Goods and services tax (Canada)

The Canadian Goods and Services Tax (GST) (French: Taxe sur les produits et services, TPS) is a multi-level value-added tax introduced in Canada on January 1, 1991, by Prime Minister Brian Mulroney and finance minister Michael Wilson. The GST replaced a hidden 13.5% Manufacturers' Sales Tax (MST); Mulroney claimed the GST was implemented because the MST hurt the manufacturing sector's ability to export. The introduction of the GST was very controversial. As of January 1, 2008, the GST currently stands at 5%.

Structure

There is a 5% tax on all products, except certain essentials such as groceries, residential rent, and medical services, and 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., they deduct the amount of GST they have collected from 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. Unfortunately, this system is not completely effective, as shown by criminals who defrauded the system by claiming GST input credits for non-existent sales by a fictional company.[1] Exported goods are exempt ("zero-rated"), 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 current HST rate is 13%. 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 Quebec Sales Tax (QST). It is the only province to administer the federal tax.

Certain services have the tax added in such a way that the total cost is rounded to the nearest multiple of cents, due to limitations in the collection mechanism; for example, payphone calls are taxed so that the cost is a multiple of 5 cents; calls payable at 35 cents or less are not charged GST as the tax is under 2.5 cents.

Untaxed items

The tax is a 5% levy on the supply of goods and services that are made in Canada, except certain items that are either "exempt" or "zero-rated":

For tax-free — i.e., "zero-rated" — sales, GST is charged by suppliers at a rate of 0% so effectively there is no GST collected. However when a supplier makes a zero-rated supply, it is eligible to recover any GST paid on purchases used in making the particular supply. This effectively removes the cascading tax from the particular goods and services.
- Common zero-rated items include basic groceries, prescription drugs, inward/outbound transportation and medical devices. Certain exports of goods and services are also zero-rated.

For tax-exempt supplies, the supply is not subject to GST and suppliers do not charge tax on their exempt supplies. Furthermore, suppliers that make exempt supplies are not entitled to recover GST paid on inputs acquired for the purposes of making the exempt good or service. Tax-exempt items include long term 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 of 9%. 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 13.5% 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 GST also replaced the Federal Telecommunications Tax of 11%.

The proposal was an instant controversy: a large proportion of the Canadian population was irritated 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 three Progressive Conservative Members of Parliament, David Kilgour, Pat Nowlan, and Alex Kindy, who ended up leaving 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.

Despite the tax being lowered to 7% by the time it became enacted, it remained controversial. What the tax covered also caused anger. The Government defended the tax as a replacement for a tax unseen by consumers because it was placed on manufacturers, and in the long run it was posited that removing the MST would make Canada more competitive. Once the MST was replaced with the GST prices did not initially fall by the level some thought appropriate immediately, however proponents have argued that in Canada's market economy the MST's replacement could only be expected to influence prices over time and not on a stroke.

Despite the opposition, the tax came into force on January 1, 1991.

Fallout

The high profile and public resentment of the GST led to a partial tax revolt on the part of Canadians^{[citation needed]}. 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.^{[citation needed]}

The political ramifications of the GST were severe. It was one of the leading causes of the decline in popularity of the Mulroney government.^{[citation needed]} A strong Liberal Party majority was elected under the leadership of Jean Chrétien in the 1993 election. The Progressive Conservative Party fared very poorly in that election, winning only two seats. Although the party recovered somewhat in subsequent elections, it remained the smallest party in the House of Commons until it disbanded itself permanently in 2004, and merged with the Canadian Alliance to form the Conservative Party of Canada.

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. They intended to call it the Blended Sales Tax, but opponents quickly came to derisively call this proposal the "B.S. Tax," and the name was changed to Harmonized Sales Tax before its introduction. Only three Atlantic provinces agreed to go along with this plan, however. Nova Scotia, New Brunswick and Newfoundland and Labrador now have the 13% 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

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. ^{[citation needed]}

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.^{[citation needed]}

The GST once again became an issue, as the Conservative Party of Canada reduced the tax by 1% (to 6%) on July 1, 2006 as part of an election promise. They again lowered it to 5%, effective January 1, 2008. This reduction was included in the Final 2007 Budget Implementation Bill (Bill C-28), which received Royal Assent on December 14, 2007.

Much of the reason for the notoriety of the GST in Canada is for reasons of an obscure Constitutional provision. Other countries with a Value Added Tax legislate that posted prices include the tax; thus, consumers are vaguely aware of it but "what they see is what they pay". Canada cannot do this because jurisdiction over most advertising and price-posting is in the domain of the provinces under the Constitution Act, 1867. The provinces have unanimously chosen to make the GST not be included in the price, similar to their provincial sales taxes.^{[citation needed]} As a result, virtually all prices (except for gas pump prices, taxi meters and a few other things) are shown "pre-GST", at the merchant's choice.

Tax-free shopping for visitors

For purchases before April 1, 2007, visitors to Canada could request a tax refund when they left Canada by filling out a form at a Canadian airport or some duty free stores at border crossings. (See www.cra.gc.ca/visitors[2].) Under that regime, the visitor sent in original receipts with a stamp by Canadian Customs. Cheques are mailed to the visitor within a few weeks. This refund was eliminated, except for business purchases, as announced September 25, 2006, in effect April 1, 2007. Legislation implementing the change (Bill C-52) received Royal Assent on June 22, 2007 (S.C. 2007, c. 29). The rebate remains available for purchasers "other than consumers" who export the goods within 60 days of purchasing them in Canada.

References

External links

Canada Business Tax Information - Goods and Services Tax/Harmonized Sales Tax (GST/HST)

"Taxes, Deficits and the Underground Economy" (PDF). Fraser Institute Conference. 1997.

Peter S. Spiro (1993). "Evidence of a Post-GST Increase in the Underground Economy" (PDF). Canadian Tax Journal.
Canada Revenue Agency: Goods and Services Tax/Harmonized Sales Tax (GST/HST)