THE GOODS AND
10 YEARS LATER
Richard Domingue, Jean Soucy, Economics
15 June 2000
THE GST WORKS
A. Taxing Mechanism
B. GST and Provincial Sales Tax
C. Some Figures
D. The Underground Economy
BACKGROUND TO THE GSTS
1920 to 1987 FST and the Search for an Alternative
1987 to 1 January 1991 From the White Paper to the GSTs
OF PROVINCIAL SALES TAXES AND THE GST
1 January 1991 to 1 April 1997 From GST to HST
B. Compensation for Declining
C. Current Situation
Provinces Reasons for Opposing Harmonization
E. Future of Harmonization
ALTERNATIVES TO THE GST
A. Business Transfer Tax
B. Federal Payroll Tax
C. New Division of Taxation
D. Increase in Personal Income
E. Other Options
A. Printed Documents
B. Documents Available Online
THE GOODS AND
10 YEARS LATER
The Goods and Services Tax
(GST) is now in its tenth year. It was introduced on 1 January
1991 to replace the Federal Sales Tax (FST), which had been in existence
since 1924. The GST, the FST which it replaced, and a number of
alternatives considered over the years form a complex topic which has
many ramifications and has raised a number of controversial issues, several
of which have yet to be resolved.
This study takes a closer
look at this question by: summarizing the general operation of the
GST; providing a brief history of the events and discussions that led
to its introduction; describing the attempts made to harmonize the GST
with provincial taxes; examining certain alternatives that have been considered,
as well as the reasons why those alternatives were not adopted; and summing
up the situation to date.
HOW THE GST WORKS
A. Taxing Mechanism
The GST is a sales tax which
applies to final consumption at a fixed rate of 7%. Whereas
the former FST was a hidden tax on the manufacture of goods,
including those exported for foreign consumption, the GST is a visible
tax on the value added at each stage of production and distribution
of goods and services which makes it a multi-stage
tax and applies only to consumption within Canada.
The GST takes into account
the cost of inputs the factors used in manufacturing or
production at each stage of the process to avoid double taxation.
Input tax credits enable partnerships, businesses and self-employed workers
to recover all GST paid on goods and services purchased for business purposes
by deducting them from their GST payments. Final consumers
are not entitled to such credits, which means that they pay all the GST
on every item purchased. The GST is thus a multi-stage tax
on final consumption.
Table 1 illustrates
the application of the GST and input tax credits at each stage of a production
process leading to the purchase of a good (a kitchen stove) by a consumer
and shows how it is ultimately the consumer who pays the GST.
Table 1 Example
of the application of the GST
at the various stages of a production process
Input tax credit
|Iron and steel
paid to government
When the government introduced
the GST, it decided to exempt two classes of goods and services: zero-rated
goods and services, i.e., goods and services taxed at a nil rate, but
which nevertheless grant entitlement to input credits (for example, exports,
basic food products and medical equipment); and goods and services that
are simply tax-exempt, i.e., which do not grant entitlement to
input tax credits (for example, residential rents, day care services,
public transit and medical care).
It is the class of a good
or service which determines whether it grants entitlement to input tax
credits. A dentist, for example, is not allowed to claim input
tax credits in order to obtain a refund of the GST he/she has had to pay
to purchase various items or to pay his/her rent or hydro bills because
dental care belongs to the tax-exempt services class.
Approximately 2,411 million
businesses are registered, i.e., they collect the GST from their
customers, deduct input tax credits, and pay the difference to the government.
Small businesses with annual sales under $30,000 may elect to be subject
to the GST or not. If they decide not to, they do not collect
the GST on their sales and are not entitled to claim input tax credits.
Apart from the input tax
credit, a GST credit is granted to low- and modest-income Canadians which
takes into account the number of dependent children. In 1998-1999,
the total amount of this credit amounted to $2.85 billion(1)
for Canada as a whole.
Special rules also apply
to charities and certain non-profit organizations, municipalities, hospitals,
schools, colleges and universities. These institutions are only
entitled to a partial refund of the tax they pay on their inputs.
Lastly, under the Debt
Servicing and Reduction Account Act, all GST revenues are paid into
the public Treasury and constitute the main source of revenue allocated
to debt reduction.
A provincial sales tax (PST)
is charged in addition to the GST at the retail sale stage for goods,
whereas services are often tax-exempt. The GST rate
and terms of application vary considerably from province to province.(2)
Alberta is the only province
with a no-retail-sales-tax policy. British Columbia, Saskatchewan,
Manitoba and Ontario apply the PST to the selling price and simply add
it to the GST, whereas Prince Edward Island and Quebec apply the PST to
the total amount of the selling price and the GST.
Newfoundland and Labrador,
New Brunswick and Nova Scotia apply a single sales tax of 15% the
harmonized sales tax (HST) which includes the PST and GST.
It is collected by the federal government, which pays those provinces
their portion. The HST went into effect on 1 April 1997.
Prior to that date, these provinces applied the PST to the total amount
of the selling price and the GST.
When the GST went into effect,
Quebec became responsible for collecting its own sales tax and the GST
under an agreement with the federal government in 1990. Since 1995,
the two taxes have been completely harmonized, i.e., they are applied
to the same tax base.(3) The Government of Quebec receives $92.8 million
a year from the federal government to administer the GST.
All GST returns and refund
claims from registered businesses, except those of Quebec residents, have
been processed in Summerside, P.E.I., since 1993. In his 1999 report,
however, the Auditor General of Canada noted that the federal government
had begun to decentralize GST processing.(4)
Figures on annual GST revenues
are published in the Public Accounts of Canada. Table 2
contains the latest available data.(5)
Table 2 Annual
GST revenues, 1998-1999
GST paid by departments and agencies
HST transfers to the provinces
|Quarterly tax credits
Source: Receiver General
The total amount collected
($50.174 billion) includes the share of the three provinces that apply
the HST ($1.662 billion). Consequently, the federal governments
gross revenues from the GST alone were $48.511 billion before refunds,
rebates and other payments. Less all these cash outflows, net revenues
amounted to $20.684 billion for the 1998-1999 fiscal year.
