July 27, 2010

HST good news for ‘legitimate’ contractors

VINCE VERSACE

staff writer

Ontario’s new harmonized sales tax will benefit provincial construction and will not drive growth in the industry’s underground economy, the Ontario Construction Secretariat (OCS) says.

“We feel the impact the HST will have on the underground economy will be negligible. In fact, it will help contractors recover costs that were formerly not recoverable,” said Sean Strickland, chief executive officer of OCS. “If you are a legitimate contractor, you will want to recover costs and comply with HST.”

OCS does not believe the HST will “drive more people to the underground economy” though the risk exists.

This possible growth is not anticipated to be significant since HST chiefly applies to cash-based transactions, especially in the residential renovation sector, where the practice of no tax being applied is already widespread.

“The primary effect of the introduction of the HST on revenue losses will be to increase the amount of tax revenue that is lost from transactions that are already conducted on an underground basis,” found a recent OCS underground economy report.

Strickland said the construction industry will be one of the biggest beneficiaries of the new HST since buyers of construction materials - whether they are owners, contractors or subcontractors - can regain the previously unrecoverable Retail Sales Tax (RST) through Input Tax Credits (ITC).

A recent OCS report on HST impacts on Ontario construction concluded nearly 40 per cent of the ITC in non-residential construction, previously subject to the RST, are now recoverable.

With the HST, a contractor building an $8 million, 100,000-square-foot non-residential structure, will now save $320,000 in costs. Overall, Ontario construction is expected to see $2.3 billion in annual savings.

“The construction industry currently pays retail sales taxes on the highest proportion of their inputs when compared to other major sectors of the economy,” the report concluded. “Therefore, the implementation of the HST should prove very beneficial to the industry.”

The Council of Ontario Construction Associations earlier this year noted that road builders and sewer-watermain companies, which buy a lot of equipment, will see more upfront benefits than someone whose expenses are predominantly labour.

The Ontario Chamber of Commerce estimated the HST will result in a one per cent increase in capital investment in Ontario’s economy, climbing to as much as 1.5 per cent.

A C.D. Howe Institute report estimates there was a 12.1 per cent increase in construction machinery and equipment investment in the Atlantic Provinces after a HST was implemented there in 1997.

As the purchasing power of a business increased, thanks to the benefits of input tax credits, so did that capital investment, the institute concluded.

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