Harmonization Tax will hit homebuyers hard -HST

Ever since the federal goods and services tax was introduced in 1991, there has been talk of "harmonizing" the GST with the respective provincial sales taxes.

Harmonization sounds like such an innocuous thing, almost pleasant, but make no mistake – it's all bad when it comes to new homes. Harmonization is a euphemism for massive tax grab and new homebuyers would be hit harder, by far, than anyone else.

Combining sales taxes is a non-issue when it comes to products that are already subject to both; however housing isn't one of those goods. Even where an item is currently exempt from PST, harmonization would only add a few bucks to the cost of things like children's clothing or monthly home heating bills.

But harmonizing sales tax on new homes, as the biggest of the big-ticket items, will add tens of thousands of dollars to home prices. How hard homebuyers would be hit would depend upon the price of the house and the extent of any offsetting rebates.

If we look at the example of a $350,000 home, the GST at five per cent is $17,500, offset by the GST new housing rebate of $6,300 for a net tax of $11,200. Under a harmonized scenario, the gross (literally and figuratively) tax at 13 per cent would be $45,500 while the net tax, assuming no change to the tax rates or current GST rebate (36 per cent of the tax payable), would be $29,120. That's an additional $17,920 in tax on a relatively modest home.

The simplified example above explains why I nearly fell off my chair when Premier Dalton McGuinty openly mused last week about a tax harmonization deal with the federal government. Even if there were some kind of offsetting rebate for the PST on building materials currently embodied in the price of a new home, harmonization will hammer housing hard because land and soft costs will now be taxable. And let's not forget that the current federal rebate zeroes out over $450,000, meaning the full harmonized tax would be payable on homes priced above that, barring any adjustment.

It's no wonder that home builder Frank Giannone, president of the Ontario Home Builders' Association, calls harmonization a "poison pill" for housing.

"The harmonization of GST and PST would have devastating consequences for homebuyers. This tax grab would add tens of thousands of dollars to the price of a new home and would cripple a $36 billion industry that is already facing economic headwinds," he asserts.

I'm truly hoping that either the news reports were inaccurate or that the premier reconsiders because he had it right when he said last fall that "harmonizing sales taxes will only hurt consumers." Ironically, harmonization will hurt the province as well through reduced home-buying activity, resulting in less employment as well as lower income, sales and land transfer taxes.

It's no secret that Ottawa is actively promoting sales tax harmonization and is putting intense pressure on the provincial premiers to do so, but that doesn't make it a good idea. It took years for the industry to recover from the implementation of the GST in 1991 and harmonization would set the industry back all over again, if we're not already there.