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1. The Impact of Sales Tax Harmonization on Ontarios Tourism Industry Tourism Industry Association of Ontario
September 2009
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2. DRAFT 2
3. Background
On March 26th, 2009 the Government of Ontario delivered the provincial budget. An unexpected and potentially harmful aspect of which (from the tourism industrys point of view) was the announcement that Ontario will harmonize the Ontario Retail Sales Tax or Provincial Sales Tax (RST) with the Goods and Services Tax (GST) effective July 1st, 2010. Harmonization would result in a combined tax rate of 13% on a wider array of goods and services as well as eliminating the three percentage point differential applied to hotel rooms. This differential has been used effectively in numerous Ontario municipalities to raise marketing funds through establishment of a voluntary Destination Marketing Fee (DMF).
Harmonization of sales taxes can be beneficial for manufacturing and a variety of other Ontario industries. The Ontario Chamber of Commerce had been an advocate of harmonization. However, the impacts on tourism appear to have been either overlooked or not considered.
The application of HST on visitor-related goods and services will result in widespread increases to the total price paid by the end consumer. The effect on individual foreign travelers and domestic leisure travelers will be far greater than for domestic business travelers though, as the HST paid will be claimed by domestic business travelers as an input tax credit and offset against the HST charged. Foreign businesses and leisure travelers have no such recourse, with sales tax harmonization simply resulting in higher prices paid for most purchases on a typical trip.
As a result, TIAO has retained HLT Advisory Inc. (HLT) to quantify the HST impacts upon different segments of visitors to Ontario. IntroductionBackground and Scope
4. Scope
The Tourism Industry Association of Ontario (TIAO) has initiated a process to ensure the provincial government recognizes the negative impacts and, where possible, considers ways to mitigate these impacts. TIAO is comprised of various tourism industry sectors that derive all or a substantial portion of their overall business volume from visitors. These sectors include (among others):
IntroductionBackground and Scope (continued)
5. Visitors to and within Ontario are currently subject to a variety of taxes on goods (and in some cases services) that can add from 5% to as much as 15% to the end price. The federally-levied GST and provincially-levied RST are the two most common forms of taxation but exemptions or modification to these two taxes as well as other taxes layered above the GST and/or RST provide a somewhat complicated taxation landscape.
The principal taxes levied in Ontario applicable to tourist purchases are summarized below:
Ontario Retail Sales Tax (RST)
RST was introduced in Ontario on September 1st, 1961. At this time, the RST rate was 3%. RST rates have been adjusted eight times, increasing to the current level of 8% for most taxable goods and services on May 2, 1988.
The RST is a consumption charged on the person who consumes taxable goods or services. RST is imposed on the consumer or user of:
taxable goods
taxable services
admission prices
insurance premiums
Most services are exempt from RST while most goods are subject to the RST.
Goods and Services Tax (GST)
The GST, a federal tax, was introduced on January 1, 1991 replacing the Manufacturers Sales Tax. The GST is a value-added tax, applied to the monetary value added to a product throughout the production process. Businesses are responsible for collecting GST from customers and remitting the tax. Businesses are able to deduct GST paid from the amount collected (referred to as Input Tax Credits).
GST of 7% was applied to most goods and services when the tax was first introduced in 1991. Subsequently, GST was reduced to 6% in July 2006 and to the current level of 5% in January 2008.
GST is charged for almost all goods and services offered by Canadian tourism industry operations. Most RST exempt products and services are subject to the GST.
2. Ontario Provincial TaxesOverview
6. Accommodation
The Ontario Ministry of Revenue RST Guide 301 (August 2006) states that transient accommodation is subject to 5% RST. According to the Retail Sales Tax Act, transient accommodation is defined as:
lodging in a hotel, motel, hostel, apartment house, lodging house, boarding house, club or other similar accommodation; and
prepared food products provided pursuant to the American plan, modified American plan or other arrangement that combines the provision of lodging and prepared food products at a single price.
2. Ontario Provincial Taxes Customized Taxes
7. Retail Sales Tax Admission to Places of Amusement
The RST charged on the price of admissions to places of amusement has its roots in a 20% federal excise tax on admissions to movie theatres and other places of amusements. This tax was introduced in 1941 as a special war excise tax and repealed in May 1948. The Government of Ontario immediately implemented a 20% provincial excise tax under the Ontario Hospital Tax Act (1948). The tax rate was lowered to 10% by 1968 but a variety of variations existed. This tax was repealed by 1972 and the taxation on admission to places of amusement was moved to the Retail Sales Tax Act.
