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Ottawa, April 23, 1996
1996-035

Statement by the Honourable Paul Martin P.C., M.P., Minister of Finance, to the House of Commons on Tabling of a Notice of Ways and Means Motion to Amend the Excise Tax Act, the Income Tax Act and Related Acts

Tuesday, April 23, 1996

Delivered text is official version

We are putting forward today a set of measures that marks significant progress towards the replacement of the GST.

We are announcing the signing of Memoranda of Understanding between the federal government and the governments of Nova Scotia, New Brunswick and Newfoundland and Labrador that are a first step towards an integrated, federal-provincial sales tax.

The province of Quebec is concluding the harmonization process this year. We are committed to working with the remaining provinces to the same end and are confident that, over time, Canada will indeed develop a single sales tax system.

In addition, we are tabling a Notice of Ways and Means Motion proposing over 100 measures to streamline and simplify the operation of Canada's sales tax system. These measures are an essential part of the new architecture of a much improved sales tax system.

Taken together, we believe the components of this package constitute a major advance in responsible sales tax reform. We believe that consumers, taxpayers and business - particularly small business - will benefit. True, this is not perfection. But perfection is not possible in the real world where tax policy has to apply. It is, however, real improvement.

Let me address at the outset - the question not of responsible tax policy, but a broader question, that of responsible government.

In the Red Book, we wrote: "A Liberal Government will replace the GST with a system that generates equivalent revenues, is fairer to consumers and to small business, minimizes disruption to small business, and promotes federal-provincial fiscal co-operation and harmonization."

We believe that today's plan begins that process.

We know that many Canadians believed that we would be able to do more than we are announcing today. Indeed, we had hoped we would be able to do more.

But there is something Canadians deserve above all else. And that is government that is responsible in its management of the economy and honest in what it does.

And so, let me be direct with this House, and with Canadians.

During the election campaign, we were right to criticize the GST. It created overlap and duplication among governments. It was costing small business time, energy and money - the price paid for having to keep two sets of books, track two sets of transactions and deal with two tax collectors.

We were right to say all that was wrong. It still is. But we were mistaken to have believed that, once it was anchored in place, a completely different alternative would be within reach, responsibly. It has not been.

The honest truth is that for two and a half years we looked at virtually every conceivable alternative. Some were not possible or desirable because of their economic impact, others because of the nature of our federation.

What we have arrived at is not the best alternative conceivable. It is the best alternative possible. And it is in keeping with our Red Book commitment.

We could have dressed up our announcement today. Pretended that it was more than it is.

Today's announcement begins the process of replacing the GST. It does not complete it.

We could have cynically claimed that this announcement was the panacea. That as of today, the GST was dead, buried, and scrapped.

We know not being able to say this today, means that many Canadians will be disappointed. We understand that disappointment. We share it

And we want Canadians to understand fully the efforts that we have made, going back more than two years, in order to avoid that disappointment.

The Finance Committee of the House looked at this issue, beginning immediately after the election. It heard nearly 500 witnesses and received more than 700 briefs - from consumers, from experts, from business. The Committee looked at 20 alternatives and it found all of them wanting. It concluded, as have we, that the best route to replace the GST was a simplified, integrated federal-provincial value-added tax.

Concurrent with the work of that Committee and thereafter, the government has worked without rest on this file.

As a government, we evaluated every proposal brought to our attention, every option open to us. We considered other types of taxes. We looked at different combinations of taxes. We looked at options apart from taxation. We looked at everything.

Some options might have made cynical, short-term political sense. But none made good policy sense.

Let me explain by beginning with some basics.

An inescapable fact is that the GST brings in $18 billion a year. That's 13 per cent of total federal revenues.

In the Red Book, we made it very clear we could not give up $18 billion in revenue. Nor can we cut spending by that amount to compensate for the loss that would be entailed. For the purpose of spending cuts must first be to bring the deficit down. Therefore, from the beginning, our focus was on finding alternatives to the GST - either alternative sources of revenue or building on taxes that already exist.

In terms of alternative taxes, we looked at twenty options.

Among them were a payroll tax, a wealth transfer tax, a national retail sales tax, and a wholesale tax. None of them worked.

