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Governments finance the goods and services that they provide in various ways, including through taxing, investing and borrowing activities.

The first of these activities – taxation – can take several forms. In Canada, sources of funds that help to finance federal initiatives include consumption taxes, personal income taxes, corporate income taxes and social security contributions.

This HillNote provides information about the revenue, rates and rationale relating to federal consumption taxes in Canada. Other HillNotes discuss personal income taxes, corporate income taxes and social security contributions.

Revenue

Figure 1 shows that, in 2019–2020, consumption tax revenue totalled $56.5 billion and represented 13.9% of total federal tax revenue and social security contributions. Of that amount, total federal consumption tax revenue comprised $37.4 billion in Goods and Services Tax/Harmonized Sales Tax (GST/HST) revenue, $5.7 billion in energy taxes, $4.9 billion in customs import duties, $6.0 billion in other excise taxes and duties, and $2.7 billion in fuel charges.

Figure 1 – Federal Tax Revenue and Social Security Contributions, 2019–2020 ($ billions)

Notes: “Social security contributions” are Canada Pension Plan and Quebec Pension Plan (CPP and QPP) contributions, and Employment Insurance premiums. The QPP operates exclusively in Quebec, with the CPP operating in the rest of Canada. For the purposes of this figure, QPP contributions are combined with contributions to the CPP, giving rise to the term “federal.”
“Consumption taxes” are the Goods and Services Tax, the Harmonized Sales Tax, energy taxes, customs import duties, other excise taxes and duties, and fuel charges.
“Other taxes and revenue” are non-resident income taxes, revenue from federal enterprise Crown corporations and similar entities, net foreign exchange revenue and revenue from other programs.
Sources: Figure prepared by Nathalie Pothier, Library of Parliament using data obtained from: Statistics Canada, “Table 10-10-0015-01: Statement of government operations and balance sheet, government finance statistics (x1,000,000),” Database, accessed on 16 February 2021 (for CPP and QPP values); and Receiver General for Canada, Public Accounts of Canada 2020, Volume 1, 2020.

“General consumption taxes” – such as Canada’s GST/HST – are applied on a broad range of goods and services. Figure 2 shows that, in 2018, such taxes represented 14.2% of total tax revenue and social security contributions collected by all levels of government in Canada. In that year, the United States’ percentage was 8.2%, which was lower than the average for Organisation for Economic Co-operation and Development (OECD) countries, at 21.2%.

Figure 2 – General Consumption Tax Revenue as a Percentage of Total Tax Revenue and Social Security Contributions, All Levels of Government, Various Jurisdictions and Years

Source: Figure prepared by Nathalie Pothier, Library of Parliament using data obtained from Organisation for Economic Co-operation and Development (OECD), “Revenue Statistics – OECD countries: Comparative tables,” Database, accessed on 25 May 2021.

The OECD’s Consumption Tax Trends 2020 indicates that value-added tax revenue is the largest source of consumption tax revenue in OECD countries, and was responsible for 20.4% of these countries’ total tax revenue in 2018. As of 3 December 2020, the United States was the only OECD country that did not apply a value-added tax, although some U.S. states have a retail sales tax.

“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 2018, revenue from such taxes was lower in Canada than the average for OECD countries but was higher than in the United States. Specifically, the percentages were 7.7%, 7.3% and 9.6% for Canada, the United States and the average for OECD countries, respectively.

Figure 3 – Specific Consumption Tax Revenue as a Percentage of Total Tax Revenue and Social Security Contributions, All Levels of Government, Various Jurisdictions and Years

Source: Figure prepared by Nathalie Pothier, Library of Parliament using data obtained from OECD, “Revenue Statistics – OECD countries: Comparative tables,” Database, accessed on 9 June 2021.

Canada’s federal government is applying a carbon pricing system – essentially, a fuel charge that is considered a tax and/or an output-based pricing system – in provinces and territories that are not aligned with the federal benchmark. Originally established at a rate of $20 per tonne of carbon dioxide equivalent, the fuel charge rate has increased by $10 per tonne annually and will reach $50 per tonne in 2022. In most cases, the fuel charge is payable by registered distributors of fuels.

Rates

The GST, which is a value-added tax, was implemented in 1991 at a rate of 7%; the rate was reduced to 6% and then to 5% effective on 1 July 2006 and 1 January 2008, respectively. It is collected at every stage of the production process and is ultimately paid by the final customer.

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, on or after 1 October 2016

Source: Table prepared by Nathalie Pothier, Library of Parliament using data obtained from Canada Revenue Agency, GST/HST provincial rates table, 25 May 2021.

Businesses generally remit the difference between the GST/HST they collect from customers and the GST/HST they pay on purchased inputs. The rate of tax applied depends on factors that include the type of goods or services and specific situations, such as e-commerce.

For example, some goods and services – such as basic groceries – are zero-rated: businesses do not collect the GST/HST, although they can claim the GST/HST paid on their purchased inputs as a tax credit. Specific goods and services – such as health care – are GST/HST-exempt: businesses do not have to collect the GST/HST, and 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.

Rationale

Most consumption taxes have a limited adverse impact on economic growth. A consumption tax encourages individuals and firms to spend – or “consume” – less, making them able to invest more, all other factors remaining the same. For example, investments can be made in the construction of productive assets, which can increase future production and economic growth.

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 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, they can be applied on products, such as cigarettes and carbon emissions, that have a societal cost. Applying a tax that is equal in value to that cost leads consumers to bear the full cost of their consumption. However, societal costs can be difficult to quantify, and 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; these goods include 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 the former might induce some Canadians to spend in the latter, resulting in less revenue for Canadian governments.

Additional Resources

Canada Revenue Agency, GST/HST for digital economy businesses: Overview, 7 May 2021.

Canada Revenue Agency, GST/HST for Businesses, 7 May 2021.

Canada Revenue Agency, GST/HST Statistics Tables (2012 to 2016 calendar years), 11 February 2020.

Natural Resources Canada, Fuel Consumption Taxes in Canada, 7 February 2020.

Authors: Simon Richards and Brett Stuckey, Library of Parliament

Categories: Economics and finance

Tags: Goods and Services Tax, Harmonized Sales Tax, Taxation