The Department of Finance
publishes updates on net GST revenues in its monthly Fiscal Monitor.(6) The May 2000 issue states that net GST revenues
for the 1999-2000 fiscal year (unaudited) had increased 9.8% over those
from the previous period to nearly $23 billion. Highly favourable
economic conditions have thus, at last, had an impact on retail sales,
and imports have expanded, thus substantially increasing the amount of
The underground economy
issue always arises in connection with the GST. Various studies
conducted in the early 1990s provided estimates of the size of that economy
relative to gross domestic product (GDP). One Statistics Canada
study estimated this figure at 4.2%.(7) This order of magnitude was confirmed by a
team of economists from the Department of Finance, which pegged the figure
This problem existed long
before the GST went into effect, but the tax may have aggravated it.
On the other hand, there are no figures to support a direct link between
the two, and it should not be forgotten that the recession of the early
1990s as well as high personal and corporate income taxes, and
payroll taxes all had an influence on the size of the underground
economy. A certain amount of caution must therefore be exercised
in any attempt to establish a causal link between the GST and the underground
BACKGROUND TO THE GSTS
Although the GST was not
introduced until 1 January 1991, studies and debates on the best
way to replace the FST date back to when that tax was adopted in 1924.
The history of this question may be divided into two major periods: before
and after the 1987 White Paper on Tax Reform.
to 1987 FST and the Search for an Alternative
On 18 May 1920, Sir
Henry Rayton, then Minister of Finance, announced that a 1% FST would
be introduced and applicable at all transaction levels except retail sales.
In his view, as a result of the expenditures required by the First World
War and the debt and bankruptcy of a number of railway companies, the
federal governments financial needs at the time were such that Ottawa
had to introduce a sales tax as a temporary measure.
This initiative followed the creation in 1916 of the corporate income
tax and, in 1917, of the personal income tax. This last measure
was also intended to be temporary.
Four years later, popular
dissatisfaction led the federal government to introduce, as a replacement
measure, a 6% sales tax applying solely to sales by manufacturers.
Throughout its existence, this tax was extensively criticized for, among
other things: promoting imports to the detriment of domestic production;
being applied to a too-narrow base comprising only one-third of goods
consumed; and being regressive, i.e., affecting all taxpayers regardless
of their ability to pay, as well as excessively complex to administer.
In 1937, the Royal Commission
on Dominion-Provincial Relations (Rowell-Sirois Commission) criticized
consumption taxes for their regressive nature and their application in
a cascading fashion to the taxation of inputs used by manufacturers.
The Commission thus suggested gradually eliminating the FST because of
In 1956, the Sales Tax Review
Committee (Carter Committee) recommended applying the FST at the wholesale
level. In the 1956 to 1959 budgets, the government made minor changes
to the FST based on the Committees report.
In 1966, the Royal Commission
on Taxation (Carter Commission) recognized that a tax on wholesale transactions
would be an improvement over a tax at the manufacturing level. It
pointed out, however, that a retail tax would be more neutral because
it would apply to a broader tax base including services. The Commission
thus proposed that the federal and provincial governments adopt a common
tax base for their sales tax, i.e., implement a kind of national sales
tax which the provinces would be responsible for collecting. The
Commission went even further to suggest that, in return, the provinces
should yield some room in the area of direct taxation.
In its 1969 White Paper
on tax reform, the federal government stated that it intended to proceed
with a restructuring of the FST after reorganizing the income tax system.
In 1975, having considered the tax system reorganization completed, the
government stated in a Green Paper that it preferred to have the FST apply
at the wholesale level. It noted that, in its view, the administrative
problems caused by the collection of a national retail sales tax would
offset the very minor benefits that could be derived from that tax.
In 1977, the Commodity Tax
Review Group published a report in which it recommended that the FST be
applied uniformly at the wholesale level. The Group believed that
this measure would afford an easy solution to the main problems resulting
from the fact that the tax was charged at the manufacturing level.
It admitted that a retail tax would be more neutral, but added that the
problems caused by integrating such a tax with the nine provincial taxes
(Alberta had no PST) would be too hard to overcome.
In November 1981, the Minister
of Finance announced his intention to apply the FST at the wholesale level.
In April 1982, he published a White Paper explaining the technical details
of the new tax, but widespread discontent forced the government to delay
Struck in February 1983,
the Federal Sales Tax Review Committee (Goodman Committee) concluded three
months later that neither an improved tax charged at the manufacturing
level nor a wholesale tax would be an alternative. In its view,
the government had only three options: a national retail sales
tax, a federal retail sales tax, or a federal valued-added tax
(VAT). In its report, it proposed in particular that the government
consider introducing a federal value-added tax and that the provinces
[be] invited to participate in its administration.
In November 1984, upon consultation
with the provinces, the private sector and concerned groups, the government
announced that, for the first time, it was considering introducing a VAT.
The Minister of Finance stated in his February 1986 budget that he was
studying a business transfer tax and, on 18 July following, announced
that his officials were preparing an in-depth restructuring of the Canadian
to 1 January 1991 From the White Paper to the GSTs Introduction
In June 1987, the Minister
of Finance published a White Paper on the overall reform of the tax system
in which the government was considering three possible forms of indirect
taxation. One was a national sales tax on value added which would
replace both the existing FST and the provincial retail sales taxes to
combine them into a single national system. According to the White
Paper, this solution would afford an opportunity for the federal
government and those provinces choosing to participate to integrate their
sales tax systems into a single national system. The other
two options proposed were exclusively federal sales taxes: a goods and
services tax without exemptions, and a European-style VAT under which
certain goods and services would be exempted. The government stated
its preference for a national sales tax and announced that negotiations
would be taking place with the provinces.
In March 1988, the House
of Commons Standing Committee on Finance and Economic Affairs published
two reports on the June 1987 reform proposal. The first drew on
the New Zealand model and recommended that the national sales tax apply
to as broad a tax base possible, including, in particular, food.
The second report recommended that the government make negotiations with
the provinces a priority with a view to adopting a national sales tax
and submit new proposals to that effect as soon as possible.
On 24 April 1989, the
Minister of Finance announced that the federal government would proceed
alone, without the provinces, in applying a multi-stage value-added tax
on goods and services and that the tax would go into effect on 1 January
1991. Negotiations between Ottawa and the provinces on harmonization
broke off and the federal government announced that the provinces did
not realize there was an urgent need for action.
The provinces then resorted
to constitutional arguments to oppose what they considered a federal power
grab. The Government of Quebec, for example, immediately denounced
the federal decision on the ground that it was unconstitutional.
