GETTING THE GST OF IT
THE TAX IS SUPPOSED TO BE VISIBLE, BUT BOTH BUSINESS AND CONSUMERS ARE CONFUSED
There is a new routine at the Olympic Athletic Club in Vancouver, but sales manager Jeffrey Fraser says that he is not sure how popular it will be with the fitness club’s members. That routine is collecting the federal government’s projected Goods and Services Tax on the portion of club memberships that extend into 1991. About 120 of Olympic’s members renewed memberships for 1991 before the Sept. 1 deadline to avoid paying the tax, which is scheduled to take effect on Jan. 1. But from now on, Fraser says, the GST will add as much as $60 to the club’s annual dues. As a result, he says that even though it has yet to become law, the GST is punishing his and many other service industries. Said Fraser: “Who are we fooling? People are not going to put us before their food, houses and cars. When the economy gets bad, we’re one of the first things to go.”
Fraser is not alone in his concern—and confusion—over the impact of the GST. For months, representatives of pensioners, consumers, labor unions and both small and large businesses have denounced the proposed seven-per-cent tax.
The Mulroney government introduced the GST legislation in January to replace the 66year-old manufacturers sales tax (MST), currently 13.5 per cent, which it argues is unevenly and unfairly applied.
But the new tax will be levied on the price of services as well as a broader range of goods, including purchases that the federal government has never taxed before, ranging from candy to haircuts to theatre-ticket subscriptions.
In April, Mulroney’s Conservatives pushed the legislation through the Commons, but it is currently being re-examined by the Liberal-dominated Senate. The 12-member standing Senate committee on banking, trade and commerce, chaired by Senator Sidney Buckwold, wound up crosscountry hearings on the GST only last week, and it is not expected to table its report for at least
another month. After that, the bill goes to the full Senate and, if rejected or amended as expected, must return to the Commons for renewed consideration.
Despite that, the government says that it is determined to pass the bill before the GST is due to come into force on Jan. 1. If necessary, Mulroney could appoint enough new and extra senators to overcome the Liberal majority. Meanwhile, the government says that the new tax should be paid from Sept. 1 on goods and services that will be delivered after Jan. 1, including such sales as season-ticket subscriptions, extended warranties on cars and even prepaid funerals. Finance Minister Michael Wilson and Revenue Minister Otto Jelinek, in addition to several private-sector consultants, have advised con_ sumers to pay the GST beI cause they say that the law S will be made retroactive 5 whenever it is passed. But David Simpson, executive director of the Ottawa-based Consumers’ Association of Canada, said, “There is no basis in law requiring them to do so.”
Even businesses not required to collect the tax until it formally becomes law, as well as consultants who advise them, say that it is already clear that the GST may be an adminis-
trative nightmare. Andy Friedman, a tax partner with the accounting firm of Peat Marwick Thorne in Toronto, says that he and his colleagues are “running off our feet trying to get information.” The legislation passed by the Commons in April is about 300 pages long, with a further 250 pages of technical notes, and an expected 60 to 100 sets of regulations are to be released soon.
In addition, until last week, Wilson had been unable to get any of the provinces to agree to jointly collect and administer their own provincial sales taxes along with the GST. Last week, however, Quebec Finance Minister Gérard D. Levesque announced that the province will bring in its own tax in January, which it will blend with the new federal tax. In a two-stage program, the Quebec sales tax will apply in 1991 to all goods covered by the federal GST, with most services remaining exempt until 1992. Then, Quebec’s proposed seven-percent provincial GST will replace the current Quebec retail sales tax of nine per cent.
For consumers, blending provincial levies into the new federal tax scheme not only greatly increases costs at the cash register, but also broadens the range of goods and services on which provincial taxes must be paid. That will enrich provincial treasuries. And Wilson wants more provinces to harmonize their sales taxes with the GST in order to reduce the burden of administering the new federal tax. Otherwise, Ottawa’s ability to collect other
taxes will almost certainly be reduced. According to a 52-page report that reviewed how effectively Revenue Canada catches tax cheats, which top departmental officials completed in April, 1989, after a year of study, giant corporations already find it easy to avoid paying their full share of Canadian taxes. The officials wrote, “Very large corporations retain highly paid advisers to ensure that they pay as little tax as possible, either by arranging their business in favorable ways or by challenging every grey area of law that could be to their benefit.”
