British Columbia Faces Sales Tax Dilemma

by Mike Godfrey, Tax-News.com, Washington

17 August 2011

More than a third of British Columbia's electors turned out to vote on the future of the province's sales tax regime, but that future looks potentially more uncertain in the wake of comments made by Canada's federal finance minister Jim Flaherty.

According to the latest figures released by Elections B.C., more than 1.6m voted in the referendum, which asked voters to answer yes or no on whether to "extinguish" the harmonized sales tax (HST) and return to the previous system of a provincial sales tax (PST) and general sales tax (GST). British Columbia has 3,063,170 registered voters. The referendum closed on August 5, with results expected on August 25. The results are intended to be binding on the provincial government, which is in support of retention of the HST.

However, in spite of this commitment to implement the wishes of voters, the provincial government's position could be complicated by a deal struck with the federal administration in 2009. Before the province switched to the new sales tax system, it secured a CAD1.6bn (USD1.62bn) payment to aid the transition process. It was agreed that, were British Columbia to axe the tax before July 1, 2015, the money would need to be repaid.

Now, it has been reported that Flaherty is satisfied that, following discussions with Kevin Falcon, his British Columbian counterpart, the province will honour the terms of its agreement. Flaherty is not expected to force Falcon's hand, and has said that the decision is for the British Columbian government to make.

Regardless of which way the votes go, British Columbia's revenues will be hit - either by the commitment to Ottawa or as a result of Falcon's promise to cut the rate were it retained. The HST system merged the PST and GST, charged at 7% and 5% respectively, thus resulting in a 12% overall rate. Under Falcon's plans, the PST portion of the tax would fall to 6% on July 1, 2012, and then drop to 5% on July 1, 2014. One-off 'transition cheques' worth CAD175 would be issued to families with children and seniors with incomes under a certain threshold.

According to Falcon, the tax is "right for the province", as it is simpler and more progressive than the old PST/GST system and allows businesses to save money and create jobs. On the other hand, the opposition has argued that the tax costs British Columbia's families an average of between CAD750 and CAD1,000 more in taxes each year.

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