Business Brief: Ottawa’s big tax test

Good morning. A couple of days ahead of the federal budget we’re taking a trip back to the GST wars (pastries were harmed), and looking at why the next big change could still pay off.

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Today’s headlines

America votes: U.S. President Donald Trump is facing a voter reckoning over gas and grocery prices, his war on Iran and his tariffs on Canadian goods in today’s midterm congressional elections.

Trade: Resumption of trade talks with U.S. rewinds the clock to August. What was on the table back then?

Energy: Blackstone, Canadian pension funds invest $3.1-billion for LNG Canada stake.

In focus

Tax reform is hard. It might be worth doing anyway.

In late August of 1989, the Department of Finance bought pages in newspapers across the country to announce that Canada’s sales tax system would change on Jan. 1, 1991. “Please save this notice,” the advertisement said. It was a confident instruction for a tax that Parliament had not yet debated, let alone passed.

That October, after no small amount of noise from the Opposition, the Speaker ruled that the ad fell short of contempt, but called it ill-conceived and said it should never be repeated, reminding the government that Canada is “a parliamentary democracy, not a so-called executive democracy.”

As fight nights go, you could do worse. But this was a warm-up for a larger clash over moving the tax from the factory to the till – for economists, a better alternative to the manufacturers’ sales tax, which was charged at the factory gate and hidden in consumer prices anyway; for the provinces, an intrusion on their turf; and for the public, an idea that was anything but short on contempt.

These are among the tensions running through “Tax and Effect,” a recent series of Globe stories exploring the challenges of taxation in Canada. In many ways, they will be behind the federal government’s budget calculus on Thursday – an accounting of Ottawa’s ambitions that must also make clear who pays.

A tale as old as taxes

But as the GST fight shows, even simple ideas have a habit of getting complicated under political pressure. To soften the backlash, Ottawa promised to leave basic groceries untaxed – a concession that narrowed the tax’s base, and one that meant deciding, item by item, where groceries ended and indulgence began. A chicken kept warm under a supermarket heat lamp would be taxed as a prepared meal, while the same bird, chilled and moved to the deli case, would be a grocery. Five muffins made a taxable snack, while six made a household staple.

When Liberal senators set out to kill the bill, Brian Mulroney became the first prime minister to use a constitutional provision allowing the creation of eight extra Senate seats, and the GST took effect on Jan. 1, 1991, at 7 per cent. Anger over the tax helped reduce his Progressive Conservatives to two seats in the 1993 election, months after he left office.

But the GST outlasted him, and outlasted the Liberals’ 1993 promise to replace it, and today accounts for about 10 per cent of the federal government’s revenue. François Vaillancourt, an economist at the Université de Montréal, said it worked because it arrived as a “big bang” that forced everyone to adjust at once.

Budgeting expectations

More than three decades on, economists and business groups are pressing Ottawa for another, even as the government signals it prefers something closer to steady state. This week’s budget is expected to include targeted tax breaks for entrepreneurs and small businesses, The Globe’s Bill Curry reports.

The GST fight remains one of the defining episodes in the history of Canadian taxation, a road paved with best intentions and rules that have long outlived their purpose. And Thursday’s budget might not do much to change its direction. Still, in “Tax and Effect,” Globe journalists found plenty of evidence that a rocky history needn’t preclude success.

Small changes can make a difference, too, as anyone who has bought a sixth muffin can tell you.

Catch up on Tax and Effect:

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Quoted

Hackers used vishing – voice phishing via Microsoft Teams and phone calls impersonating IT staff – to breach four major Canadian law firms.

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More files we’re following

Corporate results: Earnings include Shopify, Fairfax, Intact, Ivanhoe Mines, TransAlta and Advanced Micro Devices.

Morning update

A fresh bout of AI anxiety put global stocks under pressure amid investor caution as ‌U.S. midterm election day arrived.

Wall Street futures were mixed, while TSX futures were in negative territory after Canada’s main stock market closed higher yesterday.

Overseas, the pan-European STOXX 600 was down 0.32 per cent in morning trading. Britain’s FTSE 100 sunk 0.54 per cent, Germany’s DAX declined 0.63 per cent and France’s CAC 40 fell 0.18 per cent.

In Asia, Japan’s Nikkei was closed for a holiday, while Hong Kong’s Hang Seng rose 0.57 per cent.

The Canadian dollar traded at 71.64 U.S. cents.