The report says that administering the GST from Ottawa will require experts in accounting, law and management, and predicts that it will draw staff away from the enforcement of existing income tax laws. The report, noting that Revenue Canada “already faces severe competition for skilled audit resources in major urban areas,” adds that “the implementation of the GST may worsen the competition for experienced auditors and examiners.”
For some consumers, the confusion has already begun to set in. According to Simpson, some retailers are already taking advantage of that confusion. He said that many stores have posted signs urging consumers to buy before the end of the year to “Beat the GST,” even though on many items, including furniture, the GST will replace the higher MST. Said Simpson:
“These are items where we should see some reductions.”
Still, many consumers say that they are skeptical about whether they will actually see any price reductions when the GST replaces the MST. In fact, consumers who had hoped to save money by paying for their annual cable television service for 1991 ahead of time have already been disappointed. Revenue Canada has instructed cable TV operators to keep charging their customers the 11-per-cent federal telecommunications tax, which the GST will also replace, until the GST becomes law. Then, the cable companies could issue a four-per-cent credit on their customers’ bills. A Revenue Canada spokesman said that there was no double standard in allowing that treatment, while at the same time requiring other businesses to collect the GST before it becomes law. The spokesman noted that there already is an applicable tax on cable, but not on those other services.
The three major North American car manufacturers say that they will encourage their dealers to give consumers the full benefit of savings that result from replacing the manufacturers tax with the GST. In hearings before the Commons consumer and corporate affairs committee last spring, spokesmen for General Motors of Canada Ltd., Ford Motor Co. of Canada Ltd. and Chrysler Canada Ltd. said that
the proposed tax change will trim suggested retail prices by an average of four per cent— excluding any price increases in the interim. That would mean that a 1991 Pontiac Grand Prix, which now costs $20,146, would cost $19,364 after Jan. 1—a saving of $781, excluding provincial sales tax.
Still, some analysts, and even some auto industry executives, privately question whether an industry that has seen new car and truck sales decline by 8.5 per cent from January to June will risk an even worse slump in the final months of 1990 by promoting GST savings in January. Instead, they predict that the automakers and their dealers will offer such special incentives as cash rebates that equal the expected savings. Melville Hanna, for one, a senior consultant with Livingston International Inc., a customs brokerage firm in Ottawa, says that he does not foresee a sudden frenzy of consumer buying because “it is difficult to tell if prices will go up or down.”
Indeed, some store owners found consumers to be generally apathetic about the GST. Robert Lowrey, owner of Toronto-based Robert Lowrey’s Piano Experts, said that he sent a beat-the-GST mailing to his firm’s 10,000 customers last spring promoting advance payment for future pianotuning services. But the response was less than he had hoped for. Said Lowrey: “We’ve had a good -
one, but it’s not the 20 per cent of our [customer] list that I predicted, but more like 11 or 12 per cent.” The advertisement said that $30 could be saved on piano tuning in 1991 if payment was made before Sept. 1, but Lowrey said that the savings available from his and similar GST promotions are not enough to spur a great number of consumers.
For their part, funeral home directors say that they have found few consumers willing to pay in advance to avoid the GST on funerals, which cost an average of $3,300. Paul O’Connor, founder of Paul O’Connor Funeral Home in suburban Toronto, said that there was a slight increase in the number of prepayments for funerals before Sept. 1. But he added, “It is hard to say whether it is for the GST.” Consumers were also eligible to escape the GST by paying for extended warranties before Sept. 1 on such items as cars, stereos and refrigerators. Said Amin Datoo, sales manager at Rumble Pontiac Buick dealership in Toronto: “The
majority of people who are buying extended warranties have agreed to pay now instead of waiting.” Still, said Datoo, that majority is only a “trickle.”
As well, for the first time, the GST will require charities to collect taxes. As a result, Edward Garrard, director of research and marketing at the United Way of Greater Toronto, says, “The GST will increase operating expenses significantly.” Under the legislation, charities will have to charge tax on such services as meals, special events or fitness programs, if those services compete with the private sector. But they will be exempt if the project or service has annual sales under $30,000 or if volunteers carry out 90 per cent of the day-to-day task. “How exactly do you determine that?” Garrard asked.
