GST Harmonized in Atlantic

Frank McKenna had a big smile on his face, and a new spin on a familiar sales pitch. In a national newspaper advertisement that appeared late last week, the New Brunswick premier told readers across the country that "the best place in Canada to do business keeps getting better and better.

GST Harmonized in Atlantic

Frank McKenna had a big smile on his face, and a new spin on a familiar sales pitch. In a national newspaper advertisement that appeared late last week, the New Brunswick premier told readers across the country that "the best place in Canada to do business keeps getting better and better." Why? Because New Brunswick, along with Nova Scotia and Newfoundland, had agreed to harmonize its provincial sales tax with the federal Goods and Services tax. While many Canadians may still believe that the Liberals should have killed the GST, business heavily favors harmonization - the creation of a single, uniform sales tax across the country - because it is easier and cheaper to administer. But some observers contend that if McKenna succeeds in luring business to New Brunswick with his latest sales pitch, he may do more than business groups to bring holdouts like Ontario and the western provinces aboard the harmonization bandwagon. "The pressure on them will increase when Frank McKenna comes to town and says, 'We can build your plant for three-per-cent less than it costs to build in Ontario,' " said David Perry, senior research associate of the Canadian Tax Foundation. "These things are important to investors."

Although the federal government announced more than 100 changes to the GST last week, harmonization was clearly the most important. For many businesses, a uniform sales tax applied at the same rate to the same goods and services everywhere is a vast improvement over the current patchwork of federal and provincial levies. According to some estimates, a standardized system would save government and business up to $800 million annually in administration costs, savings that could be passed on to consumers through lower prices. "The announcement last week was a good first step," said Elizabeth Mills, director of government relations with the Toronto-based Retail Council of Canada. "We're hoping harmonization happens right across the country in the next few years."

For the time being, however, the three Atlantic provinces will join Quebec, which will be fully harmonized by November, in what is sure to become a closely watched test of the system. Consumers and businesses in those provinces will experience major changes in the taxes they pay. "Atlantic Canada is a laboratory exercise," said Perry. "The governments will see the pitfalls and be able to take appropriate action."

And given the magnitude of the changes, there are bound to be problems. Newfoundlanders currently pay a combined GST and PST of 19 per cent on most consumer goods, while Nova Scotians and New Brunswickers pay 18 per cent. Those rates are scheduled to fall to 15 per cent, a clear benefit to consumers, when the harmonized tax goes into effect, possibly as early as April, 1997. But taxes on some goods and many services will rise. Some things - including children's clothing, books, magazines, haircuts and other services - are currently exempt from provincial sales tax. Under the new system, however, they will be taxed at 15 per cent because PST will be applied to the same items as the GST.

Another key change, which Ottawa has proposed, is called tax-included pricing. Currently, the sticker price on consumer goods does not include tax. That results in the familiar jolt at the cash register when it turns out that the final cost is anywhere between 7 and 19-per-cent higher, depending on the province. According to Rosalie Daly Todd, executive-director of the Ottawa-based Consumers' Association of Canada, market surveys have shown that most people prefer to have the final, tax-included price shown on the sticker. That is the system that Ottawa has now proposed. But it has also suggested that the sales receipt should clearly show the GST/PST portion of the price to avoid charges that the tax is being hidden.

Some national retail chains have serious concerns about including taxes in the sticker price if the move is limited to only a few provinces. Harold Chmara, vice-president of planning and taxation for the Toronto-based Hudson's Bay Co., which operates 400 Bay and Zellers stores across the country, said that adopting tax-included pricing would force the company to create a special pricing regime in the three Atlantic provinces, a move that would be expensive and impractical. Chmara said that, with the exception of big-ticket items like appliances, the company usually charges the same price across the country, and price tags are often applied to merchandise by the manufacturer. If Ottawa sticks to tax-included pricing, retail chains like The Bay and Zellers would be forced to employ people to apply new stickers on merchandise destined for Newfoundland, New Brunswick and Nova Scotia. "I'm not sure we can produce separate price tags on any kind of economic basis for three provinces," said Chmara.

Initial public reaction to the changes in parts of Atlantic Canada was resoundingly negative. Some members of the new Halifax regional council proposed a tax revolt against the province to protest harmonization. "Let's not pay them a damned cent and make them take us to court," said Councillor Bruce Heatherington, who was promptly ruled out of order by Mayor Walter Fitzgerald. "The government is trying to sell it by saying that the increases and decreases will balance out," added Elaine Price, president of the Newfoundland and Labrador Federation of Labour. "But look at the increases - children's clothing, fuel, electricity and books."

Meanwhile, the reaction among small business owners in Atlantic Canada was mixed. "It's a step in the right direction," said Carole Alexander, manager of Dana's Collision, an auto-repair shop in Fredericton. "We will have only one cheque to write instead of two and only one tax versus two." But Maurice Pitre, owner of Hashey's Barber Shop in the New Brunswick capital, said some of his customers were already complaining about the prospect of paying higher taxes on haircuts. "The tax used to be 10 per cent, now it's 15," he said. "It's fine if you're going to buy a car or fridge or stove, but how often do you do that?"

For some businesspeople, though, the new system is attractive because it will end the need to deal with both provincial and federal sales-tax collectors. That aggravation led to the formation of a coalition of almost 55 business and trade associations, including automakers, grocers and distillers, under the leadership of the Retail Council of Canada, to lobby for a uniform national sales tax. But some coalition members admit that even their combined clout may not be enough to overcome public resistance and political hostility to harmonization, particularly in Ontario, where Conservative Premier Mike Harris is unequivocally opposed, and in British Columbia where all three major party leaders have declared their opposition. "We're a long way from any kind of harmonized national system," said Jock Finlayson, vice-president of the Business Council of B.C. "The federal Liberal government has a problem on its hands because of its promise to kill the GST. Provincial politicians don't see why they should shoulder part of the risk to get the Liberals out of a box." Until they have a change of heart, the country's sales-tax system will remain fragmented, unwieldy and expensive.

Maclean's May 6, 1996