Buyers beware -

Buyers beware

With new taxes, new fees and rising interest rates on the horizon, the once carefree Canadian consumer is about to come under attack


Arlen Redekop/The Province

The golf season has barely started and already courses in Ontario and British Columbia are gearing up for a year of lacklustre sales. In a few weeks, both provinces are set to usher in a new harmonized sales tax (13 per cent in Ontario and 12 per cent in B.C.) that replaces a separate provincial sales tax and the five per cent GST. In many cases, that means goods and services that were previously subjected to only the federal GST—including golf memberships and green fees—will become more expensive. “It’s essentially an eight per cent hit that’s going to be [passed along to] consumers,” says Mike Garside, the chief operating officer of GolfNorth Properties, which runs 18 courses in Ontario.

While most club memberships have already been sold for the season, the price hike is expected to have its biggest impact on casual golfers or groups booking tournaments, which are a major source of revenue for many public courses. “If you’re out there with a $100 green fee, that’s another eight bucks” says Garside, adding that GolfNorth will respond by abandoning its usual “all-in” pricing scheme so it’s more obvious to customers where the price hike is coming from.

The HST’s arrival has, not surprisingly, received a lot of attention in recent months. But it’s not the only—or even the most serious—consumer threat on the horizon. Consumption taxes like the GST or HST tend to get noticed because they apply to everyday items like clothing and gasoline, but the reality is that Canadians will face a major cash crunch over the next few years thanks to a wallet-busting cocktail of rising interest rates, tepid growth in employment incomes and government efforts to balance the books after racking up big deficits during the recession.

“We’re now entering an era of austerity,” says Benjamin Tal, an economist with CIBC World Markets. While the belt-tightening won’t be nearly as severe as it is in Europe, now awash in new taxes and deep spending cuts, it’s not going to be a walk in the park either. Former finance minister Paul Martin was able to successfully slay the country’s last deficit during the 1990s, but he had the help of falling long-term interest rates and a weak Canadian dollar—neither of which is currently enjoyed by current Finance Minister Jim Flaherty, who has pledged to set an example for the world when it comes to fiscal responsibility over the coming years. “This means that if we’re not raising taxes in Canada then we will cut spending,” Tal says. “But, one way or the other, there will be higher taxation in Canada even if they don’t call it taxation.”

In a sign of things to come, Quebec unveiled a host of new fees and taxes earlier this year as part of its budget. The effort to whittle down a $4.5-billion deficit includes hikes to tuition and service fees, increases in gas and sales taxes, and a new health care fee of $50 per couple this year, which will increase to $400 by 2012. The province’s Liberal government defended the measures as necessary to avoid cuts to nearly $65 billion worth of government programs and services, but that didn’t stop thousands of Quebecers from taking to the streets in Montreal in protest.

Nova Scotia, too, raised its income and sales tax rates (the province’s harmonized sales tax will rise two percentage points to 15 per cent), while residents of New Brunswick are facing a deficit of $749 million this year. Ontario is also coping with record deficits, projected to be $19.7 billion for the current fiscal year, at a time when activity in key sectors such as manufacturing is still below pre-recession levels. Meanwhile, Ottawa has its own $47-billion deficit to worry about.

The federal government and most of the provinces plan to get back to balanced budgets primarily by keeping growth in program spending flat or even in negative territory. But whether they can be achieved without putting a heavy burden on the average Canadian—or sparking a consumer backlash—is another matter. “We think that going from words to action is the main operational risk to the provincial and federal road maps,” notes a recent report by Laurentian Bank Securities. And that’s because spending cuts tend to be almost as unpopular politically as taxes.

The B.C. government already has a big fight on its hands. A well-organized protest against the impending HST is threatening to erase the Liberal government’s majority in the legislature, with one cabinet minister announcing his resignation last week over the issue. Like Ontario, B.C.’s blended tax is not really a short-term deficit-fighting tool, since it’s mainly meant to simplify the sales tax regime and make the province more attractive to businesses, setting the stage for long-term economic growth. But because it transfers some of the tax burden currently borne by businesses to consumers, the HST is expected to have a negative impact on spending in the short term.

In Ontario, the government estimates that 51 per cent of families will pay more in taxes under the new HST regime—as much as $480 more a year by 2012 for households that earn between $150,000 to $300,000. In a bid to soften the blow, Ontario has sent out the first of a series of HST rebate cheques to lower-income families. Still, even those who favour a simplified tax system say they are concerned the arrival of the new tax on July 1 is coming at a particularly bad time for consumers. “It is a tax that will provide a benefit to large manufacturing businesses in the short term, and they argue that it will trickle down over the long term,” says Kevin Gaudet, the federal director of the Canadian Taxpayers Association. “In theory, I agree with that, but in practice there’s going to be a couple of years of pain when you wouldn’t want to be putting pain on the economy.”

The other financial spectre that Canadians should be worried about is rising interest rates. When the Bank of Canada lowered rates to near zero, the big winners were Canadian consumers, who had easy access to cheap money to buy big ticket items like cars and houses. And people bought at record levels. But that’s all about to change. Canada’s central bank has already raised its prime rate by 25 basis points and more hikes are expected. Even some credit-card companies are clamping down on borrowing by raising their monthly minimum payments.

The hope is that a rebound in the job market will help to offset Canadians’ rising costs. But, so far, many companies seem reluctant to add workers or significantly boost wages—particularly given the financial crisis enveloping Europe and fears it will spread to Canada. CIBC’s Tal argues that consumer confidence in Canada has been rising over the past year while the actual ability to spend money is moving in the opposite direction. “Consumers will be squeezed. There’s no question about it.”

Some have predicted a wave of defaults by Canadian homeowners or, at least, a slowdown in spending on everything from summer vacations to big-screen TV purchases. Indeed, there’s already evidence that Canadians are beginning to have second thoughts about the state of their financial affairs. A recent survey suggested that consumer confidence is finally beginning to wane in the wake of the European crisis, falling stock markets and a strong loonie.

Ironically, many Canadians could find themselves feeling poorer during the economic recovery than they did during the recession. And that, in turn, means more hours spent toiling at the office and fewer days strolling the fairways.