CANADA

A looming tax revolt

‘There will be a tidal wave of objection’

MARC CLARK August 21 1989
CANADA

A looming tax revolt

‘There will be a tidal wave of objection’

MARC CLARK August 21 1989

A looming tax revolt

CANADA

‘There will be a tidal wave of objection’

Finance Minister Michael Wilson may never have heard of Frances Balodis— but he can count on hearing from her soon. Balodis, an Ottawa piano teacher, was one of thousands of Canadians who expressed outrage last week when Wilson released the details of a nine-per-cent tax on almost all goods and services, including many things that are now tax-free. Among the currently taxexempt services that will be included: music lessons. Minutes after Balodis learned of the proposal, which is to take effect on Jan. 1,

1991, she began phoning fellow music teachers from Calgary to Kentville, N.S., discussing ways to fight the tax. Declared Balodis: “Wilson may know about finance, but he doesn’t know a thing about music education. We are not going to stop until we are heard.” Indeed, the goods and services tax (GST) touched off a debate that may dominate the Conservative government’s second term in office as much as the free trade debate did its first.

It will also be politically divisive. Hours after Wilson released a 173-page paper outlining details of the tax, many business leaders, provincial treasurers and consumers claimed that it will drive up inflation and confuse consumers. Two maverick Tory MPs from Alberta—Alex Kindy and David Kilgour—vowed to join the fight against the tax. Said Kilgour: “If the government pushes this through, it will be political suicide. There is going to be a tidal wave of objection.” Still, Wilson said that, in order to reduce the budget deficit and make the Canadian economy more competitive, “we

are committed to going ahead.” And he would not guarantee that the GST rate will not rise past nine per cent in the future.

The measure, which Wilson first announced in broad detail in 1987, would amount to the most sweeping tax change in a generation. Only a few items would be free of the tax, notably charges for basic groceries—for which Wilson offered no clear definition—day care, most residential rents, financial services, education, health care and prescription drugs. Overall, the levy would apply to almost twice as

many purchases as does the current federal sales tax, first placed in 1924 on goods manufactured in Canada. The federal sales tax is a hidden charge now ranging from nine per cent to more than 13.5 per cent.

The GST is to replace that tax, and it should lead to lower prices for some manufactured goods, such as cars and trucks, now taxed at the full 13.5 per cent. The GST would also apply to sales of new houses, but that may have less effect on prices than many consumers feared. For one thing, finance department officials estimate that the current federal tax on building materials, which would disappear, adds at least four per cent to the price of the average home. As well, Wilson proposed to give back half of the GST paid, or 4.5 per cent, on any house costing less than $310,000—which would apply to 90 per cent of all houses sold in Canada and most of those outside of Toronto and Vancouver.

Still, the changes would create higher tax bills for almost all consumers, because the GST

would be levied on hundreds of purchases currently untaxed by Ottawa. On average, consumers pay from $1,000 to $3,000 annually in federal sales taxes. Finance department officials estimate that Wilson’s new tax would raise those levels to $1,300 and $4,700. Still, Wilson said that he will offset the increases through slight reductions in income tax rates and generous increases in tax credits for low-income earners. The minister added that families earning less than $30,000 would be “better off.”

The GST is designed to be collected at each stage of the manufacturing process. According to a simplified finance department example of how the system would work, a mining company selling $100 worth of ore to a steelmaker would charge a GST of $9 on that transaction and remit it to the government. The steelmaker, who sells his finished product to an appliance -

manufacturer for $300, will charge $27 in GST. But he will be allowed a tax credit of $9 because of the GST he paid on his purchase of ore— remitting $18 to Ottawa. When, in turn, the manufacturer sells his finished product—a washing machine—to a retailer for $400, he

$27 that he previously paid, and sends the government $9. Finally, the retailer sells the washing machine to the consumer, who pays $600 plus GST of $54. The retailer claims a tax credit of $36, sending $18 on to Ottawa. Only the consumer bears the full brunt of the tax. Even Conservatives say that few Canadians seem to agree that they could be better off with the GST. Wilson also acknowledged that the introduction of the new tax would push up inflation in 1991 by 2.25 per cent and, as a result, wages may climb too. For his part, Tory MP Donald Blenkarn, chairman of the Commons finance committee, said that his party will have to convince consumers that the new tax is not simply an additional nine-percent tax on everything they buy, but would, for the most part, replace federal taxes that now claim $17 billion a year. Declared Blenkarn:

“People complain that we

would be taxing funerals. Well, we already charge 13.5 per cent on the hearse, the coffin, the shroud—even the spade to dig the hole. If that isn’t taxing, I don’t know what is.”

The minister, who spent the first week of August resting at his parents’ cottage, will

promoting the GST in speeches. And as summer winds down and MPs drift back to Ottawa for the reopening of Parliament on Sept. 25, Wilson will turn the Conservative caucus—without those members opposed to the tax—into a national sales force, equipped with training material, pamphlets and speech notes on the GST prepared by the finance department. And Blenkarn will likely challenge the GST’s critics when the finance committee begins six weeks of public hearings on the tax on Sept. 18. When the tax legislation passes—Wilson said that he will introduce draft legislation in the fall—the government may mount a promotional radio and TV advertising campaign.

Critics said that it will be extremely difficult to convince Canadians of its value. Said Kilgour: “Wilson can say anything he likes—people in Western Canada are not going to believe him. This is a dead duck.” In the meantime, Balodis and others will press for exemptions from the tax—which Wilson says that he will not give. Despite the criticism, experienced Conservatives say that they are confident that Canadians will accept the tax. Said Newfoundland Tory Ross Reid, chairman of a caucus committee on sales taxes: “We have a year and a half to sell it, to help people understand. We are going to have to preach the message every day, to everyone who will listen.” With both sides set to turn up the volume, it may be a particularly raucous national debate.

MARC CLARK in Ottawa