Businesses brace for GST cut

By Mark Brown | June 26, 2006 | Last updated on June 26, 2006
3 min read

Do you have a client leasing a car, looking for a new home, or buying a cup of coffee? Then you know someone who will be impacted by the GST cut that comes into effect this Saturday. Just don’t be fooled into thinking that the cut will impact each of those purchases in the same way.

In many cases, consumers won’t notice the change at all, particularly if the GST is already embedded in the price. Things like taxi fares, parking and even your morning cup of java will likely cost the same next week as it does today.

Implementing the Conservative’s tax cut has not been without its challenges. Consider car lease payments, says Beverly Gilbert, the director of commodity tax for Borden Ladner Gervais, where the tax tends to be blended in with the monthly payment. These companies now have to examine all of their clients to make sure they are charging the correct amount of tax.

“Your lease payment should go down,” says Gilbert. It’s important to make people aware of this, she adds. “If the leasor doesn’t do that they don’t get to keep the 1% if he doesn’t reduce his price, he still has to send [the full 7%] in.” In other words, firms can’t simply pocket the 1% increase. While that will happen, she says, these firms must include notice that it is now being taxed at 6%.

The mutual fund industry will be a prime example of this. Will the industry pass on the tax savings? “It’s hard to tell,” says Gilbert. “You would hope that that reduction in cost would be passed on to the purchaser, but there is no guarantee.” This could also mean that some mutual funds that were thinking of raising their fees might hold off now since they are receiving that 1% benefit, she adds.

CI Investments is one of the fund companies planning on passing the savings on to investors; particularly after the public campaign they ran last year to eliminate the consumer tax on mutual funds altogether.

Because of a regulatory decision earlier in the year, the mutual fund company will be able to reflect the tax change to its MERs sooner than other fund companies as CI was allowed to update its MERs on a monthly basis. The advantage will be short lived, however, as the playing field will level itself out over the course of the next year.

Gilbert says the best practice would be to give notice that they are passing along the saving, as firms that try to pocket the 1% could suffer a backlash from consumers. “I think they are going to have to do those calculations to keep their customers happy.”

The tax cut will have a unique impact on small business owners as well. For instance, the lowering of the GST has no impact on the quarterly installment payments which businesses submit for the consumer tax. If all things between years are equal, says Gilbert, it will mean these businesses will pay more GST than they were required too. In those cases, they will receive a refund.

“The people who are in the financial industry are probably one of the big winners because generally you don’t pay GST when you purchase shares or receive dividends,” she says. Since the financial services industry performs an exempt activity, it also means they don’t get back the GST that they payout. “Those persons that are in the financial services industry actually get a full 1% benefit.”

The tricky part of all of this is the fact that July 1 falls on a Saturday. Companies are spending more to make this change because they have to call in extra staff on a holiday over a long weekend to make sure the adjustment is made correctly, she says.

All of this expense could be incurred again soon, if the Conservatives follow through with their plan to lower the GST to 5%. While this is exciting for tax specialists like Gilbert, she concedes its frustrating for businesses. The only saving grace, she adds, is they will have more experience and know what not to do next time.

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Mark Brown