Tamsin McMahon - The federal government's promise to compensate Quebec more than $2-billion for its harmonized sales tax is misguided, according to tax experts who say the province has continued to benefit from a unique sales tax deal struck with Ottawa nearly two decades ago.
This week, Finance Minister Jim Flaherty said his June 6 budget would include "provisions" to retroactively compensate Quebec for harmonizing its provincial sales tax with the GST in the early 1990s.
Quebec was the first province to scrap its retail sales tax for a value-added tax that has gradually come to mirror the GST. The province had since been demanding $2.2-billion in compensation to match billions in payments to Ontario and B.C. for agreeing to harmonize their provincial sales tax with the GST. Ottawa has said a compensation deal with the province could be signed as soon as September, with the money already set aside in the upcoming budget.
"There's a commitment on our part to complete a deal and it's being worked on," said Chisholm Pothier, spokesman for Mr. Flaherty. "Every province that has harmonized its sales tax has been compensated."
But some tax experts say Quebec's sales tax system bears little resemblance to the HST deals struck recently in provinces like B.C. and Ontario, or with most Atlantic provinces in the late 1990s. Those provinces were each given one-time payments ranging from $4.3-billion in Ontario to $364-million in New Brunswick to hand over control of their sales tax programs to the federal government, while Quebec still has control over both its own sales tax, the QST, and the federal GST.
"It's not a fully harmonized sales tax, therefore it should not receive compensation," said Derek Fildebrandt of the Canadian Taxpayers Federation.
Unlike the harmonized tax programs in other provinces, Quebec doesn't exempt large companies from sales tax on business expenses such as telecommunications and hospitality expenses and money spent to buy, repair and fuel passenger vehicles. Quebec also gets an extra windfall of around $700-million a year from imposing its provincial sales tax on top of the GST, essentially taxing the federal sales tax. It also gets nearly $150-million a year from the Canada Revenue Agency to administer the GST on behalf of the federal government.
"Having a [value-added tax] or an HST is good for Quebec, it's good for Canada. That doesn't mean Quebec should get any money out of it from Canada for having it," said David Sherman, a Torontobased tax lawyer and author.
Quebec already benefits from generous federal equalization payments, and payouts to B.C. and Ontario were meant as financial incentives to encourage those provinces to sign up to the HST, said Niels Veldhuis, senior economist at the Fraser Institute.
"We're talking about something that happened nearly 20 years ago and providing compensation for something they did in their own interests," he said. "A transfer doesn't act as an incentive if it's done 20 years later."
A $2-billion payout is "out of line" when the federal government is grappling with a $55-billion budget deficit, he added.
Ottawa has long been negotiating with Quebec over a compensation package in exchange for changes to the way Quebec administers its sales tax. The federal government has been pressing Quebec to end its practice of taxing the GST and hand over administration of the taxes to the federal government, demands the province has so far resisted.
tmcmahon@nationalpost.com