MORE ON THE  PST

Overview

Currently, five of Canada’s provinces levy a stand-alone provincial sales tax (“PST”).  These provinces are British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island.  Among the other provinces, Quebec has a provincial sales tax system (the “QST”) that is partially harmonized with the GST, while Nova Scotia, New Brunswick and Newfoundland & Labrador have the aforementioned fully harmonized HST system.

Alberta and Canada’s three territories do not presently employ retail sales taxing systems.

Contrasting the GST with the PST Systems

In many respects, the federal and provincial systems are like night and day.  If generalizations can be drawn between the two, there are two fundamental differences.

Differing Tax Bases

The most obvious is the differing tax bases.  While the GST is an all-encompassing tax, the provincial sales tax systems are generally aimed at comparatively narrow tax bases.  For example, the GST is levied on virtually all tangible personal property (“TPP”, or “goods”), intangible personal property (“IPP”), real property, and services.

On the other hand, the various PST systems are usually aimed at levying tax on transactions involving only goods, and certain specially defined “taxable services”.  Having said that, these provinces generally employ an all encompassing definition of TPP[i] which is capable of capturing virtually all goods, as well as what might otherwise be considered as IPP and/or services.  For example, all provinces now attempt to tax computer software – see infra.  

In terms of the specially defined “taxable services”, most provinces attempt to tax services related to goods (e.g., like services to install, assemble, dismantle, repair, adjust, restore, recondition, refinish, or maintain TPP), as well as certain other special-nature services.[ii]  More recently, some provinces have been adding to their definition of “taxable services”, so as to parallel the broad tax base now in place under the GST/HST.[iii]

Focus of the Tax & Treatment of Inputs

A second fundamental difference between the GST and the various PST systems lies in the overall focus of the tax, and the consequent treatment of business “inputs”.  While the GST is a multi-stage value-added tax, with a comprehensive system for taxing the value-added at each stage of the production process, and crediting tax paid at the earlier stages of that process (e.g., through ITCs), the PST systems are aimed at (theoretically) imposing the PST only on the ultimate consumer or user of the taxable good or service.  In other words, these systems attempt to create a “single incidence” tax. 

This poses a problem for business inputs, since situations arise where a business may be paying the PST on its business inputs, and then charging and collecting the PST again on the value of its production or output.  Absent rules to “remove” this cascading of tax, the final manufactured product may well bear double and triple layers of tax.  While each PST system has some rudimentary rules providing for some limited exemptions (e.g., an exemption where goods are purchased for “resale”), these rules are nothing like the “universal” ITC system available for commercial businesses paying the GST.  Thus while the GST system ensures that every good, service or intangible consumed in Canada bears, at the most, a 7% GST component, the effective rate of PST imposed on fully manufactured Canadian goods may be much higher than the stated provincial rate.  

Even more troubling, to the extent there is PST imbedded in manufactured goods, those goods will carry that PST even when they are exported from Canada.  

Hard Name.  Simple Solution.    ^TM

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