Constitutional Conference, Briefing Paper, Agenda Item 5(a) (7 September 1970)

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Date: 1970-09-07
By: Secretariat of the Conference
Citation: Constitutional Conference, Briefing Paper, Agenda Item 5(a), (7 September 1970).
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Second Working Session, Constitutional Conference

September, 1970


September 7, 1970

Agenda Item 5(a)

Report from the Continuing Committee of Officials

(a) Taxing Power – Sales Taxes (Tab 6,
Secretariat Briefing Book)

A. Federal Objectives in the Discussion of this Subject

1. To defer a decision, in order to retain flexibility
for future federal action. (The Federal Government
may want to trade a position on this subject for
concessions on other points.)

2. A reason for deferral would be the need to examine
drafting problems before reaching decisions.

3. A constitutional rule about provincial use of sales
taxes is largely a matter of provincial concern.
The Federal Government is interested in seeing that
the effect of a provincial tax remains within a
province and that there are no barriers to inter-
provincial trade.

B. Discussion Guide

Following general agreement that provinces should
have access to all tax fields with the power of each
provincial legislature applying only within that prov-
ince, the Continuing Committee of Officials was directed
to study how provincial transactions taxes could best
be kepy “within a province.” The Committee did not
reach a consensus but its report outlines the major
considerations. Work has concentrated on two alterna-
tives as follows:

Alternative 2. The Constitution would provide that
in addition to direct Taxes a province may impose
an indirect transaction tax but only on retail sales.

Alternative 3. The Constitution would provide that
in addition to direct Taxes a province may impose
an indirect transaction tax (without restriction as
to the level of trade at which it is imposed), but
with a restriction that this indirect taxation
should apply only in respect of goods or services
used or consumed within the province.

There was almost general agreement that it would
be easier to contain the effects of a tax within a
province using Alternative 2. Under this alterna-
tive the provinces would be given authority to impose
indirect taxes in respect of sales within the province
to consumers for their own use and not for resale.

The fact that retail sales are made mainly to persons
within the taxing province would generally make it
unnecessary to employ further rules or procedures to
avoid taxation outside the province. This alternative
is supported by the Atlantic and Prairie provinces.

The support for Alternative 3 rests on the view
that administrative ease is not the only objective and
that the constitutional review should seek a better
distribution of the taxing powers with greater flexi-
bility for the provinces. It was mentioned that a
value added tax would be possible under Alternative 3
but not under Alternative 2. Ontario and Quebec support
Alternative 3.

Under Alternative 3, provinces could impose a tax
on sales at the manufacturing or wholesale level but
they would have to impose additional taxes to cover
goods coming into the province and establish procedures
to ensure that the manufacturers’ or wholesalers’ tax
did not fall upon persons outside the province.

With regard to goods imported into a province, since
there are no controls at provincial borders it would
be necessary to require that all distributors, whole-
salers and retailers pay tax on their importations.
To avoid discrimination against such imports the tax
would have to be calculated on a base equivalent to
their manufacturer’s selling price.

To ensure that a tax imposed on goods manufactured
within a province did not fall upon persons outside
the province it would be necessary to provide a number
of rules:

(a) Where goods were exported by a manufactuer,
no tax would be payable and the manufacturer
would have to maintain satisfactory records
to show destination of the sales.

(b) Where goods taxed at the manufacturers’ level
were exported by a wholesaler or retailer,
refunds of the tax would be necessary. (in
the case of retailers the calculation of the
refund would be difficult because by that stage
the tax may have disappeared into the price.)

(c) Where goods were imported into a taxing prov-
ince and then exported again, any tax imposed
in the taxing province would have to be refunded.

(d) Where taxable goods such as cloth, steel,
motors or leather produced in a province are
purchased by another manufacturer within the
province to be incorporated by him into further
manufactured goods such as shirts, cars, ma-
chinery or shoes which are then exported, it
would be necessary to refund the tax paid on
the component goods or to allow the exporting
manufacturer to purchase component goods and
raw materials free of tax.

Some provinces have suggested that if Alternative 3
were chosen it would be necessary that the constitution
require that a taxing province follow some or all of
the above procedures. While it would be best to defer
any decision between Alternatives 2 or 3, it might
be suggested at this time that those provinces which
think that Alternative 3 would be possible only if
there were “detailed constitutional guarantees”
(C.C.O. Report, p. 3, para. 6) might submit to the
C.C.O., for further consideration, their proposals
for appropriate guarantees.


1. It was the general conclusion of the Subcommittee
that any new authority to impose indirect taxes
should be in addition to present constitutional
authority to impose direct taxes and that in any
constitutional revision the present wording giving
provinces authority to impose direct taxation
within the provinces should not be disturbed.

2. The publication “The Taxing Powers and the Consti-
tution of Canada”, issued by the Federal Government
in 1969, strongly favoured restricting the provinces
to transactions taxes at the retail level.

On pages 44 and 45 it stated –

“For this reason, as well as by reason of the
potential impediments to interprovincial trade
which could result from an unlimited provincial
power to impose indirect sales taxes, the
Government of Canada believes that any provincial
power to impose such taxes would have to be limited
to the retail level.”

3. In recent discussions of the Continuing Committee
of Officials, federal officials have taken the
position that the choice between Alternative 2
and Alternative 3 was not a fundamental issue from
and Federal Government’s point of view but that its
concern was to find a practical way to ensure that
the effect of any tax remains within a province.

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