Could the New Ontario HST Actually Be a Good Thing for Builders and Contractors?

Like their counterparts in the Nova Scotia, New Brunswick, Newfoundland and Saskatchewan the government of Ontario has decided to change it’s provincial and federal sales tax structure to that of a harmonized system (HST), a program where there is one tax instead of two on each item sold. This means that the rate of the new HST will be 13% on selective purchases on July 1, 2010, a blend of the 5% federal sales tax and the 8% Ontario provincial tax.

GST: The First Big Hit on Renovation and Home Building

When the Progressive Conservative government of Brian Mulroney first brought in the idea of a federal sales tax it was meant to help Canadian exporters who, like all producers of goods, were subject to a 13% Federal Manufacturers Sales Tax. This was then added to the wholesale price of the product but hidden from the consumer. In 1991 the Goods and Services Tax (GST) came into being to replace this tax and was pegged at 7%. This was 8% less than the added tax to wholesale goods but was spread out to include services as well but was separate from Canadian income tax.. This meant services like lawyers’ fees and vehicle maintenance labour was now being taxed.

For the building industry this was a colossal hit because even though materials were reduced by 8% labour, which was a service and not taxed before, was subject to the GST so in many cases the price of a home went up as labour costs were higher than materials. What this did was spread panic through many industries because people were not schooled enough in the fine art of taxation to see any benefits at all let alone what Mulroney’s government was trying to get across to them. Because it is only human nature to back-peddle when strange new ideas are dropped on their collective heads, especially in areas where their money is concerned. (Not only that, the tax was dumped on the Canadian economy before the chartered accountants knew how to deal with it.) So in 1991 this change in taxation, as well as other economic factors, led to a period of recession that hurt both the builder and renovation company.

The Effect of the HST on Building in Ontario

According to a combined report by three reputable building and development associations the Harmonized Sales Tax will spell doom for the home building industry. This is according to BILD (Building Industry and Land Development Association) and the Ontario Home Builders' Association who have facts to back up their claims. A report prepared by veteran housing analyst Frank Clayton, PhD, of real estate consulting and advisory firm Altus Group states that without proper safeguards he harmonization of provincial and federal sales taxes would deprive new buyers of around $2.4 billion dollars. And this just affects the people who bought homes. The other negative affect claimed is that many of those seeking to buy new homes will come up short for financing because the added costs will add the money they need for a down payment.

For the builders in Ontario this news hit like a being dunked in Lake Ontario in March. With the three auto giants in trouble, and thousands losing their jobs in all types of occupations from manufacturing to tourism, this news could not have come at a worse time. Because even though the Ontario government’s intention is to gain a more secure money supply to pay for its expanding deficit the politicians are failing to realize that there have been too many changes too quickly within the past four months. So even to announce a to change the tax system that will happen 15 months from now at this time is bound to create undue stress on the markets and, for many, pull away hope for better things to come.

The people of Ontario, like many in Canada, are bracing for the next round of layoffs. Many in the opposition parties are concluding that the government is undermining these peoples’ confidence from another direction. This means that, instead of regaining composure as the layoffs slow down and the economy begins to shift slowly upward the Ontario taxpayers may be frozen in fear and unwilling to part their money, resources needed to restart the flagging fortunes there.

A Disguised Blessing?

A piece of good news for both new builders and renovators is that the Harmonized Sales Tax won’t be in effect until July 1, 2010. Therefore, with all the rebates, tax rebates and tax allowances being offered both federally and provincially, many home renovation projects may be speeded up to avoid paying the tax after that date.

Buying Boom

To beat the deadline there is speculation that there may be a rush to build. This may be a good thing for developers who have idle lots and empty new homes in new developments that were caught up in the recession. This may provide an echo to the last building boom, however short-lived, and redeem the faltering home prices.

Fees and Services

Many closing costs associated with buying such as legal, moving expenses and other paperwork will also be subject to the tax. This includes the costs surrounding pre-owned homes and sales of these properties may rise briefly as well.
 
It was probably not intentional on either the part of Dalton McGuinty’s Ontario government or federal Finance Minister Jim Flaherty but there is a chance that both may have hit on a great rejuvenation scheme without knowing it. Because right now employment in Ontario needs a shot in the arm from more hard-driving engines than just borrowing heavily for make-work projects. The deadline for the HST may be just the stimulus needed to shock people into a spending spree right now when contractors really need it, a forward inertia that may help the province get through the recession and into better times. In other words, it could be that a misguided program by the Ontario government could very well hit the housing market with a defibrillator and put thousands of people back to work within a few short months.

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