HST

As of October 1, 2011, retailers were adding an additional fee to the sale of small appliances. The Unplugged website states that the fee is not a tax because it is not collected or managed by government.

In many ways, it seems like a tax.  If I buy an appliance, I must pay the fee, even though I may never need to recycle the appliance (wishful thinking?) or may dispose of the appliance somewhere else (e.g., if I move to Alberta).  Moreover, I can drop off an existing appliance for recycling even though at the time I bought it there was no fee.  There is no direct tie between the fee and the service.  However, the Unplugged website is correct that it is not the government that is setting or collecting the fee.

The BC government is forcing manufacturers and retailers to provide recycling facilities for small appliances.  In order to comply with the recycling obligation, the manufacturers and retailers have come together to form the Canadian Electrical Stewardship Association, which operates the program and sets the fee.  So, the manufacturers and retailers are essentially charging us more in order to cover their costs of complying with the government regulations.

Since the recycling fee is not imposed by government (even though it is results from government action to force recycling of small appliances), it is not a tax.

Bill Vander Zalm, always one to happily throw a monkey wrench into the works, has decided to try to force the BC government to eliminate the HST earlier than its 2013 deadline.  How does he plans to do so?  By launching a class action lawsuit to compel the government to do so, and by involving himself and his supporters in the by-elections in Port Moody and Chilliwack-Hope.

I am not sure the basis of the legal claim that Vander Zalm wants to bring, but even if there is such a legal claim, it would be ineffectual in any case.  The HST is a federal tax.  To eliminate the HST in B.C., the federal government must implement the necessary legislation or regulations.  A court order cannot force B.C. to do something it has not the power to do.  BC has the constitutional power to bring back the PST earlier than March 31, 2013, but if the HST is still in place then Mr. Vander Zalm and his supporters (and everyone else) will be paying 19% tax on purchased of goods, telecommunication services, and legal services in B.C.  That would not be good.

On the other hand, Vander Zalm does have a point that the longer the HST is in place the better it probably is for  BC government revenues.  However, it is difficult to see how the Province can move much faster.  Going into the HST system was easier, since it involved the elimination of a tax regime, the transfer of the province’s employees to the Canada Revenue Agency,  and the dismantling of systems to administer the tax, and there were precedents available already for the transitional rules to implement the HST.  Going back to the PST is harder since the provincial systems for administering the tax must be rebuilt, the employees hired, new transitional rules created and agreed to by both BC and Canada, and BC must deal with potential new double tax problems created in the meantime.

In Seven Mile Dam, the B.C. Court of Appeal held that each partner has a proprietary interest in the assets of the partnership.  That is because a partnership is not a separate legal person like a corporation is.  Accordingly, when two persons transferred taxable assets (tangible personal property) into a partnership of four persons of which they were two, they effectively retained a 50% interest in the property, and so tax was collectable on only the 50% interest they had sold to the other two partners.

Seven Mile Dam involved an ordinary (or general) partnership, but a number of cases had cited Seven Mile Dam when stating that a limited partner has a proprietary interest in the assets of a limited partnership as well.  However, notwithstanding those cases, the government of BC’s policy was to treat the limited partners as not having a proprietary interest in partnership assets for PST purposes.

In the Edenvale case, Edenvale had transferred assets into a partnership of which it had a 15% interest.  Based on Seven Mile Dam, Edenvale remitted sales tax on the basis that it had sold an 85% interest in those assets to the other partners.  The BC government assessed Edenvale for tax on the remaining 15%.  The issue eventually came before the B.C. Supreme Court.  Mr. Justice Burnyeat allowed Edenvale’s appeal.  He confirmed that a limited partner has a proprietary interest in the assets of the partnership, and therefore the BC government was wrong to assess additional tax.

The BC government could apply for leave appeal to the BC Court of Appeal. Alternatively, when it reinstates the PST it can change the rules as they apply to partnerships.  The BC legislature could make a partnership a person for PST purposes, just as a partnership is a person for GST/HST purposes, thus achieving the result it wanted in Seven Mile Dam and in Edenvale.  Indeed, the Tax Executives Institute has recommended that the BC legislature do just that.

The Vancouver Sun made a freedom of information request to find out the reasons for the delay in ending the HST in BC.  As expected, the BC government’s response referred to the need to rebuild software, train government staff, create transitional rules, and, perhaps most importantly, to update the legislation to avoid gaps or double tax problems.  The Sun also states the government response indicates that the transition date could be later than March 31, 2013.  The Sun notes that it could potentially become an election issue.

The article quotes NDP leader Adrian Dix as stating that the PST is not a mystery since it was in place for years. What his statement ignores that PST must be updated to deal with issues that have developed since the HST was implemented, including potential 20% tax on legal fees (see recent post).

In short, the world has changed since BC adopted the HST, making it more complicated to return to the PST.

Take legal services as an example.  Before the HST was implemented, it was easy for a law firm to determine what tax to charge its clients.  A law firm located in BC had to charge 5% GST plus 7% PST to its clients, regardless where the client lived (except non-residents of Canada were often exempt).  A BC law firm did not have to worry about the tax rate changing depending on whether the client was in BC, Ontario, Nova Scotia, etc.  When Ontario and BC joined the HST, the federal Parliament dramatically changed the rules, which are known as the “place of supply” rules.  Now the rate of tax a B.C. law firm must charge depends, usually, on where its client is.  That means that a BC law firm, despite performing all the legal services in BC, will usually charge BC clients 12%, Alberta clients 5%, Ontario clients 13%, and Nova Scotia clients 15%.  If BC simply adopted the old PST rules, then a BC law firm would have to charge the Ontario client the 13% HST plus the 7% BC PST, for a combined tax of 20%!

One solution would be for Parliament to reverse its change to the “place of supply rules”.  In addition to resolving this double tax problem, it would have the added bonus of simplifying the rules, which have become unnecessarily complicated and do not actually affect how much HST revenue a province receives.  However, it is unlikely that Parliament is going to change the cross-Canada rules to satisfy BC.  BC can adapt its rules to mirror the federal rules, to prevent double tax, but then BC will receive less tax revenue, at a time when it is struggling with a deficit.

Adapting the PST to changed circumstances will take time, both to find the problems and to fix them.