Report to: General Committee Report
Date:
SUBJECT: Impact
of Harmonization of the Federal Goods and Services Tax and
PREPARED BY: Joel Lustig, Director, Financial & Client Services
RECOMMENDATION:
- That the report “Impact of Harmonization of the
Federal Goods and Services Tax (GST) and Ontario’s Provincial Sales Tax
(PST) to the Town ” be received;
- AND THAT the 2010 operating
budget impact of $55,000 based on
- AND THAT the 2010 capital
budget HST impact of $545,000 be included in the 2010 capital budget;
- And That Staff be
authorized and directed to do all things necessary to give effect to this
resolution.
PURPOSE:
To provide an update to
Council on the impact of HST on the 2010 operating and capital budgets.
BACKGROUND:
The 2009 Ontario Budget
announced that effective
Notwithstanding the fact that
the municipalities have yet to receive the rules and regulations for the
proposed HST, it is understood amongst the municipalities that the HST will
generally use the same rules as the federal GST. This means that the new 13%
HST tax will apply to all goods and services that currently attract federal
GST. Therefore all goods and services that were GST applicable at 5% before
The 2009 Ontario Budget
confirmed that municipalities will be entitled to a 78% rebate on the PST
component of HST and the current federal GST rebate for municipalities will
remain unchanged at 100% of GST paid. The Province’s intention is that this
change should be financially neutral to the amount of PST currently paid by the
municipalities as a whole. Based on preliminary analysis, Staff anticipates
that the 78% rebate will not be sufficient to achieve cost neutrality as
indicated by the
OPTIONS/ DISCUSSION:
Current GST tax structure:
GST
is a value added tax which applies to all commercial activities related to the
sale of goods and services. The current tax rate is 5% and is paid on the
supply of goods and services throughout the supply chain but businesses are generally
reimbursed through credits. Public service bodies such as municipalities claim
a rebate to recover 100% of the GST.
Current PST tax structure:
The
PST is a consumption tax which means the person or entity that consumes or uses
the taxable goods or taxable services pays the tax. The tax rate is 8% and all
goods are taxable unless the purchaser is entitled to an exemption. All
services are non-taxable unless specifically taxed under the Retail Sales Act. The tax base for PST
currently applies to a much narrower range of goods and services compared to
GST. Since there are no rebates to recover the tax, the Town budgets PST on all
applicable goods.
HST Impact to municipal sector:
It
is understood amongst the municipalities that the 8% provincial component of
HST will
generally use the same rules as the federal GST. The HST will apply to a host of
goods and services that are currently exempt under
Municipalities
will be entitled to continue to claim the same 100% rebate on GST and therefore
there will be no change from the current cost structure.
On
items that the municipality currently does not pay PST there will be a maximum net
impact of 1.76%.For example, a $100 purchase that effective July 1, 2010 will include
$8.00 of PST will receive a rebate of $6.24 (78% of the 8%), therefore, the net
impact is $1.76 ($8.00 - $6.24).
For
those items that the municipality currently pays PST there will be a 78% rebate
resulting in a favourable impact that will used to offset the maximum net
impact of 1.76% above. For example, a $100 purchase that currently includes $8.00
of PST will receive a rebate of $6.24 (78% of the 8%), which will help offset
the maximum net impact of $1.76 ($8.00 - $6.24).
HST Impact to the Town:
Contrary
to the Province’s intention that the implementation of HST would have no financial
impact, there is an impact to the Town as follows:
Operating
Budget:
As
noted above, there are items which the Town does not currently pay PST such as
contracted service agreements (winter maintenance), contracted municipal
services (waste), utilities and professional services. Based on 2008
expenditures, the annualized impact to the Town will be approximately $336,000
which is equivalent to a 1.76% increase in these accounts.
Further,
there are items which the Town currently pays PST such as salt purchases,
operating materials & supplies, printing & office supplies,
rental/lease payments, vehicle supplies, botanical supplies and purchases for
resale which will have a favourable impact of approximately $226,000 resulting
from the 78% rebate on the PST portion of the HST.
Hence,
based on 2008 expenditures, the net annualized operating budget impact will be
$110,000 ($336,000 - $226,000) or $55,000 in 2010 ($110,000 x 50% - effective
Mitigation Strategy –
Operating Budget
The 2010 net operating impact
of $55,000 has been included in the 2010 Proposed Operating Budget and Staff
will monitor to determine the adequacy of the budgeted amount and will make any
adjustments if required in the 2011 Operating Budget.
In addition, budgets for items
that have significant impacts from the HST will be reallocated in the 2010 Proposed
Operating Budget accordingly.
Capital
Budget:
Based
on 2008 expenditures, the annualized impact to the capital budget will be
approximately $545,000. This is
significantly higher than the operating impact as the major items included in
the capital budget are mainly consulting fees and construction costs which will
be subject to the 8% PST.
The
annualized impact of $545,000 will be committed towards the 2010 and prior
years capital projects.
Mitigation Strategy – Capital
Budget
The annualized impact of
$545,000 is included in the 2010 Proposed Budget since the majority of the
capital spending is incurred in the summer and fall months due to the
construction season.
Based on the analysis, the
funding allocation is as follows:
Tax Funded (55%) $300,000
DC & Developer Funded (35%) $190,000
Waterworks Funded (10%) $ 55,000
Total $545,000
Starting in 2011, the PST
component net of rebate of the HST will be included in the capital project costs.
Other
impacts to the Town:
Recreation
programs such as ice rentals, facility rentals, fitness memberships and program
registrations relating to participants aged 14 and above are not currently PST
applicable. Based on the current
municipal understanding of the HST rules, these services will be HST
applicable, thereby increasing user costs by 8%. Therefore, the implementation of HST may also
impact the Town’s recreation revenues due to the increased cost of 8% on
recreation programs to its users.
The
2010 Proposed Operating Budget does not reflect reduction in recreation
revenues based on implementation of HST.
Staff will monitor recreation revenues throughout 2010 and report to
Committee through the quarterly results of Operations.
FINANCIAL CONSIDERATIONS:
The $55,000 Operating and $545,000 Capital impacts from HST have been
included in the 2010 Proposed Operating and Capital Budgets respectively.
Since the HST rules and regulations have yet to be finalized, Staff will
continue to monitor the HST impact on the 2010 operating and capital budgets
and will perform detail analysis for the 2011 Budget to reflect the HST impact
upon receiving full HST rules.
RECOMMENDED
BY: ________________________ ________________________
Barb Cribbett, Treasurer Andy Taylor, Commissioner,
Corporate
Services