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Should sales taxes be applied to all of Canadians’ online purchases?

Montreal, November 27, 2015 – As Canadian consumers get ready to enjoy some Cyber Monday sales, an MEI publication points out that the non-collection of sales taxes on Canadians’ online purchases from foreign websites has both advantages and disadvantages. This tax avoidance places our online retailers and brick-and-mortar stores at a disadvantage through a kind of unfair competition, but it increases the real incomes of consumers.

The current state of affairs also has the advantage of being realistic, given that it is difficult for the tax authorities in one province or country to collect sales taxes outside their jurisdiction.

Even though the amounts concerned are substantial—online purchases in Canada represent a $41.7-billion market, and Revenue Quebec estimates the uncollected sales taxes on Quebecers’ purchases from retailers outside the province at $465 million—most of the solutions currently proposed are unrealistic, explains economist Mathieu Bédard, the author of the publication.

For example, certain voices in Canada want to require foreign businesses to collect sales taxes directly. However, there is no reason to believe that foreign governments will collaborate with Canada to enforce such measures in the short or medium term.

Other voices are proposing that sales taxes be collected by credit card companies or banks. But requiring taxes to be collected abroad by these intermediaries would necessitate the collaboration of foreign governments to provide a legal framework for these levies, which brings us back to square one.

“Moreover, introducing such measures would not necessarily be a good thing for the economy in general, nor for governments’ finances, since new taxes have the effect of reducing the real incomes of consumers and of depressing economic activity,” maintains the author.

If taxing online consumption abroad would have significant negative effects, all while being very difficult—if not impossible—to apply, a dramatic reduction of sales taxes in Canada to make our retailers more competitive also seems unlikely.

“Since the introduction of the GST, the tendency in Canada has been to increase sales taxes. The political context clearly favours maintaining or increasing sales taxes rather than abolishing them,” points out Mathieu Bédard.

Certain compromises between these two extremes seem more plausible, however. For example, governments could exempt digital goods from sales taxes when they are sold by Canadian companies. This measure would put Canadian and foreign suppliers on an equal footing. A second compromise would be to have a reduced sales tax rate for Internet commerce.

The Economic Note entitled “The Dilemma of Taxing Online Purchases” was signed by Mathieu Bédard, Economist at the MEI. This publication is available on our website.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.

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Interview requests: David Descôteaux, Communications Coordinator, MEI Tel.: 514-273-0969 ext. 2233 / Cell.: 514-919-4450 / Email: ddescoteaux@iedm.org

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