The government of Canada has announced its plans for a temporary tax break by exempting GST/HST on certain items during the holiday season from Dec. 14, 2024 to Feb. 15, 2025. The legislation to enact the tax break has cleared the House of Commons and is now awaiting Senate approval.
The tax break applies to clothing, footwear, diapers, car seats, toys for children, jigsaw puzzles, physical video games, consoles and controllers, physical books, printed newspapers, Christmas and similar decorative trees, and food or beverages.
The purpose of this tax break is purportedly to offer financial relief to Canadians amid high food and housing costs. Minister of Public Services and Procurement Jean-Yves Duclos justified the decision as follows:
“Although inflation is down and our economy is strong, the cost of living remains a challenge for many middle-class Canadians. That is why the federal government is introducing a two-month tax break on groceries and everyday essentials.”
Government estimates suggest that someone spending $2,000 during the tax-free period could save between $100 and $300, while Pedro Antunes, the chief economist of the Conference Board of Canada, projects average household savings of $100 to $200.
But while the tax break will indeed put more money into consumers’ pockets as the government claims, whether it will actually ease inflationary pressures is uncertain.
Inflationary pressure
Tax reductions often create an income effect by increasing disposable income and boosting demand for various goods and services. If supply isn’t able to keep pace with the rising demand, this can lead to higher inflation.
If a tax reduction boosts capital formation — the total capital accumulation during a certain period — then it might not cause inflation. But this likely isn’t the case in this scenario, since GST reductions tend to boost demand without increasing supply.
Historically, similar tax policies have had short-term inflationary effects. For instance, following Prime Minister Stephen Harper’s GST reductions in 2006 and 2008, prices temporarily spiked before stabilizing.
The holiday tax break will cost the government an estimated $6.3 billion, which will likely have a multiplier effect on the economy. This occurs when an initial injection of government spending leads to a larger overall impact on the economy as the money circulates through it.
While the tax-exempt goods represent a small fraction of GDP, this multiplier effect could drive notable GDP growth in early 2025.
Another key economic concern is the potential for “price stickiness,” where businesses fail to pass tax reductions onto consumers. For instance, when the Alberta government ended its 13-cent-per-litre gas tax in 2022, not all gas stations reduced prices equally. A similar situation could occur if businesses choose to keep prices near pre-tax levels to retain part of the tax savings.
Implementation challenges to retailers
While the tax break offers relief to some consumers, it presents challenges for retailers. It will likely take a substantial effort for retailers to implement the tax exemption, with some finding it particularly challenging to do so in such a short period.
The Canadian Federation of Independent Business has argued that the new policy will add confusion and increase administrative costs for affected businesses. It has called on the government to offer a $1,000 credit in their GST/HST accounts to offset the burden.
Sylvain Charlebois, a professor of food distribution and policy, has argued that the holiday tax break may seem like a relief but it could create long-term instability because the grocery savings are minimal and the benefits are disproportional.
Some businesses will likely see a boost in sales, however. Since all types of restaurant foods — dining in, takeout or delivery — will be covered by the tax break, restaurants will have a unique opportunity to attract more customers.
Winners and losers
There will be winners and losers from this tax policy, with the benefits disproportionately favouring higher-income earners. Wealthier households, who are less affected by inflation, are better positioned to take advantage of the tax break by spending more and saving more. These families will be able to more easily adjust their purchasing habits, such as stockpiling a year’s supply of baby diapers during the tax-free period.
It’s important to note that many essential grocery items, like produce and milk, are already tax-free under Canada Revenue Agency rules. The tax break will cover taxed items like carbonated drinks, candies, snack foods and alcoholic beverages. This means higher-income households, which spend more on discretionary items, stand to gain the most from a reduction in sales tax benefits.
This holiday tax break could exacerbate economic inequity — contrary to its stated objective. Taxes play a key role in reducing inequality, and any changes to the tax systems should consider that. Unfortunately, this GST reduction appears to fall short.
Moreover, the benefits are not distributed evenly across Canadian provinces and territories. Consumers from provinces with HST will not pay any taxes for the items listed in the policy, but those with standalone provincial sales taxes will still have to pay that tax. Alberta, which only charges GST, will be tax-free.
While the holiday tax break may offer limited economic relief, its potential adverse effects on inflation and income inequality cannot be overlooked. As such, we concur with Charlebois’s recommendation that permanently eliminating taxes on essential goods would deliver more equitable and lasting benefits.
The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
