Harmonized tax would hit renovations, resales
Bob Aaron in Legal
The already battered real estate industry had reason for concern when Premier Dalton McGuinty said last month that "we owe it to ourselves to take a good, long hard look" at harmonizing the GST with the Ontario provincial sales tax.
In his column in this section on Jan. 31, Stephen Dupuis, president of the Building Industry and Land Development Association, pointed out that buyers of new homes would be hit particularly hard if Ontario harmonized the PST with the federal GST.
On a $350,000 new home, he wrote that the consumer would have to pay an additional $17,920. But it's not just buyers of new homes who would be affected by a merging of the two taxes. Buyers and sellers of resale homes would also be hurt because a harmonized tax would apply to many services that are currently exempt from PST – including legal fees, real estate agent commission, renovation services, land survey reports, home inspections, landscaping and house cleaning services. Also affected would be the cost of labour for installations or repairs, including additions, kitchen renovations, driveways, roads, fences, swimming pools and patios.
Assuming no change in the provincial sales tax rates, the seller of a $350,000 resale home would get hit with an additional $1,400 in tax on a real estate agent's 5 per cent commission, plus a new 8 per cent provincial tax on moving expenses, legal fees, accounting and bookkeeping fees, renovations, painting and other services which are currently exempt.
I agree with Frank Giannone, president of the Ontario Home Builders' Association, who calls harmonization a "poison pill" for housing. It would also have a serious impact on access to justice for ordinary Ontarians as their legal fees would jump an additional 8 per cent.
Of course, none of this matters to the Ontario Chamber of Commerce and other business groups who are pushing for harmonization. According to chamber chairman Len Crispino, if the taxes are blended, Ontario business stands to save an estimated $100 million. That saving would be dumped onto the wallets of hard-hit Ontario consumers.
Toronto home buyers have still not recovered from the imposition of the "Miller bite" land transfer tax last year. In a market where the volume of home sales has dropped by almost half over the first month of 2008, and house prices have softened considerably, the last thing Ontario needs is a new 8 per cent tax on legal fees, agent commission and other costs related to the purchase and sale of new and resale homes.
The home renovation industry could also be badly affected by a harmonized tax. In a pre-budget submission to the Minister of Finance last month, the Ontario Home Builders' Association noted, "The renovation industry is already plagued by the growing underground economy with the GST acting as the catalyst for the `cash deal'. Many legitimate renovation businesses would be in serious peril if they were to add an additional 8 per cent in PST onto their quotes when competing with the black market."
In case anyone thinks that the chances of a harmonized PST and GST are somewhat remote, they have only to look at the website of the Canada Revenue Agency to see that the Ontario Ministry of Finance and the Canada Revenue Agency have already teamed up to offer dozens of joint seminars on a harmonized sales tax all across the province throughout 2009. The effort and cost put into creating these seminars is a clear indication that harmonization is in the cards.
The last word on harmonization goes to Toronto real estate guru Barry Lebow, who is a land economist, appraiser, arbitrator and educator with 40 year's market experience. When I asked him what he thought about tax harmonization, he replied, "I hate the idea as a small businessman and as a professional. Harmonization only works well for singing groups!"
Bob Aaron is a sole practitioner at the law firm of Aaron & Aaron in Toronto and a board member of the Tarion Warranty Corp. Bob specializes in the areas of real estate, corporate and commercial law, estates and wills and landlord/tenant law. His Title Page column appears Saturdays in The Toronto Star and weekly on Move Smartly. E-mail bob@aaron.ca
OTTAWA — The Harper government has been floating the idea of a tax credit for home renovations - an idea that could deliver significant stimulus for Canada's residential construction industry in the Jan. 27 budget.
Deliberations continue as Canada's premiers meet today in Ottawa to put the final touches on a budget request for Prime Minister Stephen Harper - one that sources say will include more cash for employment training, more benefits for the jobless and extra funding for infrastructure.
Finance Minister Jim Flaherty, meanwhile, has been conducting his own consultation on the looming budget, expected to deliver up to $30-billion in stimulus to soften an economic downturn.
During a closed-door session in Montreal last week, Mr. Flaherty asked participants' opinion on a partly refundable tax credit for renovations. Some economists among the more than 20 attendees criticized the proposal while representatives of the building-trades sector lauded it. Tax credits can be used to reduce the amount of taxes a person owes to the government, but refundable tax credits can benefit filers even if they have no taxes to be paid; in that case, they could get a refund based on the credit.
The federal Finance Department looks favourably on stimulus spending that helps builders, in part because so many of their materials are made in Canada. This ensures more benefits of stimulus spending remain in this country than if the money goes to taxpayers in the form of rebates to spur consumption. There's a good chance that consumer spending would leak the benefits of stimulus to foreigners: 50 per cent of durable goods bought in Canada are imported.
"[By] contrast, only 20 per cent of investment in residential and non-residential buildings is imported through such inputs as building materials," the Finance Department said in its recent paper on stimulus.
One important decision Mr. Flaherty will have to make should the Tories proceed with this idea is whether to offer a tax credit for home renovation in general, or merely for retrofits and upgrades that increase energy efficiency.
Toronto Dominion Bank chief economist Don Drummond said stimulus for home renovations would be helpful because there's a limit to how many public works projects Ottawa can kick start soon.
"There's only so much of the big infrastructure stuff you can get going in 2009 and 2010," Mr. Drummond said.
"We are past the peak of employment in the construction industry, and those people are going to be getting laid off."
One drawback of programs such as subsidies for retrofitting and house refurbishment is that they are typically difficult to administer, hard to monitor and susceptible to fraud.
In Ottawa, the premiers plan to ask Mr. Harper when they meet with him tonight and tomorrow for more infrastructure money and increased flexibility in spending it.
The Harper government has committed itself to $33-billion over seven years, and is pledging to accelerate that spending. But premiers want the government to add to the overall global total.
Governments also appear close to an agreement to streamline environmental requirements for infrastructure projects. Ontario is particularly concerned for Ottawa to find a way to increase benefits for the unemployed and not just money for worker training. Toronto wants more workers to be able to access benefits.
Premiers will not put a price tag on their requests. "Most premiers are not looking to jam up the feds and put an astronomical number they can't meet," the source said.
Canada's municipal governments yesterday released a list of more than 1,000 infrastructure projects that they say could start this spring if federal funds become available.
Combined, the projects would create more than 150,000 jobs, the Federation of Canadian Municipalities said in a release.