The province contended that the action constituted flagrant interference
in a field of taxation traditionally reserved for the provinces.
Alberta, Ontario and British Columbia took legal action against the federal
government, alleging that it had exceeded its constitutional powers by
operating in a taxation field reserved for the provinces and that Ottawa
should pay compensation to entrepreneurs who would be collecting the GST
on its behalf.
On 8 August 1989, the
government tabled a technical paper on the tax in which it stated that
the tax rate would be set at 9%.
In November 1989, the Standing
Committee on Finance supported the government proposal to replace the
FST with the GST. In particular, it recommended that the government:
set the rate at 7%; continue to negotiate with the provinces to establish
a national sales tax as soon as three or four provinces representing a
substantial proportion of the population were prepared to participate;
and develop plans, with the aid of interested provinces, to establish
and administer a joint organization responsible for collecting the national
The provinces continued
their vigorous opposition to the adoption of the GST and to the idea of
harmonizing it with their respective PSTs. They continued to accuse
the federal government of interference in the consumption taxation field,
which they considered their exclusive jurisdiction. The provincial
governments also did not want to associate with the federal government
on the GST, given the political price that would have to be paid at election
time for introducing such an unpopular tax.
However, a few months before
the introduction of the GST, the provinces gradually seemed to abandon
the arguments on which they had based their opposition. The federal
government continued negotiations with Quebec, Saskatchewan, Manitoba
and Prince Edward Island until the GST went into effect.
On 30 August 1990,
the Quebec and federal governments announced the signing of an agreement
under which Ottawa would transfer to the province full responsibility
for administration of the GST in Quebec, and the Government of Quebec
would harmonize its provincial sales tax base with that of the federal
tax. The new QST was introduced in two stages, on 1 January
1991 for personal property, and on 1 July 1992 for services and real
This would be the only agreement
which the federal government would manage to reach before the GST was
introduced on 1 January 1991.
OF PROVINCIAL SALES TAXES AND THE GST
Support for the introduction
of the GST was far from unanimous. The taxs unpopularity,
which may be explained in part by its sudden visibility compared to the
former FST, and the fact that it was introduced during hard economic times,
made it a prime target for the opposition parties.
In early 1991, the provinces
appeared to be less reluctant to harmonize their respective sales taxes
with the GST. Some implied they might be on the verge of reaching
an agreement with Ottawa. In February 1991, the Saskatchewan government
said it would harmonize its sales tax with the GST starting in 1992.
Up to the fall of 1991, even though the provinces intentions continued
to fluctuate, an apparent change of attitude suggested that most of them
would have no choice but to join the movement to harmonization started
by Quebec and Saskatchewan. However, the NPD government elected
in Saskatchewan in October 1991 made it known that it was abandoning the
harmonization plan. In April 1991, Nova Scotia also indicated that
it would not harmonize its sales tax with the GST.
After believing that harmonization
would become a reality, Ottawa suddenly saw the climate deteriorate toward
late 1991 and, until the end of 1993, there seemed to be little likelihood
that the provincial and federal taxes would be harmonized. In June
1992, the Supreme Court confirmed that the GST was constitutional.
During the 1993 election
campaign, the Liberal Party of Canada which then formed the official
opposition announced it would replace the GST with a new tax.
Once elected in November of that same year, it directed the House of Commons
Standing Committee on Finance to consider alternatives to the GST.
On 20 June 1994, the
Finance Committee published its recommendations.(9)
In its report, it suggested that a VAT (a kind of improved GST) be introduced
across the country, asserting that integration of the federal and provincial
sales taxes was the solution to the problems caused by the existing GST.
In addition to simplifying collection for small businesses through a business
transfer tax,(10) the Committees proposal would make it possible
to integrate the federal and provincial tax systems completely.
The national VAT would thus
have a federal component and a provincial component. It would ideally
have applied to a single tax base across the country except in
Alberta, which had no PST and have a single set of standard rules.
The Committee believed at the time that the provinces would agree to harmonize
their respective sales taxes with the proposed new national tax because
of the benefits afforded by a national VAT, particularly: a simplified
tax system; reduced administrative and compliance costs; less bureaucracy
as a result of the elimination of one complete order of government; and
various economic benefits.
The Committee thus proposed
a national VAT of 10%, with 40% of revenues going to the federal government
and 60% to the provinces, and a standard tax on income (of 1.25%
to 1.5%) to offset the shortfall in revenue. That August, the federal
government proposed a VAT of 11% and, in October, one of 12% (5% for the
federal government and 7% for the provinces), together with a standard
1% tax on disposable personal income and compensatory measures in the
field of excise taxes.
In each case, the proposal
was for one national sales tax, levied on the same base across the country,
which would have been collected by the federal government. The provinces
would no longer have had to spend the annual $300 million to collect
the provincial sales tax. Businesses would have seen their compliance
costs substantially reduced, because they would no longer have had to
deal with two tax authorities. To avoid putting too great a strain
on provincial revenues, the federal government planned to introduce sales
tax credits for production inputs gradually over a period of three years.
To induce the provinces to harmonize their respective taxes with the GST,
the federal government offered those that agreed to do so greater room
to manoeuvre in the areas of personal and corporate income tax.
The provinces rejected all
these federal proposals. For some provinces, the loss of revenue
following harmonization would be too great. In addition, harmonization
would mean a transfer of the corporate tax burden to consumers, an idea
generally opposed by the provinces. From October 1994 until the
end of 1995, there was no public movement on harmonization.
Some believe that the election
in Ontario in June 1995 of a Conservative government that had promised
to harmonize the systems would be the catalyst for harmonizing sales taxes
across Canada. However, in March 1996, Ontario announced that the
province had been unable to reach an agreement with the federal government.
That same month, the federal government accepted the Committees
recommendation on introduction of a national VAT.
On 23 April 1996, the
federal government announced that it had signed an agreement with Nova
Scotia, New Brunswick, and Newfoundland and Labrador to harmonize those
provinces sales taxes with the GST. Six months later, the
parties signed detailed agreements under which a new HST of 15% would
be introduced in the three provinces on 1 April 1997.
Under those agreements,
the federal government undertook to pay $961 million over four years
($349 million in each of the first two years, $175 million in
the third year, and $88 million in the fourth year) to the three
provinces to offset half of the loss in revenue caused by harmonization.
