Home  Features Understanding GST, Canada's hated tax
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Understanding GST, Canada's hated tax |
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The Conservative Party's first major 2006 election promise, a reduction
in the Goods and Services Tax (GST), has brought the much-hated tax
back in the spotlight.
The GST, also known as TPS (Taxe sur les produits et services) in French, is a multi-level sales tax introduced in Canada in 1991 by another Conservative Prime Minister, Brian Mulroney.
In many ways, it is similar to the value-added taxes found in Europe. The introduction of 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.
While it is similar to European value-added taxes, the GST was actually more directly modelled on a similarly named tax in New Zealand. It adds a 7% charge on the sale of all goods and services, except certain essentials such as food, residential rent, health and dental care, education, day-care, legal aid, and certain services such as financial services. Exported goods and tax-free goods (such as available at airport duty-free shops) are also exempt.
Individuals with low incomes 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 federal (central) government 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, 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.
When Mulroney's Progressive Conservative government proposed the creation of a national sales tax, 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.
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.
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. Despite the opposition, the tax was made law.
The political ramifications of the GST were severe. It contributed to the Mulroney government becoming one of the least popular in Canadian history. 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.
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.
Many 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. 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.
In the lead-up to the 2006 federal election, Conservative Party leader Stephen Harper pledged to reduce the tax by 1% in the first year and another 1% in the following four years if elected.
Background information: Wikipedia
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