Goods and Services Tax (Canada)
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The Canadian Goods and Services Tax or GST (Taxe sur les produits et services, TPS) is a multi-level sales tax introduced in Canada in 1991 by then-Prime Minister Brian Mulroney and then finance minister Michael Wilson. It operates in many respects like the value-added taxes found in Europe. The introduction of the GST was very controversial, and, in the subsequent general election, it was a contributing factor to the biggest defeat of a federal governing party in Canadian history.
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Structure
While it is similar to European value-added taxes, the GST was more directly modelled on a similarly named tax in New Zealand. The tax is a 7% charge on the sale of all goods and services, except certain essentials such as food, residential rent, and medical services, and certain services such as financial services. The tax is levied on each sale. Businesses that purchase goods and services as inputs can claim "input tax credits", i.e., in general terms, they deduct from the amount of GST they have collected the amount of GST that they have paid. This avoids "cascading", i.e., the application of the GST on the same good or service several times as it passes from business to business on its way to the final consumer. In this way, the tax is effectively borne by the final consumer. Exported goods are exempt, while individuals with low incomes can receive a GST rebate calculated in conjunction with their income tax.
In 1997, the provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador and the Government of Canada merged their respective sales taxes into the Harmonized Sales Tax (HST). In those provinces, the HST rate is 15%. HST is administered by the federal government, with revenues divided among participating governments according to a formula. All other provinces continue to impose a separate sales tax at the retail level only, with the exception of Alberta, which does not have a provincial sales tax. In PEI and Quebec, the provincial taxes include the GST in their base. The three territories of Canada (Yukon, Northwest Territories and Nunavut) do not have territorial sales taxes. The government of Quebec administers both the federal GST and the provincial QST. It is the only province to administer the federal tax.
Untaxed items
The tax is a 7% charge on all goods and services except certain items that are either "exempt" or "zero-rated":
- For tax-free — i.e., "zero-rated" — sales, vendors do not charge GST. However, they are still able to recover any GST paid on purchases used in making the tax-free good or service. This effectively remove all tax from these goods and services.
- Tax-free items include basic groceries, prescription drugs and medical devices. Exports are also zero-rated.
- For tax-exempt sales, vendors do not charge tax on their sales. By the same token, however, they are not entitled to credits for the GST paid on inputs bought for the purposes of making the exempt good or service. Tax-exempt items include residential rents, health and dental care, educational services, day-care services, legal aid services and financial services.
Background
In 1989, the Progressive Conservative government of Prime Minister Brian Mulroney proposed the creation of a national sales tax. At this time, every province in Canada except Alberta already had its own provincial sales tax imposed at the retail level.
The purpose of the national sales tax was to replace the Manufacturers' Sales Tax (MST) that the federal government imposed at the wholesale level on manufactured goods. Manufacturers were concerned that the tax hurt their international competitiveness.
The proposal was an instant controversy: a large proportion of the Canadian population was irate and disapproved of the tax. Although the GST was promoted as revenue-neutral in relation to the MST, the shifting of the tax away from exported manufactured goods would make life more costly for Canadians. The other parties in Parliament also attacked the idea as did two of Mulroney's own MPs, David Kilgour and Alex Kindy, who ended up voting against the GST and were expelled from the Progressive Conservative caucus as a result.
The Liberal-dominated Senate refused to pass the tax into law. In an unprecedented move to break the deadlock, Mulroney used a little-known constitutional provision to increase the number of senators by eight temporarily, thus giving the Progressive Conservatives a majority in the upper chamber. In response, the Opposition launched a filibuster and further delayed the legislation.
Not only was the tax itself controversial, but what the tax covered also caused anger. The Government defended the tax, arguing it was merely a replacement for the hidden tax on manufacturers that would, in the long run, make Canada more competitive and help balance the books. However, the fact that prices didn't fall very much with the MST taken away took away the government's footing on the issue. Despite the opposition, the tax was made law.
Aftermath
The high profile and public resentment of the GST led to a partial tax revolt on the part of Canadians. Surveys, anecdotal evidence, and econometric analysis by economists all suggest that there was a substantial increase in the size of the underground economy in Canada as a result of the introduction of the GST.
The political ramifications of the GST were severe. It contributed to the Mulroney government becoming one of the least popular in Canadian history. The animosity towards his government played a significant role in the defeat of the 1992 referendum on the Charlottetown Accord, a package of proposed constitutional amendments. A strong Liberal Party majority was elected under the leadership of Jean Chrétien in the 1993 election. The Progressive Conservative Party was nearly destroyed: only two Progressive Conservatives were elected.
During the election campaign, Chrétien promised to repeal the GST, which the Liberals had denounced so vociferously while they were the Official Opposition, and replace it with a different tax. Instead of repeal, the Chrétien government attempted to restructure the tax and merge it with the provincial sales taxes in each province. Only three provinces agreed to go along with this plan, however. Nova Scotia, New Brunswick, and Newfoundland and Labrador now have the 15% Harmonized Sales Tax instead of separate GST and PST.
The decision not to abolish or replace the GST caused great controversy, both within the party and without. Liberal Member of Parliament (MP) John Nunziata voted against the Liberal government's first budget and was expelled from the party. Heritage Minister Sheila Copps, who had personally promised to oppose the tax, resigned and sought re-election. She was re-elected with ease in the subsequent by-election, however, as was the Liberal government in the 1997 election.
Current situation
Until recently the GST has not been much of an issue, other than with the general public who are aware of the absence of a federal sales tax in the United States. Fiscally, the GST has accounted for 15% to 17% of total federal tax revenues each year since 1999. This is slightly greater than the annual amount of the Canada Health and Social Transfer itself.
Many also argue that a switch towards heavier consumption taxes on the European model has helped the Canadian economy become more efficient and competitive with lower-priced goods for the international market. However, the effects of the GST in this realm are quite modest, and are regularly swamped by large changes in the exchange rate. It can also be claimed that the transparent nature of the GST has kept Canadians acutely aware of their taxation. This has led to a major change in political culture so that deficit financing is no longer considered an option by the federal and provincial governments.
The GST is once again an issue, as the Conservative Party of Canada has pledged to reduce the tax by 1% in the first year and another 1% in the following four years. The Conservative Party won the election on January 23, 2006, but by a narrow margin that gives it a weak minority position in Parliament. This leaves some doubt about its ability to carry out major changes.
See also
External links
- [1] "Taxes, Deficits and the Underground Economy," from a Fraser Institute Conference, 1997.
- [2] "Evidence of a Post-GST Increase in the Underground Economy," from the Canadian Tax Journal, 1993.fr:Taxe sur les produits et services