In pursuing a more competitive business tax system in Canada, the federal government is urging provinces with retail sales taxes to harmonize those taxes with the federal goods and services tax.

In the 2009 federal budget, the Conservative government calls provincial retail sales taxes “outdated and inefficient.”

“They impose a significant tax burden on new business investment,” the budget states, “and increase the day-to-day operating costs of Canadian businesses.”

In particular, the government urges British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island to implement a value-added retail sales tax structure harmonized with the GST.

Under the retail sales tax structure that currently exists in these provinces, businesses do not receive a credit for the tax they pay on inputs. Instead, companies incur extra costs that are subsequently embedded in the prices that consumers pay for goods and services.

“Ultimately, this makes our businesses less competitive, reduces employment and lowers the standard of living for Canadians,” the government says.

The harmonization would stimulate new business investment, create jobs and improve Canada’s overall tax competitiveness, according to the government.

Specifically, the budget says the harmonized structure will reduce Canada’s marginal effective tax rate on new business investment by seven percentage points. This rate takes into account federal and provincial corporate tax rates, deductions and credits, along with other taxes paid by corporations.

The government is working toward a goal of having the lowest marginal effective tax rate on new business investment in the G7 by 2010.

“Many Canadian businesses are in a relatively strong position compared to their foreign competitors,” Finance Minister Jim Flaherty said in his budget speech.

While the government does not outline specific plans for action on the harmonization of retail sales tax, it indicates a willingness to work closely with the provinces on the issue.

“The Government remains committed to working with provinces that still have RSTs to identify and evaluate potential areas in which changes to the current framework for federal/provincial harmonization could facilitate provincial movement toward the creation of a fully modernized and efficient consumption tax system in Canada,” the budget states.

The sales tax proposal is part of a larger strategy to establish a higher degree of federal-provincial/territorial collaboration.

“Provinces and territories have a crucial role to play in securing a business tax advantage for Canada,” the budget states.

The government’s other goals in this area include achieving a 25% combined federal/provincial/territorial statutory tax rate by 2012, and the elimination of general capital taxes.

IE