By Dale Barrett – Managing Lawyer at Barrett Tax Law and Tax Columnist at the Lawyer’s Daily. Originally published by the Lawyer’s Daily.
According to the 2008 federal budget, the Harmonized Sales Tax (HST) was claimed by the federal government to be “the single most important step provinces with retail sales taxes could take to improve the competitiveness of Canadian businesses.”
They were wrong.
I would argue that instead of making Canadian businesses more competitive, the HST has done exactly the opposite. In fact, it is clear that HST has robbed the Canadian government, the Canadian economy and individual Canadian taxpayers of tens of billions of dollars. In reality, rather than being beneficial the HST has actually worsened the profitability and competitiveness of Canadian businesses and has ruined the lives of many tens of thousands of taxpayers.
This is because the entire HST system and its legal framework are fundamentally flawed.
In this article and the next one in this two-part series, I outline nine of the many problems with HST to help illustrate why it should be abandoned. Here are the first four.
1.HST compliance costs businesses billions of dollars.
HST is supposed to be a consumer tax. Yet businesses have to file for it, collect it, keep it aside in separate accounts, keep track of Input Tax Credits (ITCs), file returns and remit the net tax. HST compliance has cost businesses billions of dollars for no good reason. Imagine if businesses were able to save and reinvest the many thousands of dollars which they are each forced to waste each year on compliance.
2. HST has destroyed the lives of millions of Canadians.
Time and time again when a business is short on cash, they use the HST money instead of missing payroll. Business owners dip into HST when they can’t pay their rent or their suppliers. And they all plan on paying back the HST when business improves. But often it doesn’t. And when this happens directors are held personally liable unless they meet the (almost impossible) challenge of mounting a successful due diligence defence. In turn when directors are held liable they lose their homes, investments and savings. Many are forced to declare personal bankruptcy as a result. Many end up divorcing as a result. Some end up even committing suicide.
3. The law prevents companies from claiming Input Tax Credits to their detriment.
- Often a purchase is made by an agent or a related company. This is a fact of life. If a receipt is not in the name of the correct company, it is prevented from claiming an ITC.
- ITCs are only allowed to be claimed to the extent that the underlying disbursement is used in the course of a taxpayer’s commercial activity. This is a problem for businesses with HST exempt activities. So, universities, dentists, medical professionals and other types of businesses are required to apportion the ITCs, which often leaves almost zero ITCs available, meaning the rest of the HST has to be expensed. This costs them.
- A receipt is not absolutely required under tax legislation in order to claim an expense. There is case law on this. This means that a taxpayer who has lost their receipts to a fire, flood, or error can still claim expenses. They can use their credit card statements, or even testimony to prove their expenses. However, in order to claim an ITC, a receipt is required with a valid HST number. CRA auditors often use this to their advantage when receipts are missing or when taxpayers produce old, faded receipts where HST numbers are no longer legible.
4. HST hurts certain types of businesses.
Not all companies are required to register for HST and those that don’t or can’t are prejudiced by not being able to claim ITCs. So HST is not refundable and instead, it simply reduces their income by acting as an expense. This means that the HST costs these businesses. Other businesses that bill under $30,000 per year are not required to register. But they get in trouble when revenues eventually do exceed $30,000 per year. They are deemed to have collected the HST and the Canada Revenue Agency comes collecting even if the business didn’t.
This is part one of a two-part series. Read part two here.
Dale Barrett is the managing partner of Barrett Tax Law, founder of Lawyers & Lattes Legal Cafe, author of Tax Survival for Canadians and the editor of the Family Law and Tax Handbook. He is also a frequent tax lecturer, primarily for accountants.