The Retail Sales Tax Act indicates RST of 10% (instead of the general RST rate) will be applied to every admission to a place or places of amusement where the price of admission exceeds $4.00. A place of amusement includes any place or premise where a amusement park, theatrical performance, carnival, circus, side show, menagerie, concert, rodeo, exhibition, horse race, athletic contest or other performance or entertainment is staged or held, or where a projector or similar equipment is operated. Cover charges for bars and clubs is also included in this definition.
While the definition of place of amusement appears broad reaching, the Retail Sales Tax Act outlines a number of exceptions to the 10% RST including:
When 90% of the performing cast are Canadian citizens or permanent residents in Canada;
If the entertainment is staged or under the auspices or sponsorship of a registered charity or similar groups except if the entertainment is a sporting event;
Where an organization that is substantially assisted or supported financially from public funds of the Province of Ontario
Where the price of admission is for a theatre, including a dinner theatre if the theatre has not more than 3,200 seats; and
Where the price of admission is for a live dramatic, comedic, choreographic or musical performance.
An admission price may include a combination of items taxed at different rates (i.e., 10% for entertainment and amusements, 8% for food, RST exempt components). Under certain conditions, a blended RST rate may be charged (some Ontario amusement parks and attractions are able to charge a blended RST rate).
2. Ontario Provincial Taxes Customized Taxes (continued)
8. Restaurants/Eating Establishments
Prepared foods sold by eating establishments (for consumption on or off the premises) are subject to RST of 8% when the total price of the transaction is more than $4.00. Soft drinks are RST exempt when sold with prepared foods as part of a single transaction with the total charge being less than $4.00.
RST of 10% is charged on sales of alcoholic beverages, including premixed drinks.
Retail
Most groceries are RST exempt. RST of 8% is charged on snack foods and candy when sold for 21 or more. Examples of taxable items include: chewing gum, chocolate bars and other candies, potato chips, and soft drinks (which includes fruit juice etc).
Alcohol sold at retail outlets is subject to RST of 12% for a total tax, including GST of 17%.
Recreation
Most charges or fees for the rental or use of recreational facilities are RST exempt. Recreational facilities include golf courses (greens fees), driving ranges, natural parks and campgrounds, ski hills (lift tickets), rifle ranges, bowling alleys, go-cart tracks, swimming pools, tennis courts, etc. Similarly, lessons (i.e., golf or ski lessons) are exempt from the RST. However, most charges for the rental of recreational equipment (i.e., golf clubs and carts, ski equipment, boats) are currently subject to 8% RST. 2. Ontario Provincial Taxes Customized Taxes (continued)
9. The March 26th, 2009 provincial budget introduced sales tax reform with a proposal that the province will harmonize the RST with the GST effective July 1st, 2010.
The table opposite, summarizes current taxes applicable to standard visitor commodities as well as the HST rate applicable July 1st, 2010. The variance between the current and future taxation levels is shown for comparison purposes. 3. The Harmonized Sales TaxOverview
10. For the majority of tourism goods and services, the tax burden will increase following introduction of HST.
3. The Harmonized Sales TaxNewly-Taxed Goods and Services
11. 3. The Harmonized Sales TaxInput Tax Credits
12. Several unknowns and concerns have been raised in regard to the unexpected introduction of HST in Ontario, including:
Harmonization of rebates for foreign visitorsIn 2007, the Foreign Convention and Tour Incentive Program (FCTIP) replaced the Visitor Rebate Program as a means for international visitors to claim a rebate on GST or HST. We assume this program will be applied to foreign visitors to Ontario.
Value of Input Tax CreditsOne advantages of a value-added tax such as the proposed HST is that businesses are able to claim input tax credits (ITCs) on a variety of purchases. In theory, businesses will benefit through the ability to claim input tax credits on the HST thereby reducing cost and increasing overall profitability of the business. However, the major expense of many tourist operations is labour (and the cost of food products used to prepare restaurant meals), which is not subject to HST. As a result, the most positive aspect of harmonization, the creation of ITCs, will not benefit tourism industry operations as much as less labour intensive businesses.