To induce the provinces
to adopt the HST (at a rate of 15% in the Atlantic provinces and 14% elsewhere
in Canada), the federal government had offered to pay such compensation
if the loss in revenue exceeded 5%. This adjustment assistance
was based on a formula that applied to all Canadian provinces and covered
all of the difference for the first two years, 50% in the third year,
and 25% in the fourth year.
Under this formula, Quebec,
Ontario and British Columbia would not see their revenues from their respective
sales taxes reduced by more than 5% under a harmonized system of 14% or
15%. As a result, they would not have been entitled to assistance
if they had agreed to harmonization under the letter of understanding
of 23 April 1996. Saskatchewan, Manitoba and Prince Edward
Island, on the other hand, would have been entitled to assistance and,
if they had signed the letter of understanding, the federal government
would have paid them $540 million, for a total of $1.5 billion
for Canada as a whole. The western and Maritime provinces opposed
the proposed compensation, deeming it unfair.
Table 3 provides a
summary of the current situation and the changes arising from the HSTs
implementation in April 1997. It shows the effective date of the
PST in each province, the rate of the tax and the effective tax rate (including
PST and GST) at 31 March 1997, immediately prior to the introduction
of the HST in January 2000.(11)
Table 3 Provincial
sales tax and effective tax rate, by province
(as a percentage)
(PST and GST)
31 March 1997
31 March 1997
Despite the agreements signed
by three of the Atlantic provinces and Quebec, the other provinces are
still reluctant to accept harmonization. Except perhaps for Prince
Edward Island, no other province appears likely to harmonize its sales
tax with the GST in the near future. The provinces are opposed to
harmonization for a variety of reasons.
Immediately after discussions
on the GST ended in April 1989, the provinces denounced the federal decision
as unconstitutional, maintaining that a tax on goods and services represented
flagrant interference in a field of taxation traditionally reserved for
the provinces. It was generally conceded, however, that the federal
government had unlimited taxing powers and that it could employ a method
of taxation already used by the provinces. In June 1992, the Supreme
Court confirmed that the GST was constitutional. This decision notwithstanding,
the provinces continue to oppose harmonization for five reasons.
First, the provinces are
reluctant to accept harmonization because this tax is politically very
risky. It is obvious that, by going ahead with harmonization and
broadening their tax bases, the provinces would incur part of the political
cost associated with the GST. This argument still serves to justify
the provinces continued opposition to harmonization.
Second, by agreeing to harmonize
their respective sales taxes with the federal system, the provinces would
exempt business production inputs. Harmonization would therefore
mean transferring the corporate tax burden to the consumer. This
is still a major argument for a number of provinces.
Third, the provinces have
always feared giving up significant discretionary powers over fiscal policy
in a harmonized system. Because they could no longer set the tax
base or rate, they would lose any independence and flexibility with regard
to their respective retail sales taxes. In the 1996 agreement, however,
the federal government granted the participating provinces increased powers
in the fields of individual and corporate taxation.
Fourth, the provinces are
also opposed to harmonization for reasons of administrative complexity.
Although the federal government has often said that harmonization would
result in greater administrative simplicity and reduced compliance costs,
Quebecs experience is far from a success and the other provinces
have not been inclined to believe federal claims. And yet the agreement
signed in October 1996 provides that the federal government, not the provinces,
will be responsible for collecting the HST.
There is no doubt that a
perfectly harmonized system would make tax collection easier and that
compliance costs for businesses (particularly small businesses) would
be reduced. For some of them, however, a system that differed from
region to region, like that of the HST, would lead to problems and increased
compliance costs. Effective tax rates and bases varying from region
to region would complicate the tax treatment of interprovincial transactions.
Under the last agreement signed, interprovincial transactions not confined
to the harmonized provinces appear to be more complex because the tax
basis and effective tax rates differ from one transaction to the next
depending on the province concerned. In an interprovincial transaction
toward a province that has adopted the GST, a business registered in a
non-harmonized province is nevertheless required to collect the HST.
Conversely, where a transaction occurs in a non-participating province,
the business registered under the HST system does not have to collect
the provincial share of the HST.
Lastly, the provinces have
always claimed that adopting an HST would lead to lost revenue and budgetary
problems. Even with a broader base, several provinces would face
a decrease in revenue because of having to reimburse production input
taxes. To counter this argument, the federal government is promising
to compensate the provinces through its adjustment assistance program.
In addition, the federal government is granting increased authority in
the fields of individual and corporate taxes to the provinces that have
signed agreements. Taken together, these measures should help the
provinces that have moved to harmonization to offset the shortfall in
their revenues, at least temporarily.
Attempts to harmonize the
GST and provincial sales taxes have seen many ups and downs over the years.
To date, only Quebec and three Atlantic provinces have agreed to harmonize
their provincial sales taxes, but their actions have not induced the other
provinces to do the same. One might have believed that Prince Edward
Island would be added to the list after the HST was introduced, but it
remains the only non-participating province east of the Ottawa River,
and it is unlikely that its eventual participation will help change the
status quo in the other provinces.
Ontario, however, could
play a key role in bringing about the harmonization of sales taxes across
Canada, and even the inclusion of the sales tax in advertised prices.
It is not unreasonable to believe that the harmonization of Ontarios
PST with the GST could act as a catalyst for a number of other provinces.
The federal government seems
disinclined to change its position, and the Minister of Finance has admitted
that negotiations with the non-participating provinces are at a standstill.
Although the government is pleased with the agreements reached with three
of the Atlantic provinces, those agreements put it in a delicate situation.
It will not find it easy to alter the current proposal to satisfy the
other provinces without jeopardizing the administrative benefits of the
harmonized system because, for reasons of administrative simplicity, the
same rules must apply across Canada. For example, it would be impossible
to have one adjustment assistance formula and different tax bases in Eastern
and Western Canada.
Apart from that, it appears
virtually impossible that a single-rate national sales tax will one day
apply all across Canada. At best, the federal government could hope
for four regional sales taxes: one for British Columbia, Saskatchewan,
Manitoba and Ontario; a second for Alberta and the Territories; a third
for Quebec; and a fourth for the Atlantic provinces. However, this
situation would not do any more to facilitate the inclusion of the sales
tax in advertised prices.
For individuals and corporations,
harmonization could also mean higher taxes. Nova Scotia and New
Brunswick have already announced new corporate capital taxes. Starting
in 2001, once federal adjustment assistance has been exhausted, the three
provinces could be forced to increase the 8% provincial component of the
HST to offset declining revenues or else find other revenue sources.
