Why did Ontario raise the tax rate on private car sales?
September 19 2010 by Ellen Roseman
Mike, a reader, is angry to see Ontario raise the tax rate on private car sales to 13 per cent (from 8 per cent) on July 1, the same date the HST came into effect.
He’s put together a blog to challenge the change at Red Flag Deals. He’s also written to the Competition Bureau of Canada, Premier Dalton McGuinty, the Ontario Ombudsman and the provincial finance minister and revenue minister. But he hasn’t had much response.
I’d like to publicize this change, which has slipped below the radar, and ask readers whether they think it’s fair or unfair.
Here are nine reasons why Milke thinks it’s unfair:
* The government felt that when private sales are subject to a lower retail tax rate than the rate used in car dealers’ sales, private sales have a competitive advantage. This argument ignored the fact that dealers’ vehicles are before-tax goods, while private sale vehicles are after-tax goods. Dealers’ purchases and expenses are given 13 per cent input tax credits, while no input tax credits are given to private sellers.
* Consumers are being told the tax rate was adjusted because of the HST. In fact, it has no relation to the HST. It’s entirely a 13 per cent provincial sales tax. All communication from the Ontario government about this change is hiding behind the HST banner.
* The 13 per cent PST on private sales depresses the asking price of vehicles because of this double tax. It also decreases the bargaining power of consumers wanting to trade in their vehicles to car dealers. The input tax credits given to the dealers further lessen the costs of the used vehicles to the dealers.
* The 13 per cent PST on private sales lessens the competition to the car dealers by inflating the final prices in private sales with this double tax.
* The 13 per cent PST discourages consumers from repairing their vehicles before a private sale, since all the costs (which attract HST) will be taxed 13 per cent again. Private sellers don’t
get any input tax credits, even for the HST paid for the cost of selling the vehicles such as emission, certification and advertisement. Car dealers, on the other hand, recover all their HST paid through input tax credits from the government.
* The effective HST rate on dealers’ used vehicles is not 13 per cent. It’s 13 per cent on the profit portion only. HST is a tax on “added value” and PST is a tax on the gross.
* The level playing field justification is simply not true when the field in favour of the car dealerships was 8 per cent, now increased to 13 per cent. The real effect is that consumers have increased car costs, with the burden being split between government taxes and dealers’ profits. This tax created and has now increased the unleveled playing field in favour of the car dealers.
* At 13 per cent, the high PST rate hurts consumers’ rights to fair pricing, whether disposing of their used vehicles in private sales or trading in to car dealers.
* The government insisted on fighting illegal curbsiding with the tax, while ignoring the fact that legitimate private sellers will be hurt. The use of a tax to combat an illegal activity is not a substitute for proper laws and enforcement and victimizes legal private sales activities.
The major misconception about this tax is that it’s a “retail tax”. But in reality, it’s a double tax; it’s tax on tax-paid goods. It is a transfer tax. Buyers pay it, but it’s the private sellers that have to REDUCE the asking prices to allow for this tax.
This transfer tax is not applicable if you trade into a car dealer, because the government gave you the (input) tax credit for trading in.
Mike believes the tax rate change was a result of intense lobbying from the new car and used car dealer associations. When car dealers and private sellers are competitors, if you penalize one side you benefit the other.
Not only were special favours provided to the car dealer associations, but Ontario is also raising significant tax income — with few complaints from the public.