In 1989, the Progressive Conservative government of Prime Minister Brian Mulroney proposed the creation of a national sales tax of 9%. At that time, every province in Canada except Alberta already had its own provincial sales tax imposed at the retail level.

The purpose of the national sales tax was to replace the 13.5% Manufacturers' Sales Tax (MST) that the federal government imposed at the wholesale level on manufactured goods. Manufacturers were concerned that the tax hurt their international competitiveness. The GST also replaced the Federal Telecommunications Tax of 11%.

Although the GST was promoted as revenue-neutral in relation to the MST, a large proportion of the Canadian population disapproved of the tax. The other parties in Parliament also attacked the idea as did three Progressive Conservative Members of Parliament, David Kilgour, Pat Nowlan, and Alex Kindy, who ended up leaving the Progressive Conservative caucus as a result.

The Liberal-dominated Senate refused to pass the tax into law. In an unprecedented move to break the deadlock, Mulroney used a little-known constitutional provision) to increase the number of senators by eight temporarily, thus giving the Progressive Conservatives a majority in the upper chamber. In response, the Opposition launched a filibuster and further delayed the legislation.

Despite the tax being lowered to 7% by the time it became enacted, it remained controversial. What the tax covered also caused anger. The Government defended the tax as a replacement for a tax unseen by consumers because it was placed on manufacturers, and in the long run it was posited that removing the MST would make Canada more competitive. Once the MST was replaced with the GST prices did not initially fall by the level some thought appropriate immediately; however, proponents have argued that in Canada's market economy the MST's replacement could only be expected to influence prices over time and not on a stroke.

Despite the opposition, the tax came into force on January 1, 1991.

On July 1, 2006, the Government of Canada reduced the tax by 1 percentage point (to 6%), as promised by the Conservative Party in the 2006 election campaign. They again lowered it to 5%, effective January 1, 2008. This reduction was included in the Final 2007 Budget Implementation Bill which received Royal Assent on December 14, 2007. This change has been estimated to have decreased government revenues by approximately $6 billion. Opponents of these tax decreases cited that sales taxes target those who spend more and therefore such reductions disproportionately benefit Canadians giving those who have the most and spend the most the largest tax decrease.

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