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Come July 1st, Gst Will Drop, But Will Prices?
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Come July 1st, GST will drop, but will prices?

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The 1 per cent loophole
Businesses not obliged to pass on cut in GST to consumers
Cab fares, price of some new homes unlikely to fall after July 1
Jun. 27, 2006. 06:45 AM
DANA FLAVELLE
BUSINESS REPORTER

Parking meters, taxi fares, vending machine items and possibly some new homes are unlikely to fall in price after July 1 despite a 1 percentage point cut in the goods and services tax rate effective Saturday.

They're all products that are sold at a GST-included price, rather than having the federal sales tax added at the cash register.

The tax break, first announced in the federal budget two months ago, is supposed to put $8.7 billion back into consumers' pockets over two years, according to the Conservative government of Prime Minister Stephen Harper.

And for the most part consumers will reap the promised benefits, tax experts said yesterday.

On things like clothing, cars and furniture, where the GST is added at the cash register, consumers will see the impact immediately. And some of life's biggest expenses, such as rent, mortgages, and basic groceries, were always tax free anyway.

But there are a handful of exceptions, where the tax savings may not be passed on to consumers, and the federal tax collector says there's nothing it can do about that.

"Businesses don't have to lower their prices," said Beatrice Fenelon, spokesperson for the Canada Revenue Agency. "As of July 1, they have to remit 6 per cent for the GST. What you pay may not change."

For example, cab fare in Toronto starts at $3 with the GST included. After July 1, the taxi company only has to collect 18 cents in GST instead of 21 cents. But it could keep the fares at $3 and pocket the 3-cent difference by saying the fare just went up by 1 percentage point, Fenelon explained.

In reality, taxi fares are set by city council and no decision has yet been made on what to do about the tax cut, a City of Toronto official said yesterday. But the city is already considering holding the line on things like ice rink rentals, golf green fees and skating lessons. So taxi fares could be next.

"A lot of things will probably not be going down — just because the administrative burden of changing everything or having to give a few pennies back far outweighs the savings," said Beverly Gilbert, a tax expert with Borden Ladner Gervais, in Calgary. "Most of these items are small change don't forget."

The one big exception is new housing.

"If it is GST included, you should see a price reduction," Gilbert said. "But how do you police that? It'll be interesting to see what happens."

The potential savings to consumers are substantial when you consider the average new home or condo in the Greater Toronto Area sells for $300,000. The tax break isn't quite $3,000 because a previous partial rebate meant purchasers paid less than the full 7 per cent GST anyway.

But for the 40,000 Toronto residents who buy new homes and condos each year, savings are substantial. But will they see those savings in the form of lower prices on new homes as of July 1?

The Greater Toronto Home Builders Association says it can't predict how its members will react.

In a hot market, like Toronto, where land values and other costs continue to rise, some builders may opt to maintain current prices, while others may lower their prices to gain an advantage, the association's executive vice-president Stephen Dupuis said.

Two of Canada's largest homebuilders, Monarch Homes and Mattamy, said they cut prices after the tax break was announced in the May budget.

Most other items sold on a GST-included basis are small change to consumers, though the savings can add up to hundreds of thousands of dollars.

The City of Toronto's parking authority, for example, will save $462,000 by holding parking rates at their current level. Consumers will benefit because the tax windfall will be used to delay a planned rate increase later this year, the parking authority said.

Some newspapers sold in coin boxes are also priced on a GST-included basis, said Anne Kothawala, president and chief executive officer of the Canadian Newspaper Association. But they account for a relatively small percentage of overall newspaper sales, she said.

"We're talking a maximum of $2 million on $3.5 billion in revenue," she said. "We're not talking about huge dollars here." Regular subscribers will see the tax break on their home delivery bill, she added.

"We have historically priced the Star at a rounded price (75 cents on weekdays) and we plan to maintain that strategy for box and single copy sales," said Sandy McLeod, vice-president operations at the Star. "We will reduce our home delivery price 1 per cent."

Some municipal services, such as the TTC, are already tax free.

For other City of Toronto services, the issue has become a political hot potato.

City staff has recommended maintaining current prices on things like parks and recreation services because the costs of changing them outweigh the benefits. For example, the city charges $49, including $3.21 GST, for skating lessons. The GST cut lowers that by just 46 cents per person. The move would save consumers a total of $148,000. But the cost of reprinting the parks and recreation brochure to reflect new pricing would be $300,000.

Budget chief David Soknacki said he'd love to pass on savings if he can figure out how to do it cost effectively. Councillor Jane Pitfield, who is running for mayor, called the staff's recommendation "a cash grab" and said taxpayers expect the city to pass on savings.

On a happier note, the price of a bottle of booze, which is sold on a tax-included basis, will go down.

The price of a 750 mL bottle of spirits, such as gin or rum, will fall 15 to 20 cents, while wine will tumble 5 to 10 cents, said Chris Layton, spokesperson for the Liquor Control Board of Ontario. Beer prices will be largely unaffected because an increase in the federal excise tax will wipe out the decrease in GST, Layton added.

Fast food prices, after tax, will also be lower, according to Canada's two largest fast food chains, Tim Hortons and McDonald's.

Vending machine products, such as chips, pop and candy, are likely to remain at their current prices, said Don Watson, a B.C. wholesaler who supplies the vending machine industry. Operators could use the extra cent or two they'll gain on every sale, he added. "They might actually make a bit more profit. A lot of them are struggling."

Some big-ticket items, like cars, have been selling at the reduced tax rate for more than a month to keep customers from delaying purchases past July 1.


SOURCE: Toronto Star
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Come July 1st, Gst Will Drop, But Will Prices? - paolo - 06-28-2006, 12:19 AM

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