This was taken from my post The Alberta Advantage: Implementing A Provincial Sales Tax
In 1917, to finance World War I, the federal government introduced the Income Tax War Act. This was meant as a temporary measure and was being pitched to the general public as something that would end after the war. Thomas White, the finance minister at the time, stated, “I have placed no time limit upon this measure . . . a year or two after the war is over, the measure should be reviewed.[3]” Even at the time, many politicians saw this as something that would be around past the war, raising concern that the inclusion of ‘war’ in the title of the Act may be deceiving as the tax would likely be a permanent fixture in taxation policy.[4] The Income Tax War Act eventually morphed into the 1985 Income Tax Act and will have a fixed place in Canadian taxation moving forward.
The other temporary tax that never went away, and one of the topics of this paper, is the GST or goods-and-services tax. At its conception it was designed to pay for the spending that occurred during World War I. It was a one present federal tax applied to all transactions an item/article/object would pass through, excluding the final, retail sale. Presumably, this was done to ‘hide’ the tax from consumers who would see the tax every time they bought something and may not want to re-elect the politicians who put it in place.[5] This tax system put many firms and businesses without integrated distribution systems at a disadvantage to their competitors with integrated systems as they were being taxed at a higher rate. The federal government did attempt to modify the system to accommodate firms, but this made the system overly complicated and led to a total overhaul in 1924. On January 1st, 1924, the government implemented a MST. The MST was disliked by most groups, ranging from manufactures, labour unions, and farmers associations and was seen as being unequitable and regressively shifting the burden to the wrong parties.[6] To the government of the days dismay, the MST was set to be gradually eliminated with the goal of ending it in 1927. Despite the governments best effort to end the tax, in 1936 the MST was up to six percent as a way of lessening the effects of the Great Depression. The Great Depression and the following Would War II normalized taxation in Canada and allowed for government to expand taxation programs. By 1951 the MST rate was at ten percent, and the government began justifying its need for tax dollars by earmarking revenues for old age pension funds. At this point the MST and other taxes were relatively intrenched in Canadian society and economics.[7]
In 1989, then Prime Minister Brian Mulroney alongside then Finance Minister Michael Wilson proposed to replace the dated MST with a new GST with a rate of nine percent. At the time the MST was making it difficult for firms in Canada to compete and export competitively in international markets. The Mulroney government claimed that the GST would alleviate some of that strain and make Canadian businesses more competitive abroad. Despite all of this, the GST was widely hated and according to a news article at the time “the most unpopular levy since the days of the Boston Tea Party.[8]” In November 1989, the Standing Committee on Finance supported the Mulroney government’s bid to replace the MST with the GST. Instead of a levy of nine percent the committee recommend the government set the tax at seven percent. The decreased rate did not make it look any more appealing and in order to get the bill passed Mulroney had to use his executive powers as Prime Minister and appoint an additional senator to the senate. On January 1st, 1990, the GST was put into place despite backlash and mass disapproval by the opposition, businesses, and the public. During all this the government was also trying to get provinces (excluding Alberta) onboard and harmonize their existing PSTs with the governments new GST. This was not successful as many of the provinces saw this as the federal government overextending its powers.[9] It has also been proposed that many provincial governments did not want to associate with the federal government due to the wide dislike of the GST in fear of not being re-elected.[10] Quebec was the only province to sign up and in August of 1990 Quebec began administering GST alongside a Quebec Sales Tax (QST). Five other provinces did eventually sign up for a HST. Newfoundland and Labrador, New Brunswick and Nova Scotia implemented a HST in 1997, followed by Ontario and Prince Edward Island in 2010. As promised by Stephan Harper and the Conservative Party of Canada’s election platform, the GST was lowered to six percent in 2006 and was lowered once again in 2008 to the current rate of five percent.
[1] Carter McCormack and Guy Gellatly, “This Presentation Provides Highlights on the Economic Impacts https://www150.statcan.gc.ca/n1/pub/11-631-x/11-631-x2021002-eng.htm.
[2] Ibid
[3] “History of Taxes,” Canada.ca (Governemnt of Canada / Gouvernement du Canada, January 31, 2019), https://www.canada.ca/en/revenue-agency/services/tax/individuals/educational-programs/learning-about-taxes/learning-material/module-1-understanding-taxes/history-taxes.html.
[4] Robert Easton Burns, The Income War Tax Act, 1917: A Digest (Ontario, 1917), https://wartimecanada.ca/sites/default/files/documents/IncomeWarTax.1917.pdf.
[5] “Canadian Sales Tax Reform,” Tax Executive, May 25, 2016, http://taxexecutive.org/canadian-sales-tax-reform/.
[6] John F. Due, “Canada’s Experience with the Manufacturers’ Sales Tax,” The Journal of Business 27, no. 3 (July 1954): p. 243, https://doi.org/10.1086/294043.
[7] Ibid
[8] Peter C. Newman, “Why Mulroney Is Obsessed by the GST: Maclean’s: October 8, 1990,” Maclean’s |The Complete Archive (Maclean’s, October 8, 1990), https://archive.macleans.ca/article/1990/10/8/why-mulroney-is-obsessed-by-the-gst.
[9] Richard Domingue and Jean Soucy, “THE GOODS AND SERVICES TAX: 10 YEARS LATER,” The goods and services tax: 10 years later, June 15, 2000, https://publications.gc.ca/Collection-R/LoPBdP/BP/prb0003-e.htm.
[10] Ibid
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