(Disponible en français : Les taxes à la consommation au Canada : recettes, taux et justification)
Governments can finance the goods and services provided to citizens through various means, including through taxing, investing and borrowing. The first – taxation – can take several forms.
In Canada, federally funded or federally sponsored initiatives are mainly financed by personal income taxes, corporate income taxes, consumption taxes and social security contributions.
This HillNote analyzes the revenue, rates and rationale relating to consumption taxes. Other HillNotes examine these factors for personal income taxes, corporate income taxes and social security contributions.
As shown in Figure 1, in 2015–2016, federal revenue from consumption taxes was the third largest contributor to federal tax revenue and social security contributions, at $49.8 billion, or 14.1%. This percentage ranged from 13.9% to 23.6% between 1984–1985 and 2015–2016. In 2015–2016, total federal consumption tax revenue consisted of $33.0 billion in Goods and Services Tax/Harmonized Sales Tax (GST/HST) revenue, $11.5 billion in revenue from excise taxes and duties other than customs duties, and $5.4 billion in revenue from customs duties.
Figure 1 – Federal Tax Revenues and Social Security Contributions, 2015–2016 ($ billions)
Notes: “Social security contributions” are Canada Pension Plan and Quebec Pension Plan (CPP and QPP) contributions, and Employment Insurance premiums. While the QPP operates exclusively in Quebec, QPP contributions are combined with contributions to the CPP, which operates in the rest of Canada, thereby giving rise to the term “federal.” “Corporate income taxes” includes the capital tax on financial institutions. “Other taxes and revenues” are non-resident income taxes, revenue from federal Crown corporations, net foreign exchange revenue and revenue from other programs.
Sources: Figure prepared by the authors using data obtained from: Statistics Canada, “Table 385–0032: Government finance statistics, statement of government operations and balance sheet, quarterly,” CANSIM (database), accessed 31 January 2017; and Receiver General for Canada, Public Accounts of Canada 2016, Volume 1, 2016.
“General consumption taxes” – such as Canada’s GST/HST – are applied on a broad range of goods and services.
Figure 2 shows that, in 2014, general consumption taxes represented 13.8% of total tax revenue and social security contributions collected by all levels of government in Canada. In that year, this percentage was 7.9% for the United States, and the average for Organisation for Economic Co-operation and Development (OECD) countries was 20.7%.
Figure 2 – General Consumption Tax Revenue as a Percentage of Total Tax Revenue and Social Security Contributions, All Levels of Government, Various Countries and Years
Source: Figure prepared by the authors using data obtained from: Organisation for Economic Co‑operation and Development, “Revenue Statistics – OECD Countries: Comparative tables,” OECD.Stat (database), accessed 13 February 2017.
“Specific consumption taxes” – which include various excise taxes, excise duties and customs duties – are applied on particular goods and services. Figure 3 illustrates that, as a percentage of total tax revenue and social security contributions collected by all levels of government in 2014, revenue from specific consumption taxes was lower in Canada than the average for OECD countries.
In that year, the percentage for Canada was 7.8%, and was 6.8% for the United States; the average for OECD countries was 9.6%.
Figure 3 – Specific Consumption Tax Revenue as a Percentage of Total Tax Revenue and Social Security Contributions, All Levels of Government, Various Countries and Years
Source: Figure prepared by the authors using data obtained from: Organisation for Economic Co‑operation and Development, “Revenue Statistics – OECD countries: Comparative tables,” OECD.Stat (database), accessed 13 February 2017.
In Canada and most other OECD countries, general consumption taxes account for an increasingly large share of total tax revenue and social security contributions. Canada and all other OECD countries except the United States have adopted value-added taxes.
The OECD publication Consumption Tax Trends 2016 indicates that, as a percentage of total tax revenue and social security contributions, value-added tax revenue in OECD countries grew significantly between 1965 and 2000. Since then, it has stabilized. In contrast, the contribution made by specific consumption taxes to total tax revenue and social security contributions has declined.