Insufficient funding of tourism marketingIncluded in the sales tax reform section of the budget are proposed measures to support tourism. Currently, he RST on transient accommodation (e.g., hotel rooms) is 5%. Under HST, the provincial portion of this tax will increase to 8%. The budget proposes allocating approximately $40 million of the incremental revenue associated with the difference in tax rates to destination marketing regions, once these are established, an amount the tourism industry believes to be substantially below requirements (and the recommendations contained in the 2009 Ontario Tourism Competitiveness Study final report).
Elimination of the 3% sales tax differential on commercial lodgingThis differential has been used effectively in numerous Ontario municipalities to raise marketing funds through establishment of a voluntary Destination Marketing Fee (DMF).
Cost of beverage alcoholOn the surface one of the benefits of harmonization is the elimination of a two-tier pricing system for beverage alcohol (alcohol sold at licensed premises currently attracts RST at 10% rather than 8%). Harmonization will see this tax reduced by two percentage points although the budget contains a measure to increase the base price to offset any benefit 3. The Harmonized Sales TaxUnknowns and Concerns
13. RST Refunds for Tangible Goods by visitors to OntarioCurrently, foreign visitors to Ontario are able to receive a rebate of the RST for eligible retail purchases of $50 PST or more (receipt must total at least $50 in PST). Ontario is the only province in Canada offering such a rebate. The Program falls under the Excise Tax Act where if goods are shipped outside of Ontario the tax need not be applied. This program creates an equity position whereby if goods are carried out by the visitor consideration is given. Ontario, from a provincial standpoint, receives by far, the largest number of international visitors.
The status of this program upon the implementation of the HST is unclear.
Cost of gasolineThe approach to establishing gasoline taxes in a world of harmonization is still unknown. In provinces where sales tax harmonization has already occurred, the 10 per litre federal excise tax and provincial gas tax (in Ontario 14.7 per litre) has been maintained (and are also subject to the HST). 3. The Harmonized Sales TaxUnknowns and Concerns (continued)
14. As a means to identifying the future tax burden, post HST implementation, applicable to a visit to Ontario, several scenarios were developed covering a sample of Ontarios tourism offerings. The scenarios have been prepared using the following general assumptions:
Scenarios have been prepared for individual visitors as well as different types of visitor groups, including:
Week-long family camping trip
Weekend getaway
Toronto shopping weekend
Family ski holiday
U.S.-based medical convention (including both event organizer and attendee costs)
One-week bus tour
Amateur softball tournament
Expenditures were estimated for each scenario as a means of calculating total tax burdens. These estimates include all taxation under both the current tax regime and post-implementation of the HST.
Estimates have been made (and clearly stated) for expenditure types where the formula for calculating HST cannot yet be confirmed (e.g., gasoline).
The scenarios are summarized on the following pages while detailed breakdowns for each scenario are included in the Appendix.
4. Visitor ScenariosIntroduction
15. Weekend Getaway
Two adults visiting Niagara-on-the-Lake. Expenditures include:
Two nights hotel accommodation
Two tickets to two Shaw Festival shows (four total tickets)
Two admissions to Tour Behind the Falls
Food & beverage
Retail Purchases
Gas purchases (assumed travel in private vehicle)
One-Week Camping Holiday
Two adults and three children staying at a campground for one week. Expenditures include:
Seven nights campground rental
Equipment rentals
Admission to two attractions
Food & beverage
Retail Purchases
Gas purchases (assumed to travel in private vehicle)
4. Visitor Scenarios Individual Visitor Scenarios
16. One-Week Touring Holiday
A bus tour with 45 international tourists making overnight stops in Toronto (3 nights), Kingston and Niagara Falls (two nights each). Tour operator expenditures include:
Seven nights hotel accommodation
Attraction admissions
Coach rental
Guide service
Restaurant meals
The fee charged to tour participants covers the cost of these expenditures. In addition to the tour operator expense, tour participants make additional expenditures including additional food and beverage and retail purchases.
Amateur Softball Tournament
Softball tournament held in Ottawa attracting 32 teams (including eight international teams). Each team has 15 players and 15 others (e.g., coaches, parents, siblings). Expenditures include:
Three nights hotel accommodation
Admission to various area attractions
Food & beverage
Retail purchases
Transportation (some charter buses, some using personal vehicles).
4. Visitor Scenarios Visitor Group Scenarios
17. In all seven scenarios (including all individual and group visitors), the total tax burden increases, in many cases significantly. For example, total taxation in the Weekend Getaway scenario increases by some 44%. The smallest increase in taxes paid (shopping weekend scenario) still results a 14% increase.
