A quiz about taxation

Apr 20, 2010

By Dale Goldhawk

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Here is a question about sales tax; see if you can answer it.

A student who lives in Vancouver, B.C., but who attends the University of Toronto walks into a travel agency in Toronto on July 1 and has the travel agent book an airline ticket from Pearson Airport to Vancouver so the student can fly home for the summer break. The student must pay for the airline ticket plus the sales tax on that ticket. The student also must pay a service fee to the agent for advising him on the kind of ticket needed and for going through the work of making the booking.  There is also sales tax due on the service fee.  As of July 1, the sales tax in Ontario becomes the Harmonized Sales Tax set at the rate of 13%. At what rate is the sales tax charged to the student on the ticket and on the service fee?

This sounds fairly simple, doesn’t it?  Well it isn’t simple at all. Here is the answer:

The student will pay the Ontario HST of 13 percent on the airline ticket because the first leg of the trip originates in Ontario (at Pearson Airport). However, the student will pay sales tax on the service fee at the rate of 12 percent which, as of July 1, will be the rate of the new HST in Vancouver, because the student’s home address is in B.C.  Huh?

 Not only does the above scenario defy logic, it comes as the result of three major changes occurring on July 1. Change one sees Ontario implement the HST at 13 percent to replace the GST and the Provincial Sales Tax (PST). Change two sees B.C. implement the HST at 12 percent to replace its current sales taxes. Change three is a change in what are called the rules on Place of Supply. These rules determine the rate of tax to be applied depending on geography. 

Let’s not get into all the details because this could drive us all to drink. (What’s the HST due on a bottle of Scotch in Timmins?) My point is that taxes are complicated.

I talk a great deal about fraud and incompetence in the marketplace and the need for both systemic reforms and personal awareness to fight back against crime and stupidity. Taxes are not efforts to defraud us. They are not criminal acts; they are legitimate payments made by the public to enable government to pay for all our social benefits. But why do they have to be so darned difficult?

By July 1, businesses across Canada will have paid out many millions of dollars, not in new taxes, but in changes to their accounting systems, hardware and software, training and corporate information to get ready for the new taxes. By July 1, many people in corporations and in their own businesses will have spent countless frustrating hours trying to figure out how to collect and remit the new HST in two provinces and how to interpret the new Place of Supply rules.

The whole process is harder because provinces set HST at different rates.  You would think, when they ‘harmonize’ sales taxes, they would have the same tax rate across Canada.  No such luck. The HST rate will be 12 percent in B.C., 13 percent in Ontario, New Brunswick and Newfoundland/Labrador while the HST will go to 15 percent in Nova Scotia. Quebec charges the GST and QST while Manitoba and Saskatchewan and PEI retain the GST plus their PST rates and Albertans pay the GST only at 5 percent – I think.

It may not seem to matter what each province charges until you realize Canadians can do business across all provinces. Go online from your home in Edmonton and buy a product from an Ontario supplier. Go online in Toronto and buy from a supplier in B.C.  Travel from Halifax to Toronto; you’ll pay a different sales tax than if you travelled from Toronto to Halifax.

Here’s another question for you.  After July 1, you fly from Toronto to Boston. Your business colleague hates flying and takes the train from Toronto to Boston to attend the same meeting. What sales tax will each of you pay?

The answer is, you will pay a 5 percent GST and not the Ontario HST of 13 percent despite the fact you got on your plane at the Billy Bishop airport at Toronto Island. Your business colleague will pay zero sales tax despite the fact he boarded the train at Union Station.

If you want to know why, go to Google and type in B-103 CRA for Canada Revenue Service.  Somewhere in all the arcane language are the reasons supporting the answers above. 

Taxes may be honest and well intentioned, but they are so complex and often illogical, no wonder they inspire such distrust and dislike among many of the public and among businesses of all sizes. Maybe a flat tax makes sense because the system we have surely does not.

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