Policy & Positions Manual

Provincial Issues - Finance

HST Mitigation for the RITC for the Tourism Industry

Problem statement
While the Harmonized Sales Tax (HST) to be introduced in British Columbia on July 1, 2010 is a sound economic policy for the province as a whole, it presents significant challenges for specific industries such as tourism and home construction. The government has introduced a mitigation measure to address some of the negative impacts of HST to the home construction sector.  However, concerns from parts of the tourism industry have at this point been largely unaddressed. The Chamber continues to work with the government to find specific measures to ease the HST impact on tourism.

Background
The HST tax change will eliminate the embedded sales tax on products for business and ensure that value added taxes are added only at the point of consumption. In the HST environment, businesses will be able to claim Input Tax Credits (ITCs) on business inputs for the full HST. Currently they can only claim ITCs on the GST, and not on the PST.

The detailed agreement between the province of British Columbia and the Government of Canada regarding the HST is a legally binding document called the Comprehensive Integrated Tax Coordination Agreement (CITCA).

The removal of the PST from business inputs will save a significant amount of money for BC business. Government estimates note that there will be approximately $2 billion of savings to forestry, mining, oil and gas, transportation, construction, and manufacturing sectors. These same sectors will also benefit from being able to claim back their input tax credits on the provincial portion of the HST that they pay out in the course of business operations.

Given the tax savings to business, the government has opted to restrict a small portion of the ITCs to larger businesses in the province for the first five years of the HST regime. This practice is called the Recapture of Input Tax Credits (RITC), and will apply to all companies with annual taxable sales in excess of $10 million or more. There are four areas of RITCs, these include specified road vehicles, energy, telecommunications services and meals and entertainment. The RITC will be phased out beginning July 1, 2015 by 25% per year until it is fully phased out on or after July 1, 2018. At that time all businesses will be claiming 100% of their ITCs.

The RITCs listed above represent less than 3% of the total ITCs available to large companies. In budget 2010, the government gave an estimation of the revenue to government from RITCs. That revenue for the portion of the budget year 2010/11, to which HST will apply, has been estimated to be $118 million and for the full budget year of 2011/12 the revenue has been estimated to be $162 million.

Given the nature of large and small business composition in the province, the majority of RITCs will come from businesses in sectors that also have significant ITC opportunities outside of those categories that are to be recaptured.  For the majority of large business, the RITC model is not a concern.

However, the benefits of HST and the added ITCs are not realized in the same way for the highly service oriented sectors of the tourism industry. Companies in the attractions, food and beverage, and tour operator sectors (for example) will charge HST to their customers on services that are now only subject to GST. However, the inputs to their business are primarily labour, which provides them with very few ITC opportunities. A further concern for the large companies in these sectors is that of the few ITCs they can claim, some are restricted until July 1, 2015.

The specific restriction of ITCs on the use of energy for the tourism industry is curious, as the use of energy for the production of products for resale is eligible to other industries. Yet the province has specifically excluded energy used in restaurants (for producing meals for resale) or hotels (for producing accommodation for resale) or other tourism businesses, as “production.” There is no BC HST ITC available to these businesses on that energy cost, though the use of energy in the production of resale product is a direct business cost.

The combination of these three conditions, charging their customers more tax, not having substantial ITC savings, and restrictions on the minimal ITCs available to them, have resulted in a specific tax disadvantage to tourism businesses. 

As an example, the types of tourism businesses the RITCs impact are larger hotels across the province and large iconic tourism locations. Some icons include the Capilano Suspension Bridge, Vancouver Aquarium, Vancouver Art Gallery, the Butchart Gardens in Victoria, and potentially other larger scale tourism operations. It would also affect privately owned restaurant groups. These businesses are central draws for the tourism industry in their respective areas of the province and their role in the health of the tourism economy cannot be underestimated. For these businesses, the RITC is another hit in an already difficult business environment.

While the dollar value of RITCs from tourism businesses no doubt represents a small portion of the projected RITC revenue to government, the dollar amount represents a significant hardship to the tourism businesses affected.

RITCs to tourism operators is one area where the province has opportunity to provide a concrete and time bound mitigation measure. While the Chamber understands that there can be no changes made to the RITC model, which is written into Annex C of the CITCA agreement, the province can offer a provincial tax rebate or credit for specific types of tourism businesses equal to the amount of their RITCs. This provincial tax rebate or credit program could follow the same phasing calendar as the RITC schedule. Specifically, the tax rebate or credit could provide:

  • 100% rebate or credit for the period from July 1, 2010 to June 30, 2015
  • 75% rebate or credit for the period from July 1, 2015 to June 30, 2016
  • 50% rebate or credit for the period from July 1, 2016 to June 30, 2017
  • 25% rebate or credit for the period from July 1, 2017 to June 30, 2018
  • 0% on or after July 1, 2018

Phasing out the RITC has been verbally committed to by the Provincial Government at the announcement of the HST and during budget speeches. The phase out schedule has also been written into the CITCA agreement. The Chamber calls upon the government to strengthen their commitment to phasing out the provision by drafting legislation reflecting the phased removal schedule.

THE CHAMBER RECOMMENDS

That the Provincial Government:

  1. legislate the removal of the Recapture of Input Tax Credits; and
  1. provide a provincial tax rebate or credit to tourism businesses subject to the recapture of input tax credits equal to the amount that they will be required to remit.