2. Impact of Hst on the 2010 budget
repercussions de la tvh sur le budget de 2010
That Council receive this report for information.
Recommandation du Comité
Que le Conseil prenne connaissance du présent rapport.
1. City Treasurer’s report dated 12 January 2010 (ACS2010-CMR-FIN-0004)
2. Extract of Draft Minutes from 19 January 2010 meeting of ABFC
Audit, Budget and Finance Committee
Comité de la vérification, du budget et des finances
and Council / et au Conseil
12 January 2010 / le 12 janvier 2010
Submitted by/Soumis par : Marian Simulik, City Treasurer/Trésorière municipale
Contact Person/Personne ressource : Glen Ford, Deputy City Treasurer/Controller /
Trésorier adjoint de la Ville/Contrôleur
Finance Department/Département de finance
(613)580-2424 x21305, Glen.Ford@ottawa.ca
Ref N°: ACS2010-CMR-FIN-0004
That the Audit, Budget and Finance Committee and Council receive this report for information.
Que le Comité de la vérification, du budget et des finances et le Conseil prennent connaissance du présent rapport.
In its March 26, 2009 budget, the province of Ontario announced that it had entered into a memorandum of agreement with the federal government of Canada to create a framework for the federal collection of a single value-added sales tax in Ontario to start July 1, 2010. The new Ontario harmonized sales tax (OHST) will have a combined rate of 13% consisting of an 8%
provincial component and a 5% federal component.
Under the proposed OHST municipalities will be entitled to a partial rebate of the provincial component of the tax (78% rebate of the 8% OHST) in addition to the current rebate of the federal portion of the tax (100% rebate of the 5% GST). The rebates are based on the federal Goods & Services Tax (GST) definition and are intended to ensure a fiscally neutral impact for the public sector.
The firm of Deloitte & Touche have been providing commodity tax services to the City of Ottawa since July, 2002. The Treasurer has contracted the services of Deloitte & Touche to perform a diagnostic impact analysis to assist the City of Ottawa with budgeting and forecasting the impact of harmonization.
Under harmonization the tax base will be expanded significantly, making many goods and services that were previously Ontario Retail Sales Tax (ORST) exempt now Harmonized Sales Tax (HST) taxable. While the initial cost of doing business will increase because of the expanded tax base the City will now receive rebates in respect of certain ORST-taxable goods and services for which rebates were not previously available. Accordingly, if the City's spending patterns remain relatively consistent, the amount of ORST paid should remain relatively neutral compared to previous years.
Deloitte has been contracted to complete that impact analysis using the following assumptions:
Standard municipal services that are currently GST exempt will remain HST exempt. Examples include law enforcement and fire protection services, residential services and transit services. Optional municipal services that are currently GST taxable will be HST taxable. Examples include most adult recreational programs, facility rentals, and commercial leases.
The impact of the HST implementation is anticipated to be fiscally neutral for the City's 2010 expenditures budgets. While there are anticipated increases to expenditures such as utility costs (heating fuels, hydro and diesel), professional services and real property which were previously not subject to ORST, these increased costs will be offset by decreases to costs such as tangible property (parts and other inventory purchases), maintenance and installation services, and telecommunication costs which will now be subject to partial rebates.
It is anticipated that City operations may experience cost reductions, but these will largely be offset by increased costs to the City's capital program.
Throughout the 2010 fiscal year as detailed impacts become known the Treasurer will process budget adjustments to reduce operating budgets that will benefit from these tax changes. These reductions will be offset by contributions to a segregated capital provision account to help stabilize the effect of increased costs to capital projects.
Through the conversion to HST capital construction costs could drop, since ORST will no longer be borne by contractors in their pricing and they could reflect those reductions in their purchase contract prices. The Treasurer will explore opportunities to encourage the transfer of any savings realized by suppliers to the City.
Most of the City's revenues are not currently subject to GST or ORST (property taxes, water & sewer rates, municipal transit fares, building permit fees, etc.), and will not be subject to GST or HST after the July 1, 2010 implementation date. Other fees for services such as recreation charges (except for qualifying programs which are exempt for children aged 14 and younger, and for individuals with a disability) are currently subject to GST, and will also be subject to HST effective July 1, 2010. Other than for single admittance fees, the increased HST will be charged to the user at the time of booking or enrolment. The City’s recreation guides, rental contracts and receipts will have a HST clause clarifying the applicability of the taxes.
