The Case for Harmonization


Challenging times impose their particular burdens on our political leaders. When hard work, ingenuity and perseverance aren’t enough to bring us prosperity, we turn our gaze to them in the expectation that their choices will improve our well-being. And every once in a while we are rewarded by public policy decisions made with firm resolve, not a moment too soon. When we think of courageous public policy, we probably think of historical measures like the Emancipation Proclamation or the Canada Health Act. We don’t generally view tax reform measures in that same heroic context. But I believe that Premier Dalton McGuinty’s recent decision to harmonize Ontario’s Retail Sales Tax with the GST, while it may not be historic, was indeed courageous. It is a wise public policy whose positive impacts will be felt for some time to come.

Ontario has long enjoyed an excellent reputation as one of the best places to do business in Canada. We boast the right combination of an educated population, excellent infrastructure and access to the industrial heartland of the U.S. that has served as a magnet for business investment. Ontario used to compete effectively with other Canadian jurisdictions and many U.S. states for that investment. But tax burdens have crept up on us in recent years to the point where it has become harder to justify the business case for Ontario-based operations, giving our business leaders serious concerns about the strength of the economy we are bequeathing to future generations.

 Many of us have taken that concern and advocated strenuously for a more competitive tax structure. And recently both the Federal and the Provincial Government have recognized the need for a more competitive tax structure by making significant reductions to taxes on investment.

 In Ontario, however, the predominant focus of concern has been the retail sales tax. Business has long viewed the RST as an outdated tax, preferring instead a value-added tax such as the GST. Under the Retail Sales Tax structure, business must pay tax on the inputs it uses to produce goods and services at every stage in its supply chain. That’s why almost all jurisdictions have abandoned this approach in favour of a value-added tax. So basically there is a built-in cost disadvantage for every Ontario business. We have to sell our goods and services at a higher cost as a result and so we share this burden with our customers. This places Ontario goods and services at a competitive disadvantage with goods produced in jurisdictions that can offer lower costs or more progressive tax structures. And, incidentally, this also means that goods and services produced for consumption in Ontario are priced at a higher cost.

Value-added tax structures permit businesses to reclaim the tax they pay on inputs to their production processes, so there is only one tax on the end-product. Businesses and economic experts have argued for many years now that no measure could do more to restore the competitiveness of the Ontario economy than to harmonize Ontario’s RST with the Federal GST. In addition to lightening the tax burden, harmonization will also reduce the red tape involved in complying with and filing two separate sales taxes, a burden that is particularly daunting for our SMEs. Harmonization will save businesses more than $500 million per year. This is money that was being wasted on unproductive paperwork and can be redirected to jobs and growth.

But harmonization is a tough sell for political leaders, particularly in difficult times. The impact of the RST was a hidden tax in addition to that paid at the point of sale that was buried in higher sticker prices. Prices will drop with harmonization and consumers will benefit but the benefits they enjoy may not be as obvious.

These are challenging times. We are confronting worrisome unemployment statistics. And most other financial news is gloomy. We need investment and growth. We need this measure now more than ever if Ontario is to return to the strong competitive position it traditionally held in Canada and in North America. For not only will it equip our businesses to compete better with their global rivals, it will also allow them to compete smarter. Information and communications technology investments are viewed as absolutely critical to strengthening the productivity and capacity for innovation of our businesses. Yet Canadian businesses persistently under-invest in this technology in comparison with their U.S. counterparts. There are a number of reasons for this but we must number the additional cost the RST structure poses on ICT investments among them.

Harmonization couldn’t come at a more propitious time. The leadership shown by the Premier, the Minister of Finance and their counterparts in the Federal Government could not be more welcome.

Bernard Courtois

President and CEO, ITAC


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