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Ottawa, December 27, 1995
1995-114

Deductibility of Provincial Payroll and Capital Taxes and Federal and Provincial Sales Tax Harmonization

Finance Minister Paul Martin today announced that the interim measure that limits the deductibility of increases in provincial payroll and capital taxes will be extended for another year in view of the current discussions with many provinces on a harmonized sales tax system. Under the interim measure, existing payroll and capital taxes are deductible but any increases in these taxes, whether by way of rate increases, base changes, or new taxes, are not deductible for federal income tax purposes.

Mr. Martin said that the interim measure, which has been in place since March 1993, will continue to apply throughout 1996. However, he noted that provinces which harmonize their sales tax with the federal sales tax will be provided with additional flexibility in other tax fields such as payroll and capital taxes. Because of Quebec's actions to align its sales tax with the GST, the interim measure will not be triggered by the increases in Quebec payroll and capital taxes, which were announced in the province's 1995-96 budget.

The Minister expressed the hope that all provinces would join a harmonized sales tax system. "A harmonized sales tax would be in the best interests of businesses, consumers and both levels of government in Canada," he added.

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For further information:

Jack Jung
Business Income Tax Division
(613) 992-7162