is still not in as to how the Big Three will fare within their traditional structure in Ontario. As well China, India and other countries are slowly sucking away other manufacturing staples like farm machinery, appliances and other goods that were once known as Canadian products.
With the economic engine of the province only firing on half its cylinders it seems almost unbelievable that the Ontario government would mess with the renovation industry, a part of the economy that is as reliable as the rising sun. Because bad news travels fast and unless the Ontario government takes along, hard look at their taxation plans for the home remodeling industry the whole industry could grind to a halt or much of it go underground. And this means no taxes and no recovery.