February 15, 2010
HST will affect sectors in different ways
Tom Intven
LO President
As of July 2010, the provincial government will impose its new Harmonized Sales Tax (HST). Touted by the government as a panacea for Ontario’s ailing economy, but condemned by others as the biggest cash grab in the province’s history, the HST will have an effect on our members in different ways, depending on their type of business.
Growers will likely benefit the most from the new tax. Most growers are classified as farms, and will continue as zero-rated, making purchases without paying any tax. This will apply to fertilizers, pots, pesticides and machinery. There should be a slight net decrease in sales tax, as growers will no longer pay sales tax on trucks, light vans, parts, furniture, lawn mowers, computers freezers and other equipment.
Garden centre owners will not see a net change in sales tax on their products like plants and hardgoods. They will, however, need to charge the additional eight per cent provincial portion of the 13 per cent on any services supplied, such as landscape design, tree planting and landscape installation. While they will be credited back for the tax, the fear is that the additional cost to the consumer will have a negative effect in the demand for these services.
Retail businesses will need to change accounting and point-of-sales systems to accommodate the new tax. Most businesses with less than $2-million in sales will be eligible for a credit up to $1,000.
Our in-house calculations suggest that this will not nearly cover our labour and hardware costs to implement the change-over.
Managing cash flow will be one of the biggest challenges for members. For each reporting period, business owners will have to ensure that 13 per cent of their sales are remitted to the government. This can be a huge percentage of a seasonal business’s operating budget. Staying on top of your accounts receivable will become critical to satisfy your tax demands at peak periods.
Landscape contractors, lawn care, grounds maintenance, snow and ice, designers and lighting sectors will be hit the hardest by the additional eight per cent tax levied on labour fees, which comprise a large portion of invoices. A key question for LO members is, will your customers pay the full eight per cent more for services? How much of the eight per cent will our members need to absorb in their fees to survive in a world that has already shrunk operating margins to challenging levels? Cyndee Cherniak, a tax lawyer at Lang Michener in Toronto, is worried that the there will be “another form of underground economy in Ontario created.” She sees it as similar to when the GST came into law, creating problems, particularly in the home improvement market, which governments still grapple with 18 years later.
Figuring homeowners will rush to get projects in under the deadline and avoid the tax, the government has also added a May 1 deadline clause, which states that any project ordered by May 1, but not completed by July 1, is subject to the whole 13 per cent tax. But, if the work is completed before July 1, it will be taxed at the current five per cent GST.
The immediate effect of the HST is a decrease in disposable income for consumers in Ontario. TD economist Don Drommond calculates it at 1.5 per cent. I would suggest the real level will be much higher. While residents will get a small tax credit cheque and eventually a slight reduction in income tax, I fear the negative effect of this reduction in buying power will be amplified by our ‘recession-hardened’ cautious consumers. The timing of this new tax could not be worse. Consumers have shown tremendous caution and cut back spending during the recession that began in the fall of 2008. I know that in our retail business, the average sale is down more than 10 per cent this past year. All of our price points have had to be lowered in order to generate sales. Big ticket items have disappeared. Our margins have shrunk substantially as a result. This new tax will make consumers even more cautious about any new purchases, particularly for services provided by many of our sector groups that have an additional eight per cent tax added.
So, what do we do about it? It is a done deal, the legislation has been passed and the Supreme Court denied an appeal. So, it seems, we have to live with it.
Here are a few suggestions that may help ease the pain to you and your business.
Tom Intven may be reached at 519-631-1008, or tintven@landscapeontario.com.
LO President
As of July 2010, the provincial government will impose its new Harmonized Sales Tax (HST). Touted by the government as a panacea for Ontario’s ailing economy, but condemned by others as the biggest cash grab in the province’s history, the HST will have an effect on our members in different ways, depending on their type of business.Growers will likely benefit the most from the new tax. Most growers are classified as farms, and will continue as zero-rated, making purchases without paying any tax. This will apply to fertilizers, pots, pesticides and machinery. There should be a slight net decrease in sales tax, as growers will no longer pay sales tax on trucks, light vans, parts, furniture, lawn mowers, computers freezers and other equipment.