4. Visitor Scenarios Summary
18. While the implementation of the HST will result in taxes paid by visitors within and to Ontario increasing by as much as 44%, the more significant increase is the one-time impact on a wide variety of visitor expenditures.
Page 10 identifies a long list of commodities and services (e.g., campground rentals, ski tickets, attraction admissions) that will be subject to this one-time increase, an increase that far exceeds the average annual price changes achieved by many tourism industry operators. The following table provides an illustration of the Compound Average Growth Rate (CAGR) for a variety of visitor purchases, none of which achieved 8% growth in a single year. 5. Implications of the HSTA One-Time Increase of as Much as 8%
19. The chart below compares the effective tax rates on hotel (including DMFs) for a variety of North American hotel markets based on average 2008 hotel rates. Toronto, Ottawa and Niagara Falls are shown assuming: a) HST of 13% and b) the 3% DMF will be continued to generate destination marketing funds.
5. Implications of the HSTAmong the Highest Accommodation Tax Rates
20. RST Refund for Tourist Retail Purchases
Ontario is the only province in Canada to offer a refund of the provincial sales tax to international tourists. In fact, following changes to the federal rebate program in 2007 (discussed on the following page), the Ontario RST rebate program remains the only tax refund opportunity for individual travelers. Under the RST refund program, International ( and non- provincial) visitors are able to obtain a refund of the RST on tangible purchases permanently removed from Ontario within 30 days of purchase. To be eligible for the refund, RST must exceed $50 per purchase (including multiple items purchased at the same time and recorded on the same receipt). Tobacco and alcohol products are excluded.
Visitor Tax refund programs have become an important part of strategic Tourism policies worldwide. To the tourist, HST positioned as a single tax amount of 13%, represents a significant spend and corresponding refund ( more so than a GST refund at 5% or an RST refund at 8%). The status of the refund under HST is unclear (i.e., we have been unable to determine if foreign tourists will be able to claim refunds on the provincial portion of the HST).
Price differentials for selected retail products are illustrated below.
5. Implications of the HSTUnanswered Questions on Current Rebate Programs
21.
RST Refund for Tourist Retail Purchases (contd.)
RST rebates on retail purchases are particularly valuable for visitors making shopping trips to Ontario. Tourism Toronto, for example, has used shopping (e.g., variety, range and quality of goods available at Toronto retailers) as a prominent marketing tactic for several years. Recent campaigns have focused on UK residents over the Christmas holiday season. The loss of the RST rebate cannot help but have a noticeable impact on this visitor segment.
The four adults in the shopping weekend in Toronto scenario are estimated to spend a combined $2,000 in retail purchases. If these individuals are from outside of Canada, RST rebates of $160 are potentially available for purchases in the current tax regime (provided the minimum purchase thresholds are met.
Foreign Convention and Tour Incentive Program
On April 1, 2007, the Foreign Convention and Tour Incentive Program (FCTIP) replaced the Visitor Rebate Program as a means for international visitors to claim a rebate on GST and HST expenditures. The principal change in this program was the elimination of rebates for individual travelers.
Under the FCTIP, rebates of up to 50% of the GST/HST paid on eligible tour packages are available. The rebate is based on the number of nights in short term accommodation included in the tour package.
Under the FCTIP, rebates of up to 50% of the GST/HST paid on eligible tour packages are available. The rebate is based on the number of nights in short term accommodation included in the tour package.
Rebates of up to 100% of the GST/HST are also available to foreign organizations holding conventions in Canada (75% of the delegates are non-residents of Canada). The rebate is available for full amount of GST/HST paid to the convention facility and related supplies and services and accommodations. A rebate of 50% of the GST/HST is available for food and beverage purchases or purchases from a caterer paid by the convention organizer. Foreign exhibiting companies are eligible for a rebate of 100% of the GST/HST paid on the rental of trade show space, related supplies and services and accommodations. 5. Implications of the HSTUnanswered Questions on Current Rebate Programs (contd.)
22. 5. Implications of the HSTUnanswered Questions on Current Rebate Programs (contd.)