Let's look at three examples: we considered the business transfer tax - or BTT.

The BTT has been proposed before but it has never been tried anywhere in the world. The uncertainty for business and the cost of implementing a totally new system is not a risk that can be taken lightly.

We looked at a Personal Expenditure Tax, where tax is paid on the difference between an individual's total income and his or her total savings for the year.

However, there are serious disadvantages with this option. It would be very intrusive. It would be much more complex for taxpayers - in terms of record-keeping and compliance.

We looked at what is called a turnover or transaction tax in which tax is charged at each and every stage in the production and distribution process - through a lower levy on a firm's sales. Unlike the GST, there are no rebates.

The problem: the same as with the Retail Sales Tax - in manufacturing, large companies can get around the tax by making products in-house. Small business can not.

And in the export sector, Canadian business would be dealt a blow. Why? Because, at each stage of the production and distribution process, Canadian components would be taxed and the tax would be embedded in the price of our exports. Who would benefit from that? Foreign competitors, not Canadian producers.

These are but a few of the alternatives we looked at.

We concluded none was satisfactory. Either they came no where near to raising the revenue we need - or they failed to meet one or more of the tests of responsible taxation - of fairness, of simplicity, and of economic efficiency.

Finally, we looked at making-up the revenue that would be lost by replacing the GST through increasing other taxes that already exist.

We looked at an across-the-board approach. We looked at more targeted approaches. We looked at increasing corporate income taxes and excise taxes.

And it was clear that no matter what we did, under any conceivable scenario, unduly large increases in personal income taxes would be required and that was unacceptable.

Well, that very briefly summarizes what was a very lengthy search for a system and a solution completely different from the GST.

The results of our search were not what we had hoped, but they did make very clear the direction we should take.

While we concluded that there were no alternatives today to a value-added tax, we also concluded that there is an alternative to the GST such as it now is - and that is a better value-added tax that is harmonized.

Governments need the revenue the current tax system brings in. But Canadians don't need the headaches that the current tax system causes.

The goal we arrived at is a simplified, integrated, federal-provincial value-added tax. The process we have embarked on is to put the framework in place now, so that provinces can join in when their own individual priorities make that possible, that is, when they are ready.

With today's announcement, we are now on the way to having a single, federal-provincial sales tax in four provinces. Other provinces are waiting to see how the new system works before they join in. In the end, we are confident that Canada will eventually have a single sales tax system. And so, we will continue to work with individual provinces as their circumstances permit. In the meantime, unanimity need not and should not stand in the way.

Let me describe the improvements we believe will flow from the approach being put forward today.

First, an integrated federal-provincial value-added tax reduces the burden on business, particularly small business, created by the current system. It means there would no longer be separate federal and provincial sales taxes, of different types, operating on different bases with all the complexity and inefficiency that entails.

Canada is the only developed economy in the world that tolerates two completely different sales taxes operating at the same cash register. No one else puts up with it. And it's clear why. Patchwork sales tax systems are second-rate systems - particularly in an economy that is increasingly integrated domestically and globally.

Under an integrated approach, that will change. There will be one sales tax, not two. One tax base, not two. One tax rate in a province, not two. And one sales tax administration, not two.

What does that mean? It means life will be simpler. Take for example, the case of a store that sells washing machines.

Today, the store has the burden of dealing with two entirely separate sales tax systems. The retailer must first total up any sales made to exempt purchasers and keep a separate record system to prove that such sales were legitimately exempt from provincial sales tax.

Then at the end of each month, the store must calculate the amount of provincial sales tax collected and remit it to the provincial government.

At the end of each quarter, along with the provincial sales tax calculation, the retailer must also calculate the amount of federal sales tax collected, deduct the amount of tax paid on all purchases, and remit the difference to the federal government.

Not only that, but throughout the year, the retailer must deal with two separate bureaucracies if he or she has any sales tax questions, and faces the possibility at any time of having to deal with two separate tax auditors.

No wonder business, and small business in particular, is demanding that governments do something to address their sales tax compliance burden. Well we are doing something!

All this will change under the new system. It will be better for consumers. It will mean a reduced paper burden for small business. Less time and money tied up unproductively. One tax form. One process. One system.

