General Discussion

https://taxpolicycenter.org/briefing-book/what-canadian-experience-vat

In 1991, Canada implemented a 7 percent national value-added tax (VAT) to replace a tax on sales by manufacturers. The VAT was introduced by the Conservative party, which had concerns about industry competitiveness and the country’s fiscal situation.

Canada addressed distributional concerns by applying a zero rate to certain necessities—including groceries, drugs, and rent—and adding a refundable credit to the income tax. Transfer payments had been indexed for inflation and were highly progressive, further insulating against regressivity.

The Canadian VAT is completely transparent: it is listed separately on receipts and invoices just like sales taxes in the United States.

The Canadian experience also shows that a federal VAT can successfully coexist with either a VAT or a retail sales tax levied by subnational governments.

And the VAT in Canada has not been anything like a “money machine.” The standard VAT rate declined over time to 6 percent in 2006 and 5 percent since 2008. In 2020, VAT revenue comprised 13 percent of total tax revenues for Canada, far below individual income tax revenue (37 percent) and about the same as Social Security contributions (14 percent) and revenues from corporate income taxes and property taxes (12 percent each).

In both revenues and expenditures, the size of the Canadian federal government as a share of the economy has shrunk significantly since introduction of the VAT. General government tax revenue and spending in Canada has actually fallen as a share of the economy since 1991.

Updated January 2024