Comprehensive tax reform to make Ontario more competitive
One transaction, one tax, one time

What is a value-added sales tax?

Starting on July 1, 2010, subject to the passage of the 2009-10 Ontario Budget in the Legislature, you won't be paying two separate taxes on the same sales transaction: two taxes to two levels of government, administered by two separate sets of bureaucrats, at two different rates, using two completely separate sets of rules.

The 2009-10 Budget proposes that Ontario move to a single sales tax, based on value-added taxation, with a combined rate of 13 percent: the provincial portion at eight percent, and the federal portion at five percent.

The current Provincial Sales Tax (often abbreviated as PST) is also referred to by accountants and financial people as the Retail Sales Tax, or RST. Consider the two terms and acronyms as meaning the same thing for the purposes of this discussion. The current PST applies to many purchases made by businesses in the process of providing goods and servics for sale. While the federal Goods and Services Tax of five percent is added just once due to much more modern rules on how and where it is assessed, the PST, or RST, can become embedded in the price of finished goods and services as they pass from producer to wholesaler to distributor to retailer to the end user. The old way means higher prices to you. The new single sales tax will use the value-added tax structure, which means most businesses will be reimbursed for the tax they pay on the things they incorporate into whatever constitutes their end product that is sold to the ultimate consumer.

Why is the existing Retail Sales Tax costly?

Businesses and consumers find the retail portion of the sales tax "embedded" in such purchases that businesses make as raw materials, vehicles, fuel, building materials, computers, furniture, equipment, computers, telecommunications and so on. The sales tax is said to be "embedded" because there is often no practical way for any of the retail sales tax paid on something purchased in the act of doing business to be credited against the tax collected when a sale is made.

So taxes that can't be "flowed through" become embedded in the price of the product, which makes it more expensive than it should be. The bottom line is that a lot of things are going to get cheaper, without Ontario's hard-pressed businesses having to give away their already-slim margins.

Why replace the existing Retail Sales Tax?

The existing Retail Sales Tax (RST) was first introduced way back in 1961. It is not just a different world, but the way it which the world does business has changed dramatically. For example:

• Back then, commerce ran on the making, distribution and selling of tangible things and products. the service economy that drives today's world just didn't exist. As a result, in terms of taxation, firms and individuals that deal in things you can see, measure and touch bear the value-added taxation load for the majority of the economy that now deals in professional services, intangible products (such as insurance policies, transaction costs, fees and so on). Ontario's manufacturers have always been a vital part of the economy, and just like the rest of the world, they need to bear their fair share of paying taxes, but no more;
• Computers to do all the math were big, clunky, complex, expensive and inaccessible a half-century ago. Today they are cheap, small, widely available commodity items. Complexity and math are no longer issues;
• A half-century ago, Ontario's economy was a very closed circle. Export and import were nowhere near the drivers of prosperity then that they are now. If you were out-of-step with the world half a century ago, it didn't matter as much as it does today;
• Supply chain today are much bigger and more complex than they were half a century ago. Tax systems have to be easier and more efficient to allow the business to collect the tax, claim its deductions and ensure that the end-product, which is more likely a 'bundle' of tangine things, intangible products and professional services is taxed just once, and not multiple times. And under just one set of rules too.

Why make this change now?

Aside from the fact that it is never too early to do the right thing, the single most important thing Ontario can do to strengthen its businesses struggling with the global recession is to enable them to become more competitive in a global economy. The comprehensive package of tax reforms in the 2009-10 Ontario Budget, of which the Single Sales Tax is only a small part, will enable Ontario companies to attract the investment they need; hire or bring back the people they need to prosper; and compete on a level playing field with the rest of the world.

Ontario was one of the last places into this global recesion. The proposed tax reforms will help us ensure that we will be one of the first places out of the tough times and back into prosperity.

The proposed tax reforms, of which the Single Sales Tax is just a part, have been a good idea for some time, but they do not generate tax revenue for the Province. Bear this in mind if you hear this proposal called a "cash grab." It just isn't so. Ontario and the federal government have negotiated a comprehensive agreement that has allowed the Province to provide transitional support to Ontarians.

Who else does sales tax this way?

More than 130 other countries around the world have already adopted such a value-added tax structure. It is just a more efficient and fair way of taxation. Ontario, in fact, is late into the game, joining Australia; China; France; Germany; Ireland; Japan; South Korea and the United Kingdom.

In Canada, Newfoundland; Nova Scotia; New Brunswick and Quebec already use the value-added taxation system. And that gives them a competitive advantage over Ontario.