The Canadian Institute of Chartered Accountants has estimated that a harmonized national sales tax system could save Canadian businesses as much as $700 million per year.

And because there will only be one tax collector, that same analysis suggests that the provinces could save an additional $100 million annually on their administration once such a system is fully in place.

Canadians want an end to overlap and duplication between governments. On sales tax, this integrated system would end it once and for all.

Furthermore, a harmonized value-added tax will be economically more efficient.

Not only will businesses save money and time - but their products should become more competitive.

At present, businesses throughout Canada pay provincial sales tax on a broad range of the things they themselves buy to make products or to keep their business running. This increases their costs and, in turn, leads to higher prices for their goods. As a result, Canadian goods competing with imports at home and exports abroad have provincial sales tax embedded in their price. In fact, because the tax becomes embedded throughout the production and distribution chain, the prices of our goods are often inflated not by one, but by many layers of provincial retail sales tax.

Under this proposal, that competitive disadvantage would end. For instance, exports are the engine of our economy. As a result of this reform, Canadian business will be even more successful in markets abroad. And this in turn means jobs for Canadians at home.

Consumers should also see benefits from the new system.

Let me address directly the contention that a harmonized value-added tax shifts the tax burden from business to consumers. Let me also address the contention that consumers will lose because a broader range of goods, in particular, services is taxed under this approach.

These arguments are simply wrong.

The fact is that today, as mentioned, businesses are taxed by the provinces on the items they must buy in order to make their products, deliver their services and keep their business going.

Anyone who believes that business in this country does not pass on these provincial sales taxes to the consumer is simply naive.

If business pays a tax up front - it is consumers who pay for it in the end. The tax is embedded in the price. This is true for all products and services produced in Canada whether or not they are taxed at the final point of sale.

For example, some may believe they do not pay tax on a haircut where there is none directly charged to them by their barber or hairdresser. That is not the case. The price does include tax - the tax the barber or hairdresser pays on their supplies, from their scissors to their salon equipment, to the shampoo they use. When they decide what price to charge, they pass these costs on to their clients.

Under an integrated value-added tax system, that changes completely. Provincial retail sales taxes will no longer be paid by businesses during the production and distribution process.

Therefore, for goods and services not previously taxed, prices will go up by less than the full extent of the provincial tax. That is because the embedded taxes will be removed.

And for products and services that are presently taxed, their prices should fall. This would be the case even if the overall tax rate did not come down. Why? Again, because the embedded tax will disappear - lowering prices.

Furthermore, there's another advantage to broadening the base. When you don't tax services, you distort the economy. You're imposing a burden on some businesses, but not on others.

But a broader tax spreads the burden fairly to all sectors and to all consumers. For instance, of significance in light of today's announcement, for the harmonizing provinces in the Atlantic, the broader base is one of the factors that allows a sharp decline in the overall sales tax rate.

Finally, one of the most frustrating aspects of the GST is the fact that without carrying around a calculator, consumers often do not know what things cost before they get to the check-out counter. Every time a Canadian buys a candy bar or a pair of socks, the GST is not on the sticker, not on the tag - but added as a rude awakening at the cash register.

Therefore, the agreements that will be arrived at pursuant to the Memoranda of Understanding we are announcing today will put an end to that practice. In the three Atlantic provinces that are harmonizing, beginning April 1, 1997, the price will include the tax. The price people see will be the price people pay.

However, the new tax will also be transparent. Vendors will be able to show the tax on their bills, and we will be consulting with businesses on how best to do this.

Today's announcement entails major structural change. It represents an important overhaul of the sales tax system.

This government has consistently acted on the principle that people and governments need to be able to plan and adjust to structural change, and where required, we have been prepared to provide help to those who face adjustment costs up front.

For example, payments were made to provinces to address revenue losses they incurred under the major tax reform in 1972.

And adjustment assistance was provided in each and every one of our budgets. For example, last year we provided resources to facilitate the adjustment flowing from elimination of subsidies under the Western Grain Transportation Act to the Western provinces, as we did with the Atlantic freight subsidies to Quebec and the Atlantic provinces.

Today, we are following the same precedents.