ALTERNATIVES TO THE GST
As noted above, the GST
has been controversial and not unanimously accepted. Although the
government decided not to replace it in 1996, it was not for failing to
consider alternatives, but rather because those alternatives seemed to
raise even more significant problems. A brief overview of some of
those options and related problems is provided below.
The government could have
replaced the GST with a business transfer tax (BTT). To date, Japan
is the only industrialized country that has opted for this type of VAT.
A BTT is easy to administer:
businesses calculate the amount of tax payable by multiplying their total
sales by the tax rate, then subtracting their total purchases, also multiplied
by the same rate. Because a BTT applies to all transactions and
because businesses therefore do not have to distinguish between taxable
transactions and zero-rated or exempt transactions, the tax paid or collected
on each transaction does not have to be recorded for accounting purposes
as is the case with the GST. The result is greater administrative
simplicity. In addition, businesses base their calculations on accounting
information already available to them, which reduces their compliance
However, these benefits
are reduced in a harmonization context, such as that in Canada, in which
rates vary from one province or region to the next. In this situation,
the destination province of intermediate goods must be traced in order
to apply the appropriate rates. However, this requirement violates
the principle of business accounting, which is the BTTs strength,
and requires instead a collection system based on transactions, thus one
similar to that of the GST. In addition, certain goods and services
could not be zero-rated or tax-exempt under a BTT. Consequently,
to preserve the principle of business accounting and the essence of the
BTT, the tax base would have to be expanded, a measure that has proven
unpopular and which the government seems disinclined to take.
In short, assuming a very
broad tax base and a uniform tax rate across the country, the BTT would
be simpler to implement than the GST. A BTT could thus have been
a viable alternative if the federal government had agreed to: apply it
at the federal level only, i.e., abandon the harmonization of federal
and provincial sales taxes in view of the virtually insurmountable difficulty
of having the provinces adopt either an HST or, where possible, a uniform
rate for the provincial component of the HST; and broaden the tax base.
Another promising alternative
that was proposed was a federal payroll tax (FPT). As the difference
between sales and the cost of inputs, i.e., the value added, is virtually
equal to wages and other amounts paid to workers,(15)
it would be possible to tax the value added by levying a tax on employee
wages. In administrative terms, this would be a much simpler option
than the GST or the BTT.
In March 1994, Jonathan Kesselman
of the University of British Columbia proposed to the House of Commons
Standing Committee on Finance that the GST be replaced by a payroll tax
which the employer would deduct at source based on gross salary, commissions,
bonuses, social benefits and pension fund contributions.(16)
This tax would be paid by employees and self-employed workers, not by
employers. Consequently, an FPT would not have the distorting effects
(such as impeding hiring and employment growth) generally associated with
payroll taxes such as employment insurance premiums. Kesselman estimated
that the FPT rate would have to be set at approximately 3.5% in order
to replace net GST revenues.
An FPT would afford numerous
benefits. The principle of its application would be very simple
compared to that of the GST. The FPT would affect all workers and
it would not be necessary to draw complex distinctions between transactions
or taxable, tax-exempt or zero-rated goods and services. The FPT
would not apply to benefits paid under revenue transfer programs such
as family allowances, employment insurance and so on. However, as
it would be based on gross remuneration, it would enable Canada to tax,
as it were, Canadians expenditures in and outside Canada and would
apply to social benefits and employer pension fund contributions, which
would increase with salary.
However, there are also
disadvantages to the FPT. It would apply to the current generation
of workers in a disproportionate manner relative to pensioners.
One solution to the problem would be to levy a temporary tax on pensions
to even out the tax burden. In addition, a poorly designed FPT could
also have an excessive impact on self-employed workers if it applied to
income regardless of the amount of capital invested in the business to
obtain a normal return.
To solve these problems,
Kesselman a few months later proposed a new FPT which he called a direct
consumption tax.(17) In addition to the payroll tax, there would
be a 2.9% tax on the cash flow of incorporated businesses and a source
deduction on income such as retirement pensions.
Various reasons may be advanced
to explain why the federal government did not opt for this solution, in
particular the following two. First, large organizations representing
businesses did not really understand the proposal or all its ramifications
and accordingly did not support it. Second, Kesselman was the only
person to advocate it and found himself somewhat isolated among tax experts,
accountants and lawyers in favour of the GST. The FPT was thus not
adopted and is unlikely to be selected in future.
Rather than adopt the GST,
the federal government could have completely waived its authority over
sales and excise taxes in favour of the provinces in exchange for a greater
share of personal income tax and exclusive control over corporate taxation.
That was the solution proposed by the Carter Commission more than 30 years
simple, this option would have exacerbated the problems associated with
retail sales taxes. It would likely have promoted the cascading
taxation of inputs, which the federal government attempts to correct through
input tax credits. It might also have had a negative impact on exports
(the GST does not apply to sales outside Canada) and influenced consumer
choices as a result of a narrow tax base which would result in higher
rates on certain classes of goods.
Conversely, the provinces
could have abandoned their sales tax in exchange for greater flexibility
in computing their personal and corporate income taxes.
Following the first ministers
conference of 21 December 1993, a number of participants said they
had discussed a new division of taxation fields which went beyond harmonization
of the PSTs and GST. On 26 September 1994, Ontarios Minister
of Finance proposed an exchange of taxation fields with Ottawa.
Ontario was considering giving up its sales tax in exchange for greater
control over and a greater share of income tax, which would have enabled
it to easily recover the $7 billion it would have foregone in the
federal governments favour because its share of income taxes would
have increased whereas the federal share would have declined. British
Columbia and Manitoba made the same proposal which, although discussed
by a number of provinces, nevertheless remained a dead letter.(18)
The federal government probably
dismissed the idea of the provinces completely ceding their sales tax
to it because this option, although a promising one, would have resulted
in the break-up of the current income tax system and its underlying principles.
This situation would have jeopardized one of the objectives of the federal
personal income tax: the redistribution of income within Canadian society.
According to the federal government, it was precisely because sales taxes
have little impact on the redistribution of income that the provinces
and not the federal government should occupy most of the sales tax field.
