The hated tax is about to be replaced. But how much better will the new one be?
REPLACING THE GST
The hated tax is about to be replaced. But how much better will the new one be?
In a tiny children’s clothing store, tucked along a side street in Toronto’s west end, the customers are crabby. Three years and four months after the introduction of the Goods and Services Tax (GST), they still rant about the federal burden, rail at the staff and sometimes cancel sales when they see the final bill. To placate them, owners Maxine King and Diane Jermyn must be constantly inventive.
Last month, they advertised: “We pay GST and PST.” In March, they dangled the offer of 10 per cent discounts if customers contributed to the local food bank. Throughout February blizzards, they marked 15 per cent off with the slogan “Spring Is Sprung.”
Every week, King spends an hour separating the GST from her invoices; every three months, she takes a day to fill in Ottawa’s forms. “I don’t need to be a servant to the government with absolutely no compensation for it," fumes King. Adds Jermyn: “We take the flak from the customers. And we become the government’s tax collectors.”
Once touted as an economic improvement, the GST has become the most hated tax in Canada, the very symbol of big-spending government. Introduced by the Conservatives on Jan. 1,1991, it has entangled Canadians in the most complex and expensive sales tax regime in the world. It produces more than $15 billion, but costs more than $400 million for Ottawa to administer. It has turned almost two million individuals and businesses into reluctant tax collectors. And experts believe that it has doubled the ex-
PROVINCIAL SALES TAX RATES
British Columbia 7%
New Brunswick 11%
Prince Edward Island 10%
Nova Scotia 10%
Newfoundland 12% tent of the underground economy, driving more than 10 per cent of all transactions beyond the reach of the tax system. “The GST poisoned the political atmosphere in the country,” says Canadian Federation of Independent Business president John Bulloch. “There is a sense that our political system does not work, that the system is unfair.”
But even a bad tax is difficult to dismantle—because Ottawa needs the money. The GST, in fact, has become a formidable problem for the Liberal government, which has promised to replace it with a better system by June 1, 1996. Last month, the federal finance committee completed almost three months of arduous hearings, including a two-week cross-Canada tour to ascertain the provinces’ opinions. The 15-member multiparty committee is now huddled behind closed doors, struggling to produce unanimous recommendations by June 1. There is no lack of options. But most witnesses have begged Ottawa to combine its seven per cent GST with existing provincial sales taxes (PST), which are levied by all provinces except Alberta. This new, combined “National Sales Tax” would apply to the same items and operate by the same rules. As finance committee chairman Jim Peterson, a Toronto Liberal MP, told Maclean’s-. “Just about everybody feels that Canada cannot afford to be the only country in the world with two sales tax regimes— and a plague on both our houses if federal and provincial politicians cannot find a way to integrate them.”
By almost any standard, the GST is a highly flawed tax. It replaced the federal Manufacturers’ Sales Tax (MST), which applied to only one-third of Canada’s goods such as heavy appliances, computers and vehicles. That tax was a whopping 13.5 per cent on most products in 1990. But because it was applied at the manufacturers’ level, consumers did not see it when they stood at a cash register. Still, the tax was fraught with problems. It applied to Canadian products— not imports. There were more than 22,000 special arrangements and interpretations. It hit only some Canadian goods. And it did not tax services such as lawyers’ fees and hair-
dressers’ charges, which represent about 70 per cent of total economic activity.
Although the GST has improved Canada’s competitive position because it hits imports and domestic goods equally, it has made almost everything else worse—including the federal government’s fiscal position:
• The MST required 1,800 employees to administer it. The GST takes 6,800 federal employees—and they are swamped with work.
• The MST cost $85.8 million to administer in its last full year. The GST cost about $400 million in 1992-1993.
• The MST raised $17.7 billion in net revenues in 19891990. The GST brought in only $15.6 billion in 1993-1994, even though it hit most goods and services (with such major exemptions as food and prescription drugs).
• There were about 75,000 corporations paying the MST. The GST has dragged almost two million individuals and companies into its net. More than four-fifths of those filers have annual sales of less than $200,000.
• In 1984, it cost companies about 2.7 cents to collect each dollar of MST revenue. A decade later, the comparable GST figure is about 15 cents. That has dwindled from a staggering 40 cents in 1991—that is, business used to pay 40 cents in administrative costs to collect $1 in GST revenue— largely because of amendments suggested by the 83,000member Canadian Federation of Independent Business.
