A look back at a long-gone and hated tax

I had forgotten that last year was the 30th anniversary of the introduction of the Goods and Services Tax (GST) in Canada, and the fact that it replaced the increasingly bizarre and convoluted Federal Sales Tax (FST). Very little has been written about the FST's history since that time, and to date it has not even merited its own article on Wikipedia. Perhaps this will help shed some light on how that tax came into being, and how it operated.

It was introduced on a limited scale on 1 May 1918, when the Special War Revenue Act (originally passed in 1915) was amended to impose a 10% war excise tax on (a)  the duty-paid value of specified goods imported into Canada, and (b) the initial selling price of such goods that were manufactured in Canada. The goods on which the tax was imposed were:

• automobiles for passenger use
• records and cylinders, and their players
• mechanical pianos and organs, and records for them
• jewelry, both real and imitation

 On 19 May 1920, this was expanded through the addition of various taxes on luxury goods, plus a sales tax (subject to various exemptions) of:

• 1% on "sales and deliveries by manufacturers and wholesalers, or jobbers, and on the duty-paid value of importations", and
• 2% on "sales by manufacturers to retailers and consumers, or on importations by retailers or consumers".

 Provision was also made for the eventual introduction of an annual licence requirement on all manufacturers and wholesalers.

On 10 May 1921, the rates were revised:

• 1.5% on "sales and deliveries by manufacturers and producers, and wholesalers or jobbers",
• 2.5% on "the duty-paid value of goods imported",
• 3% "in respect of sales by manufacturers to retailers or consumers", and
• 4% "on goods imported by retailers or consumers ... for the purpose of resale ... on the duty-paid value".

 On 1 January 1924, the following changes took place:

• a single rate of 6% was instituted for all subject goods (as noted above),
• every manufacturer or producer who manufactured or produced goods worth ten thousand dollars or more during any fiscal year ending 31 March (beginning with the one in 1923) was required to obtain an annual licence for collecting the tax,
• every wholesaler or jobber "who sells not less than [50%] of his total sales of goods to a licensed manufacturer or producer, to be used in, wrought into or attached to articles to be manufactured or produced for sale" had the option to apply for a sales tax licence, and
• licensed manufacturers and producers were entitled to deduct the tax they paid on imported goods that were subsequently sold to another licensed manufacturer or producer, from the tax otherwise payable on sales made of their own goods, and
  
• licensed wholesalers were entitled to claim back tax they had paid on sales of similar goods.
  

In 1938, the fiscal year requirement with respect to sales by wholesalers and jobbers exceeding the 50% threshold was revised to the proportion of such such sales occurring during the three months immediately preceding such application. In 1958, the sales threshold for manufacturers and producers was repealed, and all were required to obtain a licence.

In 1947, the Special War Revenue Act was renamed as the Excise Tax Act, and the sales tax became known as the consumption or sales tax.

By the time that the Revised Statutes of Canada, 1970 came into force, the general framework was as follows:

• the general rate was 9%, with separate rates of 3% for goods produced by the blind and 8% for building materials and heating equipment;
• the tax was imposed on
• goods manufactured or produced in Canada, payable on delivery or when title passed (whichever came first)
• goods imported into Canada, payable on importation or upon later withdrawal from a bonded warehouse for consumption
• sold by a licensed wholesaler, and the tax was calculated on the duty-paid value (if imported) or otherwise on the price paid by him
• goods where kept for the licensee's own use, or for rental, as the case may be
• the following sales were tax-exempt:
• partly manufactured goods sold by a licensed manufacturer to another licensed manufacturer
• partly manufactured goods imported by a licensed manufacturer
• goods imported by a licensed wholesaler other than for his own use or for rental to others
• goods sold by a licensed manufacturer to a licensed wholesaler other than for his own use or for rental to others
• partly manufactured goods sold by a licensed wholesaler to a licensed manufacturer
• goods sold by a licensed wholesaler to another licensed wholesaler (but a recovery of tax was in effect where the sale price was less than the original duty-paid value or purchase price)
• there was also an extensive list of goods that were tax-exempt under all circumstances

As you can see, the scheme was quite complex, calling for extensive recordkeeping and extensive proof that vendors and purchasers had the proper licences to track both liability and exemption. This could be difficult, as there was no central registry of licence numbers to consult, and it was up to the purchasers to supply proof. Needless to say, there was ample scope for fraud, and the FST auditors found that to be a fruitful ground for reassessment.

The manufacturer's and wholesaler's licences were respectively known as S and W licences. Tax reported under S licences was netted against revenues, while those under W licences were added to the cost of sales. Manufacturers had the option of quoting prices either tax-included or tax-extra, which led to some rather sophisticated sales analysis reporting. I had the privilege of analyzing such reports in my first job after graduating from college. That was back in the days of reviewing monthly 11" x 17" flatpack reports that were regularly 3" thick, and internal office copies of invoices that showed the effect of netting the FST back to taxable items, or identifying the amount of FST that could be claimed back on imported goods. Our current accounting systems in Canada have nothing like this in effect now.

That type of internal reporting was essential, because of the tyranny wrought by the Customs & Excise auditors in charge of reviewing the FST returns. They were extremely aggressive, and there was little opportunity to appeal against their rulings. No wonder that none of them were given the opportunity to  become GST auditors when the new tax came into effect in 1991!

The new GST, in comparison, can be said to be a self-enforcing tax, as it is in effect a tax on markup, and it covers both goods and services supplied (subject to a list of exempt or zero-rated items). There is also a central registry of Business Numbers available for verification purposes. The results are easily exported into PDF for purposes of recordkeeping on the local ERP system. Accountants these days don't realize how easy their jobs are!