HST, Harmonious Sales Tax

Canada’s HST (harmonized sales tax) is a good tax, if ever there was one, at least from a business point of view.

For many organizations, HST is a profit centre. A what? Yeah, you heard me right: a profit centre.

If you are buying land or commercial property, you can register before completion, and self-declare, ie, not pay HST. That’s because your tax payable and your ITC (input tax credit) are exactly equal–they cancel each other out. For registrants, you don’t pay a dime.

For example, on a commercial plaza you are buying or a piece of development land you are purchasing for $1,000,000 in Ontario, you have to pay 13% HST on it, but you also get an ITC equal to $130,000, so presto chango, no money needs to be remitted to Canada. Hooray for our side.

I was one of the first Canucks to experience this–on the acquisition of the Ottawa Senators Hockey Club expansion franchise from the NHL, CRA (Canada Revenue Agency) at the last minute told us that GST (the goods and services tax, a precursor to the HST) would be due and payable on the franchise fee of $50 million USD. That meant, we would have had to come up with an extra 7% or $3.5 million USD on completion (December 1991).

That’s a lot of extra hot dogs and beer you’ve got to sell to pay the tax. But wait a second! That $3.5 million becomes an ITC, which we’ll get back in our quarterly filing anyway, so we argued with CRA that it makes no sense for Canada to levy a tax in that amount only to give it back a few weeks later.

Eventually they agreed, and on closing with the NHL, we wrote a check to CRA for $3.5 million, and they wrote another one in the exact same amount–then both checks went into the escrow closing and, obviously, cancelled each other out.

Today, your lawyer just prepares a form for you to complete and swear to–as long as you personally or your partnership or your company or organization is an HST registrant, you self-declare and don’t pay…

For SMEEs and for partnerships or sole proprietorships with up to $400,000 in annual revenues, there’s another great way to save/make money with HST–use the quick method of HST reporting.

Here’s how it works. Say, you are a consultant named Sue, who is making $50,000 a year plus she is billing her clients HST in the amount of 13% (that’s the rate in Ontario) or $6,500. So her total annual revenues are $56,500.

Let’s also assume she has ITCs of $500, ie, she’s paid $500 of HST in connection with her business in, say, taxes on printing, subcontractor services, marketing etc.

So she thinks that she owes Canada $6,500 less $500 of ITCs or $6,000.

But there is this thing she can elect to do–use the quick method of calculating your HST remittance. Here’s how it works:

Quick Method HST = (amount earned + HST collected) x 8.8%

So under this alternative, Sue would owe $4,972 in HST instead of $6,500 – $500 or $6,000, a savings/profit of $1,028.

The quick method has other advantages–Sue doesn’t have to keep track of her ITCs, and she is less likely to be audited because it’s so simple.

The HST, from a business point of view is an efficient tax (much better than the old MST, manufacturer’s sales tax, it replaced, which significantly harmed Canadian exports by making them more expensive) and can be a profit center as well.

It also helps the GOC (government of Canada) cover its costs. It’s a more stable source of revenue so it gets government through recessions with more options available to it to not only fund programs, but also invest in the nation and prime the pump. 

It’s a progressive tax too (in a way) since rich dudes cannot avoid paying it on any luxury items they buy. 

Wealthy people have legions of tax attorneys and accountants to make sure they pay as little income tax as possible. It’s why Warren Buffett pays a lower rate than his secretary.

But if a rich person buys a $100 million yacht, he’s gonna pay HST.

The only developed nation that I know of that doesn’t have an HST or VAT (value added tax) is the US, and it certainly harms that nation in my view.

New taxes are not easy to get approved–two national elections (one to re-elect conservative Brian Mulroney and one to elect liberal Jean Chrétien) were fought over the issue in Canada. 

Mr Chrétien based his entire campaign on getting rid of the “hated GST” but, upon winning office, he quickly forgot about this promise.

When the media braced the new prime minister, he denied ever saying such a thing. When they showed him a video clip of him actually saying, “When my government is elected, I shall get rid of the GST,” he replied, in his charming way, “Oh! Dat? Me, I was just kidding.”

Everyone laughed, and promptly forgot about it.

Anyway, it was hard in Canada. The US is likely to be much more difficult, mainly because business interests there are so much more powerful than perhaps anywhere else on the planet, and labor is likely to resist as well since it’s easy to wrongly assume these VATs are, by design, naturally regressive.

@ profbruce @ quantum_entity

postscript: more on quick method HST here, https://madanca.com/quick-method-of-hst-collection/