An adjustment framework will be put in place to share the cost with those provinces which would experience revenue losses from harmonization in excess of 5 per cent of their current retail sales tax revenue.

In addition to the three provinces previously mentioned, this would also include Prince Edward Island, Manitoba and Saskatchewan. It would not include BC, Alberta and Ontario, whose revenues would not be reduced sufficiently to trigger compensation under the formula, nor Quebec, for the same reason, either today or in 1990 at the time it signed the MOU on harmonization with the federal government.

Under the set formula, the federal government will provide 100 per cent of the balance of revenue losses in years one and two, 50 per cent in year three, and 25 per cent in year four.

The formula has been applied consistently to each province that has decided to harmonize and will remain open to the other provinces for the foreseeable future.

Given the benefits that will flow from harmonization, we believe the total cost to the federal government - about $960 million for the three participating provinces spread over four years - is a responsible and reasonable investment.

The federal and provincial governments will be sharing about equally in the adjustment costs over four years. The assistance will end after year four, by which time the provinces will have had adequate time to adjust.

We must emphasize that this adjustment assistance will not jeopardize our deficit targets. They are secure.

Finally, the measures being announced today include a package of over 100 changes designed to streamline and simplify the operation of Canada's value-added tax system. These improvements result from extensive consultations with businesses, particularly small business, consumer associations and other groups over the past two years.

Some of these are technical and sector-specific. Many will have a positive impact on those they affect.

For example, as part of our commitment to assist charities and non-profit organizations, new rules will be put in place. As a result, about 10,000 charities will no longer be required to register for and administer the GST.

The provisions that remove the tax from medical devices used by persons with disabilities will be broadened, and clarified.

More equipment and supplies for Canada's farmers will be made tax-free.

The rules for employee benefits are being simplified - an area of the sales tax that has been the focus of small business anger from day one.

In addition, we will be streamlining accounting, interest, penalty, administration and enforcement provisions across all federal tax laws - something that will go a long way to simplify the system for small business.

These are significant changes that will be of immediate importance to those concerned. However, let me point out one thing that isn't being changed. The credit provided to low-income Canadians and the rebates provided to municipalities, universities, schools, hospitals, qualifying charities and non-profit organizations, remain intact.

The provinces joining us today clearly recognize the gains that flow from this reform: The fact is that in a region where the need to secure economic growth is as acute as anywhere, tax rationalization and simplification is probably one of the most beneficial job creation initiatives that could be taken.

The benefits of acting in concert, so that reform in each province is reinforced by parallel change in the others, maximizes the improvement for Atlantic enterprise and consumers.

The benefits of a more efficient Atlantic economy - means companies and workers will be able to compete more successfully in world markets.

The benefits of less overlap and duplication means reduced administrative cost for both governments and small business. For example, small business with less than $30,000 of taxable sales, will no longer have to register for either federal or provincial sales tax.

And finally, the benefits that will result from a lower sales tax rate. When this reform is fully implemented, the official tax rate will be 3 per cent lower in Nova Scotia and New Brunswick, and 4 per cent lower in Newfoundland and Labrador.

The real tax reduction will be even greater. Because the new system will eliminate "tax on tax", the effective rate reduction will in fact be almost 4 per cent in Nova Scotia and New Brunswick, and almost 5 per cent in Newfoundland and Labrador.

The announcements today are not the end of the process. They are a stage.

As part of moving towards an integrated federal-provincial value-added tax, discussions with the three provinces will now take place to turn the Memoranda of Understanding into final detailed agreements - with a goal of implementation on April 1 of next year.

At the same time, with Quebec's harmonization process proceeding, we are very much open to continued discussions with the remaining governments to move forward towards integration on the basis that has now been established.

In summary, while the strategy we are proposing is not the best solution in an ideal world, we believe it is the best solution in the real world.

The alternative would have been to embrace some option that would have been superficially attractive but, in the end, would have been more complex for Canadians, would have reduced the capacity of government to provide needed services and would have thrown the clean up of the nation's finances severely off track. This we were not prepared to do.

We are not pretending that our proposals are more than they are. They will have to stand on their own merits. We are not making changes for change's sake. We are making changes that make sense.

That's what we were elected to do - to govern, to make responsible choices. And that's what we are doing today.