Harmonizing sales tax to reduce trade barriers

In a nutshell

The CBA’s Commodity Tax, Customs, and Trade Section is recommending to the respective Finance Ministers of British Columbia, Manitoba, Saskatchewan, and to the federal Ministers of Finance and Transport and Internal Trade that the three provinces listed replace their provincial sales tax (PST) regimes by each becoming a ‘participating province’ in the GST/HST system. This change would significantly improve competitiveness in these provinces and across Canada and would reduce one of the most significant trade barriers for businesses.

Key details – a complex tax system

“Harmonization is an easy win in terms of reducing complications in Canada's tax system right now,” says Section Chair Jesse Waslowski.

The existence of PST in B.C., Manitoba, Saskatchewan (the ‘PST Provinces’) creates an unnecessary internal trade barrier that does not exist in provinces that only have the goods and services tax and harmonized sales tax (GST/HST).

There are three main reasons why PST is a significant internal trade barrier:

1. Compliance complexity: Canada has multiple, yet distinct, sales tax regimes, forcing businesses to comply with different rules and leading to increased administrative costs and discouraging businesses not located in the PST provinces from providing goods and services to persons residing in the PST provinces. 
    
2. Embedded tax costs: B.C., Manitoba, and Saskatchewan have legacy PST systems that operate on outdated retail sales tax concepts that result in businesses that operate in the PST Provinces having to pay PST on property and services that they consume in the provinces; whereas, businesses with operations in the “participating provinces” generally recover the GST/HST that they pay on property and services that they consume in operating their respective businesses. This distinction results in businesses that are located in the PST provinces being at a competitive disadvantage vis-à-vis businesses with operations in the ‘participating provinces.’ 
    
3. Discouraging investment in Canada’s economy: PST is an upfront tax imposed on capital investment, whereas GST/HST and the QST (Québec sales tax) are value-added taxes (VAT).
   
   “They don't have embedded or hidden tax costs that are imposed on business and passed on to consumers,” Waslowski says. “They are effectively only charged to the consumer, so you can actually see what's being paid, and it doesn't increase the cost of doing business, it reduces it by harmonizing.”
   
   The underlying theory is that a business should not be taxed while investing in itself, and instead, the earned income for value consumed in Canada is, in effect, taxed. Harmonizing the PST with the GST/HST facilitates new ventures and other investments without sacrificing government revenues. 

Why this matters

The patchwork of multiple consumer-facing PST and VAT systems has led to unnecessary complexity and compliance costs.

“Harmonization is actually aligning us with international norms such as those in Europe,” Waslowski says.

“It's important now to grow our economy internally, but also to work with more cooperative trading partners. Harmonizing or standardizing our taxes is an important step in that direction.”

By harmonizing Canada’s PST systems with the GST/HST, Canada can reduce duplication, lower unnecessary costs for businesses, and make life more affordable for Canadians.

Read the submission. 

Get involved: The CBA’s Commodity Tax, Customs and Trade Section continues to examine ways to simplify Canada’s tax landscape and reduce barriers to business across provinces. Members interested in contributing to future discussions on tax harmonization and modernization are encouraged to join the Section or share insights through their local Branch representative.