The division of taxing powers
between the federal and provincial governments has always involved the
question of the redistribution of wealth and income. The federal
government believes it is in a better position than the provinces to influence
the redistribution of income, particularly among the various regions of
the country. In its view, this is a question of national interest
and, in a more decentralized income tax system, competition between the
various provinces and the lack of coordination might undermine the redistribution
In addition, the federal
governments coordination of income tax ensures better allocation
of economic resources. For example, a province which lowered its
capital tax might drain the capital from other provinces. As well,
this federal coordination also permits harmonized collection across Canada,
thus reducing administration and compliance costs. It is for all
these reasons that the federal government believes it must occupy a significant
position in the income tax field. Too great a shift in powers between
Ottawa and the provinces could undermine one of the federal governments
most important roles.
It was difficult at the
time for the federal government to contemplate the significant decline
in tax revenues which simple elimination of the GST would have caused,
particularly in a context of chronic deficits. The solution thus
had to be at least revenue neutral for the government and every new source
of tax revenue had to be reliable. Some had suggested simply increasing
personal income tax, in particular as a result of its higher degree of
progressiveness. As its rate increases based on income, the tax
is assessed on taxpayers in accordance with their ability to pay.
However, as Robin W.
Boadway and Harry M. Kitchen emphasize in their most
recent survey of the Canadian fiscal landscape,(19)
marginal tax rates are consistently higher in Canada than in the United
States, Canadas main trading partner. As the proposed solution
would have expanded that gap, its implementation would probably have met
with serious opposition.(20)
Among other things, it could have induced very high income taxpayers to
leave Canada for the United States, where conditions would have been more
favourable for them.
Another option would have
been a national FST which would have applied jointly with the provincial
taxes in accordance with the conditions in effect in each of the provinces
a sort of national retail sales tax with variable rates and bases.
This kind of tax would obviously have been very complicated to
administer and would have aggravated the problems associated with retail
sales taxes such as: difficulties involved in exempting inputs in a standard
manner (a considerable disadvantage for interprovincial transactions);
the cascading effect; the administrative complexity of issuing exemption
certificates in view of the varying conditions from province to province;
and high rates as a result of a narrower tax base.
The government did not adopt
this option or the idea, which moreover has never been accepted elsewhere
in the world, of taxing consumption by taking as the tax base the difference
between income and the variation in accumulated wealth (unrealized capital
gains, for example), i.e., net savings. Although simple in theory,
such a tax would be complicated to administer. All taxpayers would
have to measure all forms of income, including income from: employment;
the sale of assets; gifts and inheritances; reduction in savings levels;
and returns on loans. They would also have to report all annual
net savings, including all assets acquired and investments of all kinds,
together with depreciation and interest payments. The sale of unregistered
assets such as numismatic coins would easily escape tax authorities.
The administrative complexity and compliance costs of this type of tax
would render it inoperative.
The GST was introduced at
a time when Canada was going through a deep recession. The subsequent
consideration of alternatives occurred in still difficult economic circumstances
also marked by persistently high budget deficits. The 1990s were
one of the worst decades for Canadian economic performance.
This type of situation lends
itself poorly to tax reform of any kind. The government may find
it hard to consider reducing its revenue, and any revenue-neutral reform
necessarily works to the disadvantage of certain groups. This was
the case with the GST. It was not supposed to generate more net
revenue than the FST in effect in 1989, but rather correct various disadvantages
and inefficiencies which had been associated with that tax since its introduction
in 1924, while favouring exports and eliminating the cascading effect
of the sales tax.
Few major changes can be
expected with regard to: restructuring or replacing the GST; or pursuing
the process of harmonization with the provincial sales taxes. However,
voices occasionally speak out calling upon the federal government to make
certain adjustments to the GST, to expand its base, for example, and reduce
its rate. David Laidler, an economist from the University of
Western Ontario, issued an invitation of this kind during the Standing
Committee on Finances 1999 pre-budget consultations.(21)
Contrary to the situation prevailing during the two previous decades,
when the government constantly faced hard choices in managing ever-increasing
debt and finding new revenue sources, those hearings were held in a context
of budget surpluses, which participants discussed how to redistribute.
Because cutting personal
and corporate income tax appears to be the federal governments priority
for the next few years, it is highly likely the debate on the GSTs
future will resume in the medium term, but this time in an entirely different
June 1987 - White Paper
on tax reform.
24 April 1989 - Negotiations
between Ottawa and the provinces on harmonization of the provincial sales
taxes and the future federal sales tax were broken off. The Government
of Canada abandoned the idea of a national sales tax and decided to act
8 August 1989 - Technical
paper on the GST.
Winter 1989-1990 - The House
of Commons passed Bill C-62.
30 August 1990 - Quebec
announced its intention to harmonize its sales tax with the GST.
Fall 1990 - Senate debate
on the GST.
14 December 1990 -
The Quebec National Assembly adopted amendments to the Loi concernant
limpôt sur la vente au détail to include provisions applicable
to Quebec as of 1 January 1991.
19 December 1990 -
Newfoundland adjusted its tax base.
21 December 1990 -
A reciprocal taxation agreement on implementation methods was signed by
Ottawa and Quebec.
1 January 1991 -
The GST came into effect in Canada, as did Phase 1 of the new harmonized
provincial sales tax in Quebec.
20 February 1991 -
Saskatchewan announced that it would harmonize its provincial sales tax
with the GST.
1 April 1991 - Phase 1
of harmonization of the Saskatchewan sales tax with the GST came into
9 April 1991 - Plans
to harmonize the sales tax with the GST were unveiled in the Prince Edward
8 August 1991 - The
Government of Prince Edward Island announced that the harmonization of
the provincial sales tax with the GST would not take place.
22 August 1991 - The
Government of Nova Scotia announced that it would not be harmonizing its
provincial sales tax with the GST.
22 October 1991 - Return
to the tax treatment provisions in existence in Saskatchewan prior to
1 April 1991.
24 October 1991 - Quebec
postponed the introduction of its tax on services until 1 July 1992.
14 May 1992 - The Government
of Quebec announced that a 4% sales tax would apply to services.
June 1992 - The Supreme
Court ruled that the GST was constitutional.
1 July 1992 - The second
stage of sales tax reform came into effect in Quebec.
20 June 1994 - The
House of Commons Standing Committee on Finance tabled its report on the
23 June 1994 - In a
declaratory judgement, the Supreme Court ruled in favour of Quebec and
granted the provinces the right to introduce a multi-stage tax such as
29 June 1994 - The
federal government called for the introduction of a 10% national
August 1994 - Ottawa proposed
a VAT of 11%.
