Reno credit benefits undercut by HST
November 14, 2009
Stephen Dupuis
By definition, fiscal stimulus has to be short-term in nature, otherwise human nature kicks in and people procrastinate.
The federal government's home renovation tax credit is a perfect example of a well-conceived fiscal stimulus measure as Canadians have been renovating in droves ahead of the Feb. 1 deadline for this incentive program.
With the tax credit due to expire in less than three months, the federal government has a golden opportunity to leverage the surprising popularity of this stimulus initiative to long-term advantage.
According to the Canadian Home Builders' Association, the HRTC is having a significant and positive effect on the level of home renovation activity across the country.
The CHBA adds that there is evidence that the tax credit is complementing other federal initiatives, such as the ecoENERGY home retrotfit program.
"Our renovator members report that many consumers are including energy efficiency measures in their projects. This is allowing them to take advantage of both the HRTC and ecoENERGY grants, as well as compatible provincial grants and incentives," CHBA president Gary Friend noted in a presentation to the House of Commons Finance Committee.
"The HRTC is also delivering another important benefit by encouraging consumers to carry out their projects using the services of legitimate, tax-paying renovators," Friend added.
"By requiring receipts to support HRTC claims, the government is moving consumers away from dealings with underground 'cash' operators. This is a benefit shared by consumers, who are better served by dealing with legitimate, tax-paying companies. It also benefits governments, through higher tax and other revenues that would otherwise be lost to underground economic activity," Friend continued.
So far, so good, but as Friend points out, "while it is clear that the HRTC is having a very positive impact on the level of home renovation activity in Canada, this initiative will end early in 2010. A few months later, harmonized sales taxes (HST) will be introduced in both Ontario and British Columbia, resulting in a tax increase on home renovation amounting to about $1 billion each year.
"Clearly, it will have a significant impact on both the level of renovation activity and the number of jobs lost to the underground 'cash' economy.
To put matters simply, the benefits flowing from the HRTC will be more than nullified by the impacts of sales tax harmonization," Friend asserted.
In order to address this situation, the CHBA has called upon the federal government to introduce a permanent 2.5 per cent GST rebate for home renovation expenditures. This will achieve tax neutrality with the pre-GST federal sales tax.
In both Ontario and British Columbia, the CHBA is urging provincial governments to enact similar renovation tax rebates to achieve tax neutrality in relation to the provincial portion of the harmonized sales tax.
On that note, the Ontario Home Builders' Association has released a report detailing the potential impact of the HST on underground construction activity in Ontario.
The report estimates that the HST, as currently proposed, will result in substantial revenue loss to all levels of government as more and more consumers choose to pay cash to avoid paying any sales tax.
Of course, when sales tax is avoided, income tax is also avoided, and OHBA estimates governments could lose up to $1.6 billion in income tax and another $298 million every year in GST.
The solution put forth by the OHBA is a 5.4 per cent HST rebate on renovations.
"Unless governments approve a plan to discourage cash transactions, honest and legitimate renovators won't be able to compete," said OHBA president James Bazely.
Stephen Dupuis is president and CEO of the Building Industry and Land Development Association. The views expressed are those of the president. Email: president@bildgta.ca.
Toronto Star