Invest in Canada

Ontario to forge ahead with sales tax reform

by investor on 25/03/09 at 1:45 pm

The Ontario government will announce in tomorrow’s budget that it will sign a tentative accord with Ottawa to harmonize the province’s 8 per cent provincial sales tax with the 5 per cent federal goods and services tax, sources familiar with the document said.

The accord, a first step in what is expected to be a lengthy process to reform the province’s sales tax, was welcomed by business, but could anger consumers, who would end up paying a single, blended consumption tax of 13 per cent.

Consumers fear that taxes would increase on basic goods such as heating oil, diapers and children’s clothing, all of which are currently exempt from Ontario sales tax. Under harmonization, a new value-added tax would apply to all products covered by the goods and services tax, and consumers would see one charge on a sales receipt.

A harmonized system would add $46,676 to the purchase of a new home in Toronto, according to one study.

Ontario Premier Dalton McGuinty

But the biggest political risk for the government is at the bottom of the economic spectrum: poor families and those joining the swelling ranks of the unemployed who can least afford to pay an extra 80 cents in tax on a $9.99 pair of baby shoes.

The proposed tax changes are part of an extraordinary move by Premier Dalton McGuinty to address the province’s stunning reversal of fortune. Ontario officially became a poor cousin of Confederation this year, receiving payments under the national equalization program for the first time, and it is not at all clear whether Canada’s most populous province will ever reclaim its status as the country’s economic powerhouse.

Harmonization would help the ailing province weather the recession by making businesses more competitive, because they could receive a refund for taxes paid on goods and services and other purchases to run their operations. Mr. McGuinty would not confirm Tuesday that the reform is part of the budget, but he acknowledged the risks.

“I don’t think we’ve been put in government to choose what’s easy,” he told reporters.

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