As part of their announcement the Province is providing $10.6 billion in temporary and permanent tax relief for Ontarians over three years to help consumers through the transition. A one-time transition funding of $1,000 will be given to families with income below $160,000 and $300 to singles with income of $80,000 or less. The transition payments will be paid in two instalments in 2010 and a third in 2011. Low and middle-income families will also be eligible for a sales tax credit of up to $260 upon filing their tax returns.
In addition, the Government will provide point-of-sales exemptions for the provincial portion of the harmonized tax on certain consumer products such as children’s clothing and footwear, all infant and child car seats, diapers, books and feminine hygiene products. Finally, there will be a rebate 75% of the provincial portion of HST on new homes costing up to $400,000, and a reduced rebate for homes up to $500,000.
Under the Ontario Harmonized Sales Tax (OHST) a charity or qualifying not-for-profit organization will receive a rebate of 82% of the provincial value-added tax. This will mean that many of these organizations will likely experience a decrease in sales tax costs depending on its mix of spending on taxable goods and services. No specific analysis of these organizations was included in the contract with Deloitte.
As part of its 2010 budget submission, the Ottawa Community Housing Corporation has included a budget provision of $292,000 on the basis of an effective tax rate of 1.76% (8% OHST reduced by 78% municipal rebate = 1.76%).
No public consultation was required for the preparation of this report.
There are no legal implications to receiving this report. The risk implications relate to the adequacy of budget provisions for the HST implementation effective July 1, 2010. This matter is addressed in the Financial Implications section.
The analysis completed by Deloitte on behalf of the City of Ottawa has been based on many assumptions including the utilization of 2008 fiscal results as a baseline year for predicting future impacts. Changes to operations and the nature of the City’s spending would potentially alter the anticipated impacts.
Based on the analysis completed it is anticipated that City operations may experience cost reductions, but these will largely be offset by increased costs to the City's capital program. This result is consistent with the objectives from the Provincial government to structure the rates and rebates to ensure a fiscally neutral impact for the public sector.
The results of the analysis conducted on behalf of the City of Ottawa should not be used to estimate the impacts on other organizations, including other Ontario municipalities, which may have different spending patterns that could result in different impacts.
There are no direct rural implications separate from the above-noted financial implications to the City’s operations arising from the implementation of the HST.
Document 1 – City of Ottawa OHST Impact Analysis report from Deloitte and Touche will be provided and presented to the Audit, Budget and Finance Committee (previously issued to all members of Council and held on file).
The Finance Department is responsible for the implementation of the HST in the City of Ottawa.
Impact of Hst on the 2010 budget
repercussions de la tvh sur le budget de 2010
Ms. Marian Simulik, City Treasurer, introduced this item by talking briefing about why the report was before Committee and Council. She then introduced Mr. Michael Matthews, Associate Partner, Indirect Tax Group, Deloitte & Touche, and Mr. Rob Leavoy, Senior Manager, Indirect Tax, Deloitte and Touche. Mr. Matthews then spoke to a PowerPoint presentation, which served to provide Committee with a detailed overview of the report. A copy of the presentation is held on file with the City Clerk.
Responding to questions from Councillor Harder, Ms. Simulik confirmed that staff was working on a communications plan with respect to the HST. She noted many municipal fees would not be impacted because they were already subject to both provincial sales tax (PST) and the goods and services tax (GST). She indicated the biggest impact would be in the areas of recreation, cultural and library services. She reported that Recreational staff has already started a communications plan but she re-iterated that staff would work on a strategy for members of Council wanting to discuss the matter with residents.
In response to a question from Councillor Cullen, Ms. Simulik confirmed that staff agreed with the analysis and material being presented by Deloitte and Touche.
Councillor Cullen then asked whether there would need to be a mid-year adjustment to recreational fees as a result of the HST or whether the City would absorb the impact for the second half of 2010. Ms. Simulik explained that Council approved fee schedules without taxes and any applicable taxes would be added at the cash register. Further, with respect to recreation and culture fees, she advised that a large portion would not be subject to HST because they were services provided to children 14 years of age and under. However, she indicated staff was proposing that the City absorb the impact of the HST for single entry fees during the latter half of 2010 and reassess these fees in the 2011 budget. She estimated the City would absorb approximately $50,000 of taxation as a result of this. She explained that these were flat fees and absorbing the HST impact would avoid having to make change on each transaction.
