Canada’s Goods and Services Tax (GST), or, as a tip of the beret to our French-speaking northern neighbors, Taxe sur les produits et services (TPS), is a multi-level value added tax (VAT) that was introduced on Jan. 1, 1991. The GST replaced a 1920s-era Manufacturers’ Sales Tax (MST) which had been blamed for hindering exports.
Canada’s sales tax differs from that in the United States in a fundamental way: it is essentially a coordinated two-level sales tax structure. The federal government, in the form of the Canada Revenue Agency, collects 5% of all retail sales that are not tax exempt (not zero-rated sales) in every province and territory countrywide. Each sub-national unit then has the option to collect its own VAT, Retail Sales Tax (RST), or no tax at all.
In addition to the federal GST, Canada’s territories and provinces can fall under the jurisdiction of either the Harmonized Sales Tax (HST) or a form of a Provincial Sales Tax (PST). For the sake of simplicity, Zip2Tax has grouped the differing kinds of PST into a single column on our sales tax table. The Quebec Sale Tax (QST, or TVQ [Taxe de vente du Québec]) and RST amounts will appear in the PST column.
One ungainly “hitch” with the provinces of Quebec and Prince Edward Island is that they have elected to apply the VAT tax after the GST has been added to an item’s retail price. In the sales tax table for these regions you will note that the column for “Sales Tax Rate” will reflect the “effective” total sales tax rate and not the sum of the individual tax districts to compensate for this seeming “tax on a tax”.
While not exactly elegant, the Canadian sales tax system has far fewer convolutions than nearly any of those in the United States which have been known to layer on special tax districts with no discernible pattern and vary randomly from state to state in rates, jurisdictions, exemptions and remittance.
You can look at America’s tax system as being additive, while the Canadian sales tax system takes the opposite approach. In the United States, each state can hike taxes in individual jurisdictions whenever lawmakers in a municipality wish to raise funds for a certain project. In Canada’s subtractive solution, everyone in a given province or territory is taxed at the same rate and then granted VAT relief in the form of rebates based on income and tax exemptions returned to the consumer as a tax refund.
Along with exemptions for various grocery items, special treatments are provided for other activities including small businesses, nonprofit organizations, charities, the so-called MASH (municipality-academic-school-hospital) sector, tourist expenditures by non-residents, real estate, and financial institutions.
Even though it is controversial to this day, the Canadian sales tax system has proven to be not only successful, but has some innovations that could be used as a model by the United States should calls for a federal sales tax gain traction.
For detailed information, check out the paper “SALES TAXES IN CANADA: THE GST-HST-QST-RST “SYSTEM,” by Richard M. Bird and Pierre-Pascal Gendro, available on the American Tax Policy Institute’s web site.
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