Media Member Articles Ontario's Proposed OHST Conversion
Ontario's Proposed OHST Conversion
Possible Public Sector Construction Cost Impacts

  Paul Westbrook, MRICS, outlines how the upcoming change to HST may result in a reduction in the cost of construction for public and private sector builders while highlighting that safely navigating through the transition period may well require some additional planning.

Overview of Proposed Change
The Government of Ontario recently announced that the province will be adopting an Ontario Harmonized Sales Tax (OHST) on July 1, 2010. The new tax will replace the current 8% provincial retail sales tax (PST) of and the 5% federal Goods and Services Tax (GST) with a single 13% OHST. The OHST will have a provincial component (8%) and a federal component (5%) and will be a value added tax.

Potential Impact on Construction Cost
As for the potential cost impact of this change, it's possible that public sector builders may experience a modest decrease in construction costs.
The rule of thumb amount of PST currently embedded in construction costs is 3%. This is based on the fact that the provincial government will currently rebate 3% of the construction cost to certain public sector agencies and registered charities who build things. Under the current regulations, this rebate is not available to hospitals, even though they are often considered charitable institutions. You can also get close to the 3% guideline by applying 8% to 40% of construction costs (based on a 40/60 split of materials and labour). With the adoption of OHST, the embedded PST will 'disappear' resulting in a 'pre-tax' reduction in construction costs.

Private Sector Builders
For private sector builders, the change to OHST should result in a construction cost reduction of about 3% because the full amount of the HST - a value added tax - is recoverable. The 3% guideline should be viewed with some scepticism as some suppliers may see the tax change as a profit opportunity.

Public Sector Builders
For public sector clients the issue is somewhat more complex. The province has indicated that the change in tax structures is intended to be revenue neutral for the public sector and - to this end - they have announced that rebates similar to the current GST rebates will be available to certain public sector builders. Again, the rules have not been finalized, but we understand that the following rebates may apply to the provincial portion of the OHST:
  • Universities and Colleges - 78%
  • School Boards - 93%
  • Hospitals - 87%
  • Charities and Non-Profit Organizations - 82%

The current federal tax rebates are unaffected and remain available.

Overview of a Hospital, as an Example
To take hospitals as a case in point, it appears that the new OHST could result in a construction cost reduction of about 2%. (Again - be skeptical.) Start with a hospital project with an estimated value of $1,000,000. Under the current tax structure, this project would have about $30,000 worth of PST embedded in the pricing and would be subject to GST at 5% with an 83% GST rebate available. Under the new tax structure, the embedded 3% PST would disappear and the project would be subject to OHST at 13% with a rebate of 87% of the 8% provincial portion of the OHST and 83% of the 5% federal portion of the OHST available.
If you do the math, it looks - at least in theory - something like this:

Current PST/GST tax structure:
  • start with $1,000,000 (including 3% embedded PST)
  • add GST at 5% ($1,000,000 + $50,000 = $1,050,000)
  • deduct GST rebate of 83% of GST paid ($1,050,000 - $41,500 = $1,008,500)
  • total $1,008,500

Proposed OHST tax structure:
  • start with $1,000,000 (including 3% embedded PST)
  • deduct the 3% embedded PST ($1,000,000 - $30,000 =$970,000)
  • add new OHST at 13% ($970,000 + $126,100 =$1,096,100)
  • deduct rebate of 87% of the 8% provincial portion of OHST ($970,000 x 8% x 87% = $67,512)
  • deduct rebate of 83% of 5% federal portion of OHST ($970,000 x 5% x 83% = $40,255)
  • total $1,096,100 - $67,512 - $40,255 = $988,333

Accordingly, the change in tax structure may result in a cost reduction of $20,167 or about 2% for healthcare projects after rebates. At least, in theory.

Transition Period
With the upcoming change from the current PST/GST to the new OHST, there will be a transition period where ongoing projects that were commenced under one tax regime will have to adopt the new regime 'in flight'. To this end, Revenue Canada will be publishing a set of transition guidelines or rules for the change over. These rules have not yet been finalized, and they may not be complete for a few more months.

However, one thing that is for certain is that owners and constructors should consider including additional contract wording that will define how potential savings or increases to construction cost will be shared between the parties for projects that are likely to bridge the PST/GST period and the commencement of the new Ontario HST.

The province of Ontario intends that the upcoming tax regime change from the current provincial retail sales tax and federal goods and services tax to a harmonized federal/provincial tax structure will be revenue neutral for the public building sector. While the transition rules have yet to be published, we believe that, in fact, public sector construction projects in the province could benefit from a modest cost reduction - perhaps in the 1% to 2% range - as a result of the changes if the proposed tax rebate structures remain unchanged.