Although he appreciated that this would be revenue neutral for the City and that it was not the municipality’s job to try and react to tax changes at other levels of government, Councillor Cullen maintained that there would be a direct impact on the community, particularly for low income families accessing programs. He noted they were limited in terms of what they could get as a subsidy from the City, therefore he believed there would have to be some corresponding adjustment in subsidies. In closing, he asked that staff prepare talking points for the use of members of Council in terms of what would and what would not be affect and report back with a strategy to deal with recreational fees in light of the HST.
Councillor El-Chantiry referenced page 14 of the consultant’s report, which talked about the impact of the HST on non-recoverable sales tax costs. He noted the next paragraph on the page indicated qualifying firefighting/EMS equipment would see an increase in non-recoverable tax. He wondered if staff had an estimate of this increase. Ms. Simulik explained that on the operating side, a savings of $1.3M was estimated whereas on the capital side, an increase of $1.5M was estimated. Therefore, she submitted the global effect was that increased in one area would be offset by decreased in the other.
Councillor El-Chantiry expressed interest in the non-recoverable because he felt this was potentially an area of risk. He asked for an estimate of the non-recoverable items. Ms. Simulik explained that staff would have to go in and adjust all the budgets to reflect either increases or decreases in terms of the impact of the HST. After all these adjustments, the next impact to the City for 2010 would be $130,000, which would not be recoverable and not offset by other areas. She noted this estimate was based on the assumption that there would not be pass-through from suppliers and she indicates staff was working with suppliers to ensure there would be pass-through savings.
Councillor El-Chantiry referenced the staff time related to the implementation and the cost of the Deloitte and Touche study and he maintained that there was a cost to the City. Ms. Simulik indicated staff’s position was that there was no cost to the City on a budgeted basis. She explained that Financial Services already had staff in place to do the work, though some staff had to be moved from one area to another to get the work done and that she had budgeted to hire Deloitte and Touche. Therefore, she stated there was no incremental increase in terms of staff time and resources needed to implement the HST. She noted that there was a cost in terms of time and effort but not in terms of incremental dollars. She re-iterated that in terms of incremental dollars, the cost was $130,000, as previously identified. She opined that on a $2.4B budget, this was insignificant, though going forward, staff would continue to assess if this changed.
Responding to a follow-up question from the Councillor, Ms. Simulik stated that for 2009, in addition to the cost of hiring Deloitte and Touche to undertake the study, the value of the staff time spent so far on this effort was $337,000. For 2010, she estimated the value of the staff time would be closer to $700,000 and she advised that she would again be employing Deloitte and Touche to do additional work.
Councillor Feltmate asked whether there was training available for non-profit organizations to help them deal with the HST implementation. Mr. Michael indicated Deloitte and Touche had hosted training information sessions with non-profits and charities and that they hoped to host more. He noted that based on their analysis, in most cases, and from a fiscal perspective, the charities and non-profit organizations would be better off as a result of the HST. He added that he believed the Ontario Ministry of Revenue and the Canada Revenue Agency would also be hosting information sessions.
Councillor Feltmate wondered how the City could ensure that those non-profit organizations receiving grants from the municipality also received information to encourage them to attend the aforementioned training information sessions. Ms. Simulik indicated staff would include this in the communications strategy noting it would be easy for the City to send something out to the non-profit agencies advising them of the dates, times and locations of the training information sessions.
Responding to a question from Councillor Feltmate with respect to the impact on summer programs, given that the HST would not be implemented until July 1, Ms. Simulik advised the rules required that the City start charging the HST as of May 1, 2010 for any services that would be received in July or later.
Councillor Harder was concerned about the impact on the Library. Ms. Simulik indicated the hit to the Library was $3,000.
In response to a question from Councillor El-Chantiry, Ms. Simulik confirmed that staff would be updating members of Council on a regular basis with respect to this matter and noted a report would be coming forward in the near future to get some authority for special capital works and adjustments.
That the Audit, Budget and Finance Committee and Council receive this report for information.
Direction to staff :
1. Provide members of Council with talking points in terms of which municipal fees will be affected and which will not; and
2. Report back with a strategy to deal with recreational fees in light of the HST.