Confusion with Canadian GST

Lessons being learnt
Complex and inconsistent system
The growth of e-commerce gives rise to yet more complications

In 1991 Canada introduced its current system of Goods and Services Tax, by virtue of the Conservative government. As nations like Australia nervously edge towards a GST system of their own, comparisons and experiences are sought from those who have already made this complicated transition into a new taxation system.

Lessons being learnt

However, despite Canada possessing what would seem to be invaluable experience, the lessons being learnt by external bodies are that the Canadian model is not necessarily an appropriate one for imitation.

The GST is a seven per cent tax on the supply of most goods and services in Canada, replacing the old Federal Sales Tax, which was levied at the manufacturer's level, generally at the rate of 13.5 per cent. However, Canada is also subject to Harmonised Sales Tax (HST) at the rate of 15 per cent in three provinces - Newfoundland and Labrador, Nova Scotia and New Brunswick.

Certain goods and services, such as medical care, long term residential accommodation and music lessons are exempt from GST/HST. Sales of basic groceries such as milk, vegetables, and prescription drugs are not deemed exempt but are zero-rated, and therefore do not incur taxation. A Provincial Sales Tax (PST) of varying rates on short-term accommodation and goods is also levied in the provinces of Manitoba and Quebec.

To add to the confusion, in Quebec PST is known as TVQ. Subsequently, once the correct terminology has been ascertained it is then necessary to determine the correct level of taxation. Given the wide number of variances, the percentage rate will vary significantly depending on which part of Canada goods are bought or services received. GST was introduced into Canada by a Conservative government who, in 1988, had just won their second consecutive election for the first time in the 20th Century, maintaining their massive majority in the House of Commons. The idea of GST was presented in 1989 when their popularity was unquestionable.

The legislation to enact the tax was tabled before the House of Commons in 1990, and critics urged the Opposition Liberals, who dominated the Senate, to reject it. The Prime Minister at that time, Brian Mulroney, then named 19 new senators, 14 of whom were Conservative and 5 whom were Liberal but pro-GST. Subsequently the bill was passed. M

r Mulroney waited for a full five years before calling another election in 1993. He also resigned prior to its commencement. The Conservatives entered the election with 153 seats and GST to their name - they won only two seats in total, allowing the Liberals to sweep to victory. GST, however, remains in place.

Complex and inconsistent system

This complex and inconsistent system was not favoured at all by the Australian government, who are about to introduce a flat rate GST of 10 per cent. Australians have been told that the Canadian system is a mess, and should not be the model to be adopted in the Southern Hemisphere. Some consideration has been given to Canada's experiences, however.

The one-off set up costs for Australia's businesses have been calculated from the costs incurred at this initial period by Canadian businesses, estimated at close to $3 billion. The Australian retail industry has based its cost projections for continuation of GST compliance upon the experience of the Canadian Federation of Independent Businesses.

The Tax Court of Canada recently tackled provisions at the heart of the GST - the so-called place-of-supply rules. These determine whether taxable goods and services are supplied in Canada, and therefore subject to GST, or outside its borders.

Some companies claim circumstances that would dictate ineligibility to charge GST, and often find themselves fighting their case in the TCC. Even after years of implementation, the place-of-supply rules do not have an official name, nor are they clearly defined for the businesses that use them.

Political unrest about GST refuses to abate. Canadian Alliance leadership candidate, Stockwell Day, has stated that the tax: "needs to be reduced with a longer-term hope to see it eliminated."

Mr Day has also said that GST would eventually be phased out under his leadership of a Canadian Alliance government. This despite the Alliance party convention in January voting down a proposal to remove the tax should they come to power. And in 1996 Prime Minister Jean Chretien infamously argued on national television with a voter who chastised him for not removing GST.

The growth of e-commerce gives rise to yet more complications

The growth of e-commerce gives rise to yet more complications. The main issue is determining which tax law is appropriate to a specific transaction when the exchange takes place in cyberspace. GST is often included in the cybersale of goods but, if relevant, PST is not. Inter-Canadian Web sales represent an increasing amount of provincial revenue loss.

A recent study by retail consultant J.C. Williams Group predicted Canadians would spend more than $3 billion shopping online this year. Complications arise when the product sold is not physical and does not have to be delivered. A buyer, purchasing software in the format of a digital file sent via the Internet, confuses the whole place-of-supply issue. Four e-commerce groups have been set up by the Canada Customs and Revenue Agency in order to research the topic of cyber-taxation. Their report is expected at an international conference next year.

This emerging loophole, added to the continuing unpopularity of GST and parallel taxes, and the debate that still makes the top of the political agenda, demonstrates that despite several years of implementation, this tax system is neither welcomed by Canadians, nor is it particularly coherent.

By: Mario Cacciottolo

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