PICKERING, Ont. - Ottawa is prepared to cut a cheque to three holdout provinces if they agree to merge their sales taxes with the federal GST, Finance Minister Jim Flaherty said Tuesday.

Ontario and British Columbia signed lucrative agreements this year to harmonize their taxes, with the federal government kicking in billions of dollars to ease the transition.

Saskatchewan, Manitoba and Prince Edward Island could also get their share of federal cash if they jump on the bandwagon and move to a single tax, Flaherty said.

"We'll see what their governments decide to do," he said.

"But the same proposal - in terms of transition funding - that we made with the province of Ontario followed by the province of British Columbia is available to those provinces as well. The same formula."

But P.E.I. Premier Robert Ghiz says there will be no deal, unless the federal government is prepared to put more cash on the table.

"Unless there's dollars there to offset the lost revenue that the province is going to receive a we're not interested in HST," Ghiz told the Charlottetown Guardian on Tuesday.

Ghiz said he wants some exemptions "like home heating fuel, clothing."

Flaherty said he's talked to the provinces "from time to time" about tax harmonization, but wouldn't say whether any of them are planning to sign on.

Nova Scotia, New Brunswick and Newfoundland and Labrador harmonized their sales taxes with the federal GST more than 10 years ago. Quebec partially harmonized its sales tax system and Alberta has no provincial sales tax.

Business groups that have lobbied for harmonization argue it saves companies money by reducing red tape and lowering taxes on investment.

However, tax harmonization essentially broadens the tax base for consumers because the GST applies to more goods and services than the provincial levy.

Moving to a single tax became politically toxic for some governments when consumers ended up paying more for goods that were previously exempt from the provincial tax.

Saskatchewan Premier Brad Wall has said he has no plans to pursue tax harmonization, and with good reason.

He was a ministerial assistant when former Conservative premier Grant Devine harmonized sales taxes in 1991 in what critics called a $200-million tax grab. Devine was defeated in the next election by the New Democrats, who split the taxes up again.

The public uproar over hamonization in Nova Scotia contributed to the Liberal government's defeat in 1999.



"It's a tough political decision because it shifts the burden of taxation from businesses to consumers," said Derek Burleton, an economist and director of economic analysis at TD Bank.

"Politically, it's a challenging choice, but economically, it's the right one."

Flaherty said tax harmonization is an important step to put Canada back on firm economic footing.

"This is solid economic policy in the long run for Canadian businesses and therefore for Canadian jobs and for growth of the Canadian economy," he said after announcing Ottawa's share of a joint federal-provincial, $93.5-million project to expand a waste water treatment plant in Pickering, about 30 kilometres east of Toronto.

But dangling cash in front of the three remaining provinces may irritate Quebec, which has bitterly complained that it never received compensation when it moved to harmonization in the early 1990s.

B.C. will receive $1.6 billion from Ottawa to help grease the wheels when the single tax takes effect July 1, 2010, while Ontario is getting $4.3 billion over two years. The Atlantic provinces received $961 million over four years.

Both B.C. and Ontario are receiving sums that amount to 1.5 percentage points of gross GST in their province, according to federal finance officials.

The Ontario government, which announced the change in its March budget, hopes to ease consumer pain and minimize the political fallout by offering cheques of up to $1,000 to families and individuals when it merges the taxes next July.

The last cheques will be in mailboxes just a few months before the next provincial election in October 2011.

Some items in B.C. and Ontario will be exempt from the provincial portion of the new tax, such as kids' clothing, diapers and books. Gas and diesel fuel will also be exempt in B.C. because the province already has a carbon tax on fuel.





Now that B.C. has signed on, there will be more pressure on the remaining provinces to follow suit, Burleton said. If they don't, it could dampen economic growth and hurt their ability to compete with the other provinces in luring business investment.

"It's a very good idea to sign on," Burleton said. "Economists are pretty much on the same wavelength when they argue that it's a smart path to take."