Charities will also have to pay the GST on a wide range of office supplies and services. “Charities get back a 50-per-cent rebate, but we still end up paying a lot of money,” said Garrard. But perhaps the most pressing concern for charities is what the GST will do to the general climate for charitable giving. Said Garrard: “Charitable donations are GST-exempt, but if people are spending their money on the GST elsewhere, they have less disposable income.”
Analysts also predict that the GST will cause widespread confusion among consumers because the GST legislation leaves it up to each store to determine how it will post notices of the tax. According to the Consumers’ Association’s Simpson, that means some stores may include the tax in their listed prices, and others will add it on at the cash register. That will make it virtually impossible for consumers to comparison shop, said Simpson. “When you get that degree of confusion, it leads to distortion in the marketplace,” he added. “There will be a lot of price inflation because of tax confusion.” Last week, the association asked the Senate committee to delay passing the GST legislation until the issue can be clarified.
Mel Fruitman, vice-president of the Toronto-based Retail Council of Canada, said that the majority of large stores, at least, have promised to add the GST at the cash register, making it clearly visible to consumers. Declared Fruitman: “Everybody feels strongly that it’s useful for people to know they are paying the government coffers.” He said that adding the GST at
the cash register is simpler. If prices or the GST change, stores will simply have to make changes at the checkout, rather than on every item in the store.
The pricing issue is further complicated by differing plans among the provinces on how they will require merchants to apply both the GST and their own retail sales taxes, which are levied by all provinces except Alberta.
While Quebec plans to combine the two taxes, which by 1992 will amount to 14 per cent, others have devised different procedures. British Columbia and Manitoba will require retailers to apply the GST and their provincial sales tax separately on the retail price. The rest have indicated that they will require merchants to compound the tax-
es, charging the provincial sales tax on top of the GST. Applying the seven-per-cent GST and an eight-per-cent provincial tax separately on a $100 item means that the buyer would pay a total of $115. Compounding the same two rates of tax on $100—in effect, taxing a tax— would make the final price $115.56. Still, Statistics Canada, the federal agency that monitors what goes on in the economy, said last week that it can only measure what impact the GST will have on consumers’ pockets after the tax is introduced.
Apart from charging consumers tax on tax, said John Bulloch, president of the Canadian Federation of Independent Business (CFIB), compounding will place a special hardship on small businesses. “Many cash registers are not designed for compounding,” he said. As a result, merchants in that situation will have to include the GST in their listed prices, making their prices appear higher than in stores where it is added at the cash register. Bulloch also argued that taxes need to be harmonized as they are in Germany, where the federal and state governments exempt the same goods and services from taxes. Canada, by contrast, is a complicated jumble of clashing jurisdictions in which the lists of taxable items vary among provinces and may also differ from the GST list. Unless they are harmonized, Bulloch predicted, “you will have an unbelievable compliance nightmare.”
Many consultants take a similar position. Howard Petrook, managing director of the private, Toronto-based Retail and Financial Consulting Services Inc., said that large businesses have the resources and personnel to plan for administering the GST. “But many small businesses have not yet made the psychological adjustment to the tax, let alone start planning for it,” said Petrook.
In Alberta, where merchants have never had to deal with a sales tax at the cash register, some of them will end up paying the GST
themselves, said Douglas Wright, an Edmonton-based spokesman for the CFIB. Said Wright: “The federal government is grossly underestimating the time it will take business to get used to this. There is going to be a lot of uncollected tax revenue absorbed by businesses that were not on top of the situation.” Added Wilfred Barranoik, president of the Alberta Chamber of
Commerce: “People always bitch about the tax because when they don’t live in a province that has a tax, they don’t understand.”
Even among large, nationwide retailers who have plans well under way for implementing the GST, one giant problem remains—the actual switchover from one tax system to another between the time that business closes on Dec. 31 and opens on Jan. 2. Tony Lavecchia, a GST implementation co-ordinator for Sears Canada Inc., said that the department store has been planning for the GST since last October. Still, the 94 Sears retail outlets and more than 1,700 catalogue order offices have not yet worked out how exactly they will handle the crucial switch-
over. Said Lavecchia: “It’s a
logistical nightmare.” For many Canadian businesses and consumers now faced with the GST for goods and services to be delivered next year, that nightmare has already begun.
BARBARA WICKENS with ADRIENNE WEBB in Vancouver, KERRY DIOTTE in Edmonton and MICHAEL HARRISON in Toronto