Harmonizing the provincial sales tax with the GST should only proceed if consumers don’t pay more in total sales taxes.  Here is how that can happen and why harmonization can be a good initiative. 

First of all, nothing has been finalized here in Manitoba. While other provinces such as B.C. and Ontario have agreed to move forward, Manitoba’s provincial government and the federal government are still at the discussion stage – at least publicly. 

If harmonization does move forward, the provincial government’s 7 per cent Provincial Sales Tax (PST) would be eliminated. At the same time, the federal government’s 5 per cent Goods and Services Tax (GST) would increase 7 per cent to create a new Harmonized Sales Tax (HST) rate of 12 per cent; with each level of government receiving their appropriate share. 

As both taxes have complex rules, having only one tax for businesses to administer is an obvious advantage of harmonization. To give you an idea as to how complex the rules can be, go to the store and buy a box of salt, a bag of peanuts and a bag of salted peanuts. You won’t pay the GST on the salt or the peanuts, but you’ll pay it on the salted peanuts as that’s deemed “a snack” and, thus, taxable. 

The other significant advantage for most businesses comes from the fact that harmonization reduces their tax burden. Right now, when businesses buy products for usage in their operations (eg. cash registers, computers, mops, etc.), they pay the PST and GST, but are able to get the GST back from the federal government through an “input tax credit.” Switching to an HST model would then allow businesses to get the 7 per cent PST amount back as well. 

As Canada has a high level of taxation on businesses when compared to other countries, harmonization would help improve our country’s tax competitiveness. 

The catch to harmonization comes on the consumer side. As mentioned previously, a new harmonized sales tax of 12 per cent would use the GST’s rules. Because the GST is charged on more products and services than the PST, consumers would then pay more in taxes. 

For example, when you get your hair cut or buy gasoline, you only pay the 5 per cent GST. Harmonization would result in paying 12 per cent tax on those goods and services and a long list of others. 

The key to implementing sales tax harmonization is to ensure consumers don’t pay more in tax than they did before. This could be achieved by reducing the combined HST rate. For example, instead of simply adding the 7 per cent PST with the 5 per cent GST for a new tax rate of 12 per cent, the rate could be cut to, say, 11 per cent. While you would still pay more in tax for some goods and services, you would pay less on things you’re paying 12 per cent on right now. 

The challenge for governments is to set the combined rate in such a way that consumers don’t end up paying more in total sales taxes. It’s a challenge worth exploring, but only if consumers aren’t left holding the bag.