Such distressing statistics cannot convey the full extent of the bureaucratic nightmare. Montreal accountant Yvon Cyrenne told Peterson’s committee about clause 179 of the Excise Tax Act, which deals with “drop shipments,” or goods that are imported with the help of a sales agent: it grew from one subsection with two paragraphs prior to the introduction of the GST to she subsections with 20 paragraphs. A lecturer recently needed 88 pages of text and examples to explain that single clause to an accountants’ meeting.
As well, retailers have to keep track of a mind-boggling list of exemptions. Ottawa’s Spring 1994 GST news report, for example, cheerfully announced six more exemptions including leafeutter bees, bean rods with an operational width of at least 2.44 metres and min-
eral feeds except for trace mineral salt feeds. Former Tory MP Donald Blenkam has pointed out that starch from com is not taxable if it is used in puddings, but taxable if it is used as a component of garbage bags. So manufacturers have to keep detailed lists of who bought the starch and why they needed it.
The Peterson committee was aware of most of those problems—and most possible solutions—before it began its February hearings. In November, 1992, the Canadian Tax Foundation, a private, nonprofit research organization, held a three-day Toronto symposium
with sales tax experts and senior government officials. The two-volume report from that meeting became a primer for most MPs. Because they were so well-informed and so anxious to resolve the sales tax crisis, the MPs were able to put aside partisan differences and concentrate on achieving consensus. As a result, it is almost certain that they will unanimously call for a National Sales Tax, urging Ottawa to merge its system with as many provincial systems as possible. The members will likely disagree, however, over whether there should be an exemption for food. The current exemption was introduced to assist lower-income Canadians who spend a larger proportion of their income on groceries. But groups such as the Canadian Automobile Association have pointed out that the exemption has also forced small businesses such as campgrounds to cope with crazy rules that, for example, exempt plain croissants and tax sweet-filled croissants. The MPs may also fail to agree on suggestions that retailers should be allowed to hide the proposed National Sales Tax in the price tag of the product.
The key question, of course, is: will any of the nine PST provinces co-operate? The answer is: maybe, depending on how many favors the provinces can pry out of Ottawa. The provinces largely view the GST as Ottawa’s problem because their own retail sales taxes were working reasonably well before Ottawa’s intrusion. As well, many see little political benefit—and the possibility of enormous political damage—if they combine the tax regimes. The reason for that situation is a taxation nightmare. Retailers can deduct the GST that they pay on their own purchases from the GST that they collect from their customers before they send the difference to Ottawa. But they cannot deduct the PST that they pay from the PST that they collect.
If the GST and the PST are combined into a single tax, retailers would be able to subtract all of their “input” sales taxes before they remit the payment. (For the tax to work, there must be one set of rules.) And that deduction would cost the provinces about $6 billion in lost revenue. Most provinces would make up the shortfall because the broader National Sales Tax would now apply to services. But voters would simply see the same rate of taxes applied to more items. As a result, the provinces are quietly angling for federal favors, such as more funds for health care. “This is a very delicate minuet, an incredibly complicated thing,” warns David Perry, senior research associate at the Canadian Tax Foundation. “All of the things that Ottawa and the provinces have been arguing about are related in some way to the GST. It is one chip in the poker game.”
The game, of course, may end badly. Ottawa and the provinces may fail to agree. As a back-up position, Peterson’s committee will likely recommend that Ottawa transform the GST into a Business Transfer Tax (BTT). A BTT simply requires merchants to deduct their total input costs from their total sales— and remit tax on the difference. There would be no need to calculate the GST on each invoice. And there would be far fewer exemptions. But there would still be two sales taxes—and the compliance costs would remain relatively high. Peterson says there is good reason for the provinces to co-operate: “It is going to be a necessity of the new economy to have competitive tax regimes.”
Solutions cannot come soon enough for the millions of Canadians who pay or collect the tax. Maureen McKenna, owner of Toronto’s Durie Lane gift shop, complains that her customers also continue to squawk about the extra payments—and wheedle for deals. She, too, spends a full day every three months calculating the tax. And because she often spends the GST that she collects before she remits it, she usually ends up scrambling to find funds to send to Ottawa. “I hate the government,” says McKenna. “Every day, a new bill comes in. In the GST, we have created a monster.” □
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