September 1994 - Ontario
proposed to Ottawa that the province would give up its provincial sales
tax in exchange for greater control over income tax (British Columbia
and Manitoba supported this proposal).
13 October 1994 - The
federal government proposed a VAT of 12%.
9 May 1995 - Quebec
announced that the QST would be fully harmonized with the GST.
23 April 1996 - The
federal government and the governments of Nova Scotia, New Brunswick
level, and Newfoundland and Labrador signed a letter of understanding
to harmonize federal and provincial sales taxes.
23 October 1996 - These
three Atlantic provinces signed detailed agreements outlining the new
HST system that would enter into effect on 1 April 1997. The
federal government paid them $961 million in compensation.
March 1997 - In the face
of strong opposition, the three Atlantic provinces applying the HST and
the federal government abandoned the idea of including the HST in advertising
1 April 1997 - The
HST went into effect.
1 January 1998 - The
QST was increased from 6.5% to 7.5%.
27 March 1999 - Saskatchewan
lowered the PST rate from 7% to 6%.
The following documents
were used to prepare this study. They constitute a varied group
ranging from legislative committee reports to economic treatises and concern
the history of the GSTs design and introduction, attempts to replace
it and harmonization of the GST with the provincial sales taxes.
Bird, M. Richard and Jack
Mintz (eds.). Taxation to 2000 and Beyond. Canadian
Tax Paper No. 93. Toronto: Canadian Tax Foundation,
Bird, M. Richard, Davis
B. Perry and Thomas A. Wilson. Tax Reform in Canada: A
Decade of Change and Future Prospects. Discussion Paper No.
1. Toronto: International Centre for Tax Studies, University
of Toronto, 1994.
Boadway, Robin W. and Harry
M. Kitchen. Canadian Tax Policy. 3rd ed. Canadian
Tax Paper No. 103. Toronto: Canadian Tax Foundation,
New Direction for Canada: An Agenda for Economic Renewal.
Ottawa: November 1984.
1989: The Goods and Services Tax. Ottawa: April
Paper on Indirect Taxation [Green Paper]. Ottawa:
and Fiscal Statement. Ottawa: 2 December 1992.
and Services Tax: Technical Paper. Ottawa:
Release 90-109 on the Ottawa-Quebec Memorandum of Understanding.
Ottawa: 30 August 1990.
for Applying the Federal Sales Tax at the Wholesale Level [White
Paper]. Ottawa: 1982.
of the Commodity Tax Review Group [Brown Paper]. Ottawa:
Tax: Measure Concerning the Taxation of Commercialization and
Distribution Costs: Technical Notes. Ottawa:
Tax Reform: An Updated Federal Proposal. Ottawa:
14 October 1994.
Reform 1987: Sales Tax Reform. Ottawa: 18 June
Reform Proposals [White Paper]. Ottawa: 1969.
Dean, James. A
Note on Interprovincial Variations in the Base for Retail Sales Tax.
Canadian Tax Journal, Vol. 37, No. 4, 1989.
Drummond, Don, Mireille
Éthier, Maxime Fougère, Brian Girard and Jeremy Rudin. The
Underground Economy: Moving the Myth Closer to Reality.
Canadian Business Economics, Summer 1994.
Federal Sales Tax Review
Committee [Goodman Committee]. Report. Ottawa:
Hill, Roderick and Michael
Rushton. Harmonizing Provincial Sales Taxes with the G.S.T.:
The Problem of Interprovincial Trade. Canadian Tax Journal,
Vol. 41, No. 1, April 1993.
House of Commons.
Debates. 18 May 1920. [Budget Speech]
Ip, Irene and Jack Mintz.
Dividing the Spoils: The Federal-Provincial Allocation of Taxing
Powers. Toronto: C.D. Howe Institute, April 1992.
a Direct Consumption Tax to Replace the GST. Canadian
Tax Journal, Vol. 42, No. 3, 1994.
a Federal Tax to Replace the Goods and Services Tax. Brief
to the House of Commons Standing Committee on Finance. 8 March
Tax in Lieu of GST. Canadian Tax Highlights. Toronto:
Canadian Tax Foundation, Vol. 1, No. 12, 21 December
the GST or Retreading It. Policy Options, June
of Finance. Newfoundland Tax Reform: A Focus for Public
Discussion. St. Johns: April 1991.
Ontario. Fair Tax
Commission. Fair Taxation in a Changing World. Toronto:
1 December 1993.
Perry, J. Harvey.
Taxation in Canada, 5th ed. Canadian Tax Paper No. 89.
Toronto: Canadian Tax Foundation, 1990.
Québec, ministère des Finances.
à la Déclaration ministérielle concernant ladministration de
la TPS et la réforme des taxes à la consommation au Québec.
Québec, 3e trimestre 1990.
de vente du Québec : Document technique. Québec,
1er trimestre 1991.
Royal Commission on Dominion-Provincial
Relations [Rowell-Sirois Commission]. Report. Ottawa:
Kings Printer, 1940.
Royal Commission on Taxation
[Carter Commission]. Report, Vol. V. Ottawa:
Queens Printer, 1967.
Sales Tax Review Committee
[Carter Committee]. Report to the Minister of Finance.
Ottawa: Queens Printer, 1956.
of Finance. Reform of Saskatchewans Provincial Sales Tax.
Regina: 20 February 1991.
Standing Committee on Finance.
Report. Minutes of Proceedings and Testimony, Issue no.
147. Ottawa: House of Commons. 15 March 1988.
Report. Minutes of Proceedings and Evidence, Issue
no. 148. Ottawa: House of Commons. 23 March 1988.
the GST: Options for Canada. Ottawa: House
of Commons. June 1994.
on the Goods and Services Tax Technical Paper. Ottawa:
House of Commons. November 1989.
HST: Toward a Single National VAT. Ottawa: House
of Commons. March 1997.
The Size of the Underground Economy in Canada. Study in National
Accounting, No. 13-603E, No. 2. Ottawa: June 1994.
