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January 1, 1991 – GST Introduced: A new tax on consumption

The 7% Goods and Services Tax (GST) is a relatively new tax that came into effect in Canada on January 1, 1991. It replaced the out-dated 13.5% Manufacturers’ Sales Tax (MST), which had been in effect since 1924. The MST was generally levied at a rate of 13.5%, but was also highly complex in that it was subject to no fewer than 22,000 special provisions and administrative arrangements.

The GST is a simpler, fairer and more visible tax than its predecessor. It is a multi-stage value-added tax levied on a broad range of goods and services Businesses are entitled to receive a fully refundable credit (i.e., and input tax credit) for the GST they pay on the goods and services they purchase as inputs into their production and distribution processes. For this reason, the tax is said to apply only to the value added by a business. The GST applies to a broad range of goods and services; it doesn’t apply to items that are “zero-rated” or exempt, such as  basic groceries, most medical services and devices, prescription drugs and residential rents. To offset the regressive impact of a broader taxation base on low-income Canadians, the GST credit, a refundable income tax credit, was introduced along with the tax.

The replacement of the MST by the GST has helped to make Canadian manufacturers more competitive. The GST applies to all imported goods and services, but does not apply to Canadian manufactured goods and services that are exported to other international markets. The GST has also made consumption tax rates more equal across commodities, thereby reducing relative price distortions in the economy.

On April 1, 1997, three of the Atlantic provinces—New Brunswick, Nova Scotia, and Newfoundland and Labrador—combined their provincial sales taxes with the GST to create a single harmonized value-added tax structure. In partnership with the Government of Canada, these three provinces introduced a new 15% joint federal–provincial Harmonized Sales Tax (HST).
 
In 2001, as noted in the Public Accounts, the GST generated over $24 billion in net revenues. In addition, the provincial portion of the HST generated an additional $1.8 billion for 2001 for the three provincial governments. In the same period, the federal government provided nearly $3 billion to low-income Canadians through the GST credit.

Links

Goods and Services Tax (GST) and Harmonized Sales Tax (HST)
Source: Canada Customs and Revenue Agency
http://www.ccra-adrc.gc.ca/tax/business/gsthst/menu-e.html

GST/HST Credit
Source: Canada Customs and Revenue Agency
http://www.ccra-adrc.gc.ca/benefits/gst_hst-e.html

Chapter 7: Fiscal Management in Uncertain Times, Budget 2001 - Budget Plan
Source: Department of Finance
http://www.fin.gc.ca/budget01/bp/bpch7e.htm

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