Today, excise taxes, as well as customs and import duties, account for a smaller percentage of total tax revenue and social security contributions in OECD countries than in 1965. Trade liberalization has resulted in tariff rates that are now lower than they were in 1965, with implications for customs and import duties.
The GST, which is a value-added tax, was implemented in 1991 at a rate of 7%; this rate was reduced to 6% on 1 July 2006 and to 5% on 1 January 2008. It is collected at every stage of the production process, and is ultimately paid by the final customer.
Businesses generally remit the difference between the GST/HST they collect from customers and the GST/HST they pay on purchased inputs.
As shown in Table 1, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador currently have an HST that is a combination of the GST rate and a separate rate set by the province. Except for Alberta, which has no provincial sales tax (PST), the remaining provinces apply the GST and a PST separately. The three territories apply the GST only.
Table 1 – GST/HST Rates, by Province/Territory, February 2017
|Province||GST/HST Rate (%)|
|Prince Edward Island||15|
|Newfoundland and Labrador||15|
Source: Table prepared by the authors using data obtained from: Canada Revenue Agency, GST/HST Rates, 28 September 2016.
For purposes of the GST/HST, some goods and services – such as basic groceries – are zero-rated: businesses do not collect the GST/HST, and they can claim the GST/HST paid on their purchased inputs as a tax credit.
Some goods and services, such as health care services, are GST/HST-exempt: businesses do not have to collect the GST/HST, but they cannot claim the GST/HST paid on their purchased inputs.
Municipalities, hospitals, universities, colleges, and elementary and secondary schools are entitled to a full or partial rebate of the GST/HST they pay on certain purchased inputs.
In addition to the GST/HST, federal excise taxes are applied on fuel-inefficient vehicles, automobile air conditioners and certain petroleum products. When these goods are made in Canada, such taxes are payable when the goods are delivered to the buyer; otherwise, they are payable when they are imported.
Federal excise duties are applied on Canadian beer, spirits, wine and tobacco products at the point of manufacturing.
Finally, the federal government imposes customs duties on a range of imported goods. Tariff rates vary according to the good and the country from which it originates.
One benefit of most consumption taxes is their limited adverse impact on economic growth. When the income of individuals and businesses exceeds the amount of their consumption, the difference can be invested. For example, investments can be made in the construction of productive assets, which can increase future production and economic growth. A consumption tax encourages individuals and firms to consume less, which means that they are able to invest more, all other factors remaining the same.
Some believe that general consumption taxes, which many economists feel should be applied as broadly as possible, are regressive because they have a greater effect on individuals with low incomes; these individuals typically spend – or “consume” – a greater share of their income than do people with higher incomes.
In Canada, the regressive effects of the GST/HST are mitigated somewhat by the zero-rating or exemption of some products, such as basic groceries, and by the refundable GST/HST tax credit that can be claimed by low-income Canadian taxpayers.
While economists usually prefer general consumption taxes to specific consumption taxes, the latter may have some benefits. For example, specific consumption taxes can be applied on products that impose costs on society, such as cigarettes. Paying a tax that is equal in value to societal costs leads consumers to bear the full costs of their consumption. However, because societal costs can be difficult to quantify, determining appropriate tax rates can be challenging.
Specific consumption taxes can also be a reliable revenue source for governments when they are applied on goods for which demand is relatively unresponsive to price changes, such as cigarettes, alcohol and fuel. That said, if specific consumption taxes are high, transactions in the underground economy may increase.
Finally, given Canada’s proximity to the United States, high consumption taxes in Canada might induce some individuals to spend in the United States, resulting in lost revenue for Canadian governments.
Canada Revenue Agency, GST/HST for businesses, 8 December 2016.
Canada Revenue Agency, GST/HST Statistics Tables (2009 to 2013 calendar years), 13 October 2016.
Natural Resources Canada, Fuel Consumption Taxes in Canada, 11 November 2016.
Authors: Dylan Gowans and Simon Richards, Library of Parliament