Garden centre owners will not see a net change in sales tax on their products like plants and hardgoods. They will, however, need to charge the additional eight per cent provincial portion of the 13 per cent on any services supplied, such as landscape design, tree planting and landscape installation. While they will be credited back for the tax, the fear is that the additional cost to the consumer will have a negative effect in the demand for these services.
Retail businesses will need to change accounting and point-of-sales systems to accommodate the new tax. Most businesses with less than $2-million in sales will be eligible for a credit up to $1,000.
Our in-house calculations suggest that this will not nearly cover our labour and hardware costs to implement the change-over.
Managing cash flow will be one of the biggest challenges for members. For each reporting period, business owners will have to ensure that 13 per cent of their sales are remitted to the government. This can be a huge percentage of a seasonal business’s operating budget. Staying on top of your accounts receivable will become critical to satisfy your tax demands at peak periods.
Landscape contractors, lawn care, grounds maintenance, snow and ice, designers and lighting sectors will be hit the hardest by the additional eight per cent tax levied on labour fees, which comprise a large portion of invoices. A key question for LO members is, will your customers pay the full eight per cent more for services? How much of the eight per cent will our members need to absorb in their fees to survive in a world that has already shrunk operating margins to challenging levels? Cyndee Cherniak, a tax lawyer at Lang Michener in Toronto, is worried that the there will be “another form of underground economy in Ontario created.” She sees it as similar to when the GST came into law, creating problems, particularly in the home improvement market, which governments still grapple with 18 years later.
Figuring homeowners will rush to get projects in under the deadline and avoid the tax, the government has also added a May 1 deadline clause, which states that any project ordered by May 1, but not completed by July 1, is subject to the whole 13 per cent tax. But, if the work is completed before July 1, it will be taxed at the current five per cent GST.
The immediate effect of the HST is a decrease in disposable income for consumers in Ontario. TD economist Don Drommond calculates it at 1.5 per cent. I would suggest the real level will be much higher. While residents will get a small tax credit cheque and eventually a slight reduction in income tax, I fear the negative effect of this reduction in buying power will be amplified by our ‘recession-hardened’ cautious consumers. The timing of this new tax could not be worse. Consumers have shown tremendous caution and cut back spending during the recession that began in the fall of 2008. I know that in our retail business, the average sale is down more than 10 per cent this past year. All of our price points have had to be lowered in order to generate sales. Big ticket items have disappeared. Our margins have shrunk substantially as a result. This new tax will make consumers even more cautious about any new purchases, particularly for services provided by many of our sector groups that have an additional eight per cent tax added.
So, what do we do about it? It is a done deal, the legislation has been passed and the Supreme Court denied an appeal. So, it seems, we have to live with it.
Here are a few suggestions that may help ease the pain to you and your business.
- Be prepared in advance. Have everything in place to change your computer systems over well in advance of the July 1 deadline. There’s nothing worse than scrambling at the last minute for a major change like this.
- Apply for your point-of-sale/computer update grant early and often. (I could not find any grant forms available on the Government of Ontario website. Ask your accountant to forward them to you as soon as they come available.)
- Do a cash flow study to determine your extra cash needs, especially in the peak spring season. An additional line of credit may be needed if your accounts receivables run past your HST due date.
- Increase your accounts receivable monitoring and communication. On-time collection will be more critical for your business in coming years.
- Tighten up your credit application requirements and forms as the effect of slow-payers will be amplified by the HST.
- On the other side of the coin, pay your bills on time.
- Choose a pricing strategy to help ease the burden for your customers.
- If you plan to absorb the extra eight per cent on your labour charges, add what you need to maintain margin in your January pricing, averaging it out over the entire year. If you plan to add it after July 1, make sure you advise your clients well in advance to allow them to build it into their budgets. Either way, keep your customers in the loop. No one like surprises.
- Offer ‘pre-HST’ discount packages well in advance for your services.
- Apply for and take advantage of all tax credits available to your business and yourself, personally.
- Raise your business acumen by enrolling in one of the many financial and business competency courses offered by Landscape Ontario, especially Prosperity Partners.
- Network more often at LO Chapter meetings and LO Sector functions with like-minded professionals to help develop a strategy to navigate through the transition.
Tom Intven may be reached at 519-631-1008, or tintven@landscapeontario.com.