23. Transitioning to a harmonized sales tax environment in Ontario will have negative implications for the provinces tourism business and individual tourism businesses. Pricing to the end consumer will increase, only some of which will be eligible for rebates (i.e., expenditures by domestic business travelers). Further, from the perspective of Ontario tourism businesses, the cost savings from tax harmonization will be limited given the tourism industrys preponderance of input costs (e.g., labour) not being eligible for Input Tax Credits. It appears that unlike manufacturers (and many other sectors of the Ontario economy), the positive benefits accruing from tax harmonization will not be felt by the provinces tourism businessesand certainly not tourism consumers.
As harmonized tax is carried out over the coming year, the tourism industry should be vigilant of how the Ontario government intends to address the following:
Rebates to foreign travelers through established programmesCurrently, foreign convention organizers as well as organizers of group leisure travel and non- resident exhibiting companies are eligible for rebates of GST through the Foreign Convention and Tour Incentive Program. Individual travelers are eligible for the Ontario RST refund program. A reasonable expectation would be that these programs be accommodated within the harmonized sales tax going forward. However several questions remain from the perspective of:
Tour operators: Can the current process be streamlined to eliminate sometimes complex and confusing paperwork necessary to receive the rebate? Anecdotal information suggests that a great many tour operators simply add the GST to package tour prices rather than take the time to file necessary documentation. Can implementation of the harmonized sales tax on tour packages be delayed until the end of 2010? The prices of many packaged tours for the 2010 operating year have already been established (and contracts signed with a variety hotels, transportation and ground services companies) and are not easily adjusted. Without transitioning implementation of harmonized tax, tour operators are facing an unrecoverable cost.
Retailers: How will the current RST rebates (applicable to retail purchases with RST incurred of $50 or more) be factored into calculation of harmonized sales tax rates going forward?
Individual travelers: Can the tour operator and foreign convention program be applied to individual travelers as was the case with GST until changed in 2007 and is currently the case with respect to retail purchases?
24. Tax increases to GST only goods and servicesImpact of one-time price increases resulting from the application of HST to goods and services previously subject to only GST (at 5%) but will now be subject to HST (at 13%). Could tax rates be phased in over multiple years to cushion the effect of these double-digit price increases?
Ineligibility of ITCs on electric power
The Ontario governments decision to delay eligibility for claiming ITCs on electric power will damage the major Ontario ski operators who will face a one-time cost increase of 8% with no ability to claim the ITC offset. Further, the difference in applicability (i.e., those with revenue above and below $10 million) will create an unlevel playing field in a highly competitive industry.
Revenue windfall for provincial attractionsMost Ontario government attractions (e.g., Royal Ontario Museum, Science North, Fort Henry) are currently exempt from RST, but will commence charging HST in 2010. Although the HST will now place provincial-government owned attractions on the same competitive playing field as private attractions, should the HST revenues earned at provincial attractions be dedicated back to capital improvement/rehabilitation of these attractions?
Loss of 3% tax room available for raising marketing and development dollarsStrengthening the Ontario tourism industry by ensuring an appropriate allocation of marketing and development dollars (e.g. tourism infrastructure investment) should be a primary focus of government. The industry has reacted negatively to the quantum of funds allocated to tourism marketing (i.e., $40 million per annum) as compensation for the loss of the 3% tax room. Should a greater amount be reinvested in marketing and development? Should these amounts be indexed for inflation?
The Ontario Tourism Competitiveness Study (February 2009) notes tourisms importance to the provincial economy ($22 billion or 3.4% of provincial GDP) as well as the objective of doubling receipts by 2020. Harmonization of sales taxes will have an unintended dampening effect on the industrys growth prospects by increasing prices in a competitive environment while at the same time increasing costs of many tourism businesses. Managing the transition to a harmonized tax environment through adjustment of implementation processes could ease the negative impacts. Consideration of the points noted above will greatly affect this transition.
25. Appendix ADetailed Visitor Scenarios
26. Detailed Visitor ScenariosWeekend Getaway
27. Detailed Visitor ScenariosOne-Week Camping Holiday
28. Detailed Visitor ScenariosShopping Weekend in Toronto
29. Detailed Visitor ScenariosFamily Ski Holiday
30. Detailed Visitor ScenariosOne-Week Touring Holiday Operator Costs
31. Detailed Visitor ScenariosOne-Week Touring Holiday Additional Spending
32. Detailed Visitor ScenariosU.S. Medical Association Convention Association Costs
33. Detailed Visitor ScenariosU.S. Medical Association Convention Attendee Costs
34. Detailed Visitor ScenariosAmateur Softball Tournament
