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Ottawa, April 23, 1996
1996-034

Federal Government, Three Provinces Reach Sales Tax Harmonization Agreements

Related documents:

• Memorandum of Understanding on Sales Tax Harmonization.
• Amendments to the Excise Tax Act, the Income Tax Act and related acts: Notice of Ways and Means Motion, Draft Regulations and Explanatory Notes (Adobe Acrobat format - 894,935 bytes).
• Adjustment Assistance.
• Implementing a Harmonized Value-Added Sales Tax: Questions and Answers.
• Measures to Simplify and Improve the Fairness of the Federal Sales Tax.
• Towards Replacing the GST: technical document.

Finance Minister Paul Martin and Revenue Minister Jane Stewart today announced the signing of Memoranda of Understanding between the federal government and the governments of Nova Scotia, New Brunswick and Newfoundland and Labrador outlining the process to harmonize the federal and provincial sales taxes.

This will bring to four the number of provinces with harmonized sales tax systems. Quebec's sales tax will be fully harmonized in November 1996.

Minister Martin also tabled a Notice of Ways and Means Motion proposing over 100 measures to streamline and simplify the operation of Canada's value-added tax system.

Together with the streamlining measures, harmonization will mean a simpler tax system for both consumers and business.

For consumers, it will mean the price will include the tax -- the price consumers see is the one they will pay at the cash register. To ensure transparency, the tax will be clearly shown on the sales slip. The government will consult with business on how best to do this.

For business, harmonization will mean lower costs and less paperwork as there will be only one administrative system, one tax, one base and one rate. This will help business to be more competitive and, as a result, enhance job creation in Atlantic Canada.

Harmonization will also help lower prices through a reduction in the cost of doing business. That's because provincial retail sales taxes are currently levied on a broad range of business inputs -- the things businesses buy to make their products and run their operations. Because the hidden tax becomes embedded throughout the production and distribution chain, prices are inflated by several layers of provincial sales tax. Prices are pushed even higher by the cost to business of complying with two separate sales tax systems. The new harmonized value-added tax will eliminate the hidden tax and reduce compliance costs for business.

The Memoranda of Understanding commit the governments to conclude a final agreement in time to implement the harmonized tax by April 1, 1997. Elements of the final agreement will include:

• the replacement of the current federal-provincial sales tax systems with one harmonized value-added tax and one sales tax base;
• a combined federal-provincial rate of 15 per cent in the three participating provinces, a substantial reduction from current rates;
• a single administration of both federal and provincial sales taxes; and,
• tax-included pricing so that consumers will know in advance the exact price they will pay. For transparency, the tax will be shown separately on the sales slip.

Both Ministers Martin and Stewart made it clear that the federal government will continue to seek agreement with other provinces interested in harmonization.

Adjustment assistance is being offered to qualifying provinces based on a set formula that applies equally to all provinces harmonizing their sales taxes. The federal and provincial governments will be sharing about equally in the transition costs over a four-year period.

The assistance will help offset the cost of provincial revenue losses in excess of 5% of their retail sales tax revenues. For those provinces which qualify -- including the three provinces signing Memoranda of Understanding -- the adjustment assistance will cover 100 per cent of the balance in years one and two, 50 per cent in year three, and 25 per cent in year four. The total adjustment assistance under the harmonization agreements with Nova Scotia, New Brunswick and Newfoundland and Labrador is $961 million over four years.

The four-year period will give provinces time to adjust to the substantial structural changes that will take place. A similar approach to adjustment assistance has been taken by the government with other structural changes initiated over the past few years.

The proposed streamlining and simplification measures include more than 100 changes that result from extensive consultations with businesses and other groups over the past two years. The government will continue to consult with interested groups to examine ways to make the sales tax system more efficient.

Key changes include simpler rules that will reduce the number of charities and non-profit organizations required to register and account for the tax. Provisions that remove the tax from medical devices used by persons with disabilities have been broadened and clarified. The treatment of used goods will also be simplified. For example, tax will be paid only on the difference between the price of a new car and the trade-in value of a used vehicle.

The competitiveness of Canadian businesses will be enhanced through a number of improvements to the tax treatment of international transactions, and the visitor's accommodation rebate will be broadened to make Canada a more attractive place to do business. Among other changes, the rules for accounting for the tax on employee benefits will be simplified and the range of tax-free agricultural equipment and supplies will be expanded.

Additional information on harmonization, transitional assistance and the simplification and streamlining measures is attached. The legislative proposals on simplification and streamlining are also described more fully in the technical document, Towards Replacing the GST. References to "Announcement Date" in the technical document and in the proposed legislation should be read as references to today's date.

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