Thomas Sheehan and his employees have been working late into the night adjusting tax rates for products in their Durham, Ont. general store. The changes are needed to comply with the federal government’s two-month GST/HST holiday on select items.
Sheehan says Ottawa’s lack of clarity about the details of the tax holiday has made it incredibly difficult to onboard the new rules.
“We know that candy and snacks are included [in the tax holiday]. Then we discovered today … lozenges, like throat lozenges, are excluded,” said Sheehan, who owns the Enniskillen General Store. Sheehan spoke with Canadian Affairs on Dec. 13, a day before the tax holiday went into effect.
“It’s been hard to try to figure out what is on there and what isn’t. [The tax policy is] definitely not very clear.”
Business owners across Canada are struggling to untangle Ottawa’s tax holiday policy. Thousands have committed extra hours to reconfiguring their pricing systems before the start of the tax holiday on Dec. 14.
Small businesses are left with heavy administrative burdens to put the tax policy into effect on such short notice, says Dan Kelly, president of the Canadian Federation of Independent Business. The hastily formed policy points to rash politicking by the federal Liberals, he says.
“This is not the way to do tax changes. I’m sure this sounded good in some political meeting in Ottawa. But all of the compliance burdens are being pushed down to small and medium-sized companies,” said Kelly. “Even the CRA is struggling to come up with answers for all these very specific questions.”
‘Nightmare scenario’
First announced Nov. 21, the Goods and Services Tax/Harmonized Sales Tax (GST/HST) sales tax exemption will apply to various products, including certain foods, alcoholic beverages and children’s clothes and toys. The tax holiday ends Feb. 15.
Ottawa’s list of tax-exempt products is too “vague,” says Kelly. This has left businesses scrambling to figure out which items are included in the tax holiday.
“For example, a doll that’s [a] collectible, you have to charge the tax. A doll that is for play, you don’t have to charge the tax,” Kelly said. “The business owner has to figure out what that means.”
Thousands of businesses are turning to the Canadian Federation of Independent Business for clarity. The federation has forwarded their questions to the Canada Revenue Agency.
The agency has taken days to respond to many of their questions, says Kelly. For example, it took 10 days to receive an answer to a question about whether the glue and paint in an airplane model box are tax exempt. (They are tax exempt when purchased in the same box as the model, but are taxed when bought separately.)
“One gift store owner said that she has 75,000 [items] in her store, and has to go through every single one of them, and she’s on maternity leave at the same time,” said Kelly. “This is a nightmare scenario for so many business owners.”
The Canada Revenue Agency did not respond to a request for comment by deadline.
Significant costs
Onboarding the tax holiday is also a challenge. Businesses have required employees to work extra hours to sift through hundreds or thousands of items to select which ones are tax exempt.
Chris Perentes, owner and manager of Lorne Drugs PharmaChoice in Regina, Sask., has had to pay both an employee and pharmacist to work extra hours. Provincial law dictates a pharmacist must be present at the pharmacy while employees work on location.
“The cost is going to be quite significant in terms of wages and time to do this,” said Perentes. “[The] cost … will barely be made up in additional sales, at least not for our location. I don’t think [the tax holiday is] going to [make] a huge impact.”
The vast majority of business owners agree with Perentes. Only four per cent say they expect to see higher sales during the tax holiday, according to a Canadian Federation of Independent Business poll.
Two-thirds believe the holiday will encourage consumers to make the bulk of their purchases during the tax holiday period.
“We’ve been really, really slow this week,” said Sheehan, of the Durham general store. “I don’t know if people are waiting till the [GST/HST holiday] is implemented, because our sales are probably half of what we usually do in a normal week.”
‘Strong-armed into it’
Lack of clarity about the tax holiday policy has made many business owners feel they had no choice but to participate, says Stephanie Brown, reservations manager at the Totem Resorts, a fishing lodge and resort in Sioux Narrows, Ont.
“We’re a small business, it makes us nervous to not participate in it — we feel strong-armed into it,” said Brown. “We feel like if we don’t do it, we’re gonna get some type of consequence in the end from CRA.”
Katherine Cuplinskas, a spokesperson for the Ministry of Finance, told Canadian Affairs that businesses are required to participate. “Now that the law has been enacted by Parliament, we expect all businesses to remove the GST at the point of sale, so that Canadians benefit from these savings,” she said in an emailed statement.
Some businesses are nonetheless choosing to opt out.
PepsiCo Canada ULC, the largest snack food maker in the country, announced Dec. 10 that it would not be participating in the tax holiday.
Businesses carry the cost of paying GST/HST up front, but they “won’t really get anything back until we do our GST return,” said Perentes, of the Regina pharmacy.
“Your actual cash flow in your business is going to be severely constrained during this period of time,” said Kelly. ”No care has been given to that issue whatsoever.”
It is also not clear whether businesses that do participate will face penalties if they incorrectly apply taxes during the tax holiday.
“Business owners are now panicked about doing this right,” said Kelly.
The business federation has lobbied Ottawa to extend a $1,000 credit to businesses to cover the administrative costs of putting the tax holiday into effect. The federation has also asked Ottawa to order the Canada Revenue Agency to be lenient on businesses that fail to implement the tax policy correctly.
“If somebody’s made a judgment call that’s wrong, I’m asking the government to … not even charge the back taxes in that case, given how poor the communications have been now,” said Kelly.
The rushed policy is a result of Ottawa being in a “complete crisis trying to save its political skin,” says Kelly. “That’s why we end up with decisions like this, where we have sudden holidays to try to boost the polls, but with very little thought as to how this is going to be administered.”