The following documents
are more recent, and are accessible online. They are cited in, or
added here to, the references contained in the text and provide more up-to-date
information on certain aspects of the GST.
technical vocabulary used in this paper is consistent with the definitions
used by the Department of Finance Canada, most of which appear in
that Departments glossary.(22)
presents a series of estimated costs in terms of foregone tax revenues
associated with GST deductions and other credits, based on the Departments
tax changes, including those affecting the GST/HST, are normally proposed
at the time the budget is tabled, useful information may be found
in the Budget Plan 2000,(24) in particular Annex 7.
This annex, together with the Economic and Fiscal Update(25)
(a document that has been submitted to the House of Commons Standing
Committee on Finance every fall since 1994), contains an overview
of changes proposed to the GST/HST since 1994 with regard to the way
it is collected and to the payment of credits granted. For example,
certain administrative adjustments were introduced in the 2000 Budget
to address costs caused by the collection of GST/HST by exporters.
These measures accompanied other measures relating to various aspects
of the administration of the GST/HST (rental properties, duplexes,
etc.) without altering the nature of the tax.(26)
annex to the Report of the Technical Committee on Business Taxation
better known as the Mintz Report(27)
contains a brief section examining the idea, which was considered
but not adopted by the committee, of a tax on cash surpluses, the
tax base of which would have been similar to that of the GST.
Receiver General of Canadas website includes the Public Accounts
of Canada,(28) which contain a breakdown of
expenditures and revenue by allocation and source respectively.
The amounts reported for GST purposes over the past fiscal year appear
in Volume 1, Chapter 1. A more detailed breakdown
is provided in Chapter 3.
of the 1999 Report of the Auditor General of Canada(29) contains a review of the treatment of GST returns
and audits, which is essentially handled in Summerside, Prince Edward
rules are enforced by the Canada Customs and Revenue Agency, formerly
Revenue Canada, which regularly publishes interpretation bulletins
firms are a useful source of information. For example, KPMG
publishes a newsletter,(31) most often in English only,
which provides a summary of the most recent noteworthy changes to
the GST, HST and provincial sales taxes.
Canadian Tax Foundation is a think tank on taxation in Canada.
Its newsletter, Canadian Tax Highlights,(32)
succinctly reports the latest news in the field of taxation and occasionally
judgements pertaining to GST interpretation. The Foundation
also publishes the Canadian Tax Journal.
GST is a Canadian VAT. Many countries have long since adopted
this type of taxation, with the notable exception of the United States,
which does not have a general federal sales tax. Australia also
has its own version of the GST. The University of New South
Wales offers an advanced taxation program with a particular focus
on this issue. It publishes a GST researchers guide(33)
containing a number of hypertext links to sites in Australia and the
rest of the world, in particular Canada, to facilitate research on
the GST in various contexts.
International Bureau of Fiscal Documentation(34)
is a well-known research institute which employs international tax
experts; the Bureau produces high-quality publications, including
a periodical providing updates on the VAT around the world.
(These publications are not free of charge.)
The Government of Canada, 1998-1999 Public Accounts of Canada,
Vol. 1, p. 1.16
The section entitled Harmonization of Provincial Sales Taxes and
the GST, more specifically Table 3, contains information on
the PST and HST and their rates as well as the effective tax rates of
The tax base is the amount on which a tax rate is applied. This
is the definition adopted by the Department of Finance Canada
1999 Report of the Auditor General, Chapter 16, p. 16-7,
Government of Canada, 1998-1999 Public Accounts of Canada, Vol.
1, p. 1.14
This document is available online at http://www.fin.gc.ca/purl/fiscmon-e.html.
Statistics Canada gave this figure in the conclusion of its document entitled
The Size of the Underground Economy in Canada, Study in National
Accounting, No. 13-603E, No. 2, June 1994, p. 56.
This estimate for 1992 includes activities not measured in GDP and not
reported to tax authorities (2.7%) as well as activities measured but
not reported (1.5%).
Don Drummond, Mireille Éthier, Maxime Fougère, Brian Girard and Jeremy
Rudin, The Underground Economy: Moving the Myth Closer to Reality,
Canadian Business Economics, Summer 1994, pp. 3-17.
Standing Committee on Finance, Replacing the GST: Options for Canada,
See Business Transfer Tax section later in this paper.
It is assumed here that the two taxes have the same tax base, i.e., all
goods and services are subject to both taxes. However, this is not
the case in all provinces.
On 1 January 1998, Quebec increased the QST rate from 6.5% to 7.5%.
On 27 March 1999, Saskatchewan lowered its sales tax rate from 7%
In Taxation in Canada, 5th ed., Canadian Tax Paper No. 89, Toronto,
Canadian Tax Foundation, 1990, p. 174, Harvey Perry reports
that Alberta was the first province to introduce a retail sales tax, but
that it eliminated it the following year.
In reality, the economic rent or yield in the form of dividends
and interest of capital invested or saved would also have to be
taken into account.
Jonathan Kesselman, Assessing a Federal Tax to Replace the Goods
and Services Tax, Brief to the House of Commons Standing Committee
on Finance, 8 March 1994. See also J. Kesselman, Payroll
Tax in Lieu of GST, Canadian Tax Highlights, Toronto: Canadian
Tax Foundation, Vol. 1, No. 12, 21 December 1993, p. 89,
and J. Kesselman, Replacing the GST or Retreading It, Policy
Options,June 1994, pp. 41-45.
See Jonathan Kesselman, Assessing a Direct Consumption Tax
to Replace the GST, Canadian Tax Journal, Vol. 42, No. 3,
1994, p. 709.
On the other hand, in December 1997, following the federal-provincial
conference, the federal government announced it was ready to grant the
provinces more flexibility in computing their provincial income tax, except,
of course, in Quebec, which was already collecting its own income tax.
The measures taken to give the provinces more room to manoeuvre were announced
jointly by the ministers of Finance and National Revenue in a news release
dated 25 January 2000 (News Release 2000-004, http://www.fin.gc.ca/newse00/00-004e.html),
entitled Federal Administration of Provincial Taxes: New Directions
Canadian Tax Policy, 3rd ed., Canadian Tax Paper No. 103,
Toronto: Canadian Tax Foundation, 1999, p. 303.
Various informative tax comparisons between Canada and the G-7 countries
are provided in the report by Jean-Yves Duclos and Julie Gingras
entitled Mixing It Up: Directions for Federal Tax Reform, published
on 15 June 1999 by the C.D. Howe Institute (see
Hearing of 2 December 1999, in Ottawa. See transcript of proceedings