11/29/2024

The hidden costs of Ottawa’s food tax holiday

While a tax holiday on food may seem like a gift to consumers, its ripple effects—logistical headaches for grocers, inflationary risks, and regional disparities—could leave Canadians paying the price long after the holidays are over

Sylvain Charlebois

For the average consumer, grocery savings over the two-month period are estimated at just $5.

It’s official. Starting December 14, Ottawa’s two-month GST/HST holiday will temporarily reduce the tax to 0%, offering Canadians a reprieve until February 15. While this initiative appears to be a gift for consumers during the holiday season, it comes with unintended consequences that could harm consumers, retailers, and the broader economy.

Under this policy, provinces with standalone provincial sales taxes (PST)—such as British Columbia (7%), Saskatchewan (6%), Manitoba (7%), and Quebec (9.975%)—will continue to apply these rates. Meanwhile, provinces using the harmonized sales tax (HST)—Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, and Ontario—will see the total tax rate on eligible items drop to 0%. Alberta, which already lacks a PST, will remain tax-free.

At first glance, this may seem like a win for Canadians. Grocery stores will no longer charge taxes on snacks and ready-to-eat items, and restaurant meals will also see a significant tax cut. However, the benefits of this measure are unevenly distributed.

Minimal savings at the grocery store

For the average consumer, grocery savings over the two-month period are estimated at just $5. While this amount is negligible for most households, it creates a significant burden for grocers. Implementing system updates to reflect the tax holiday for more than 4,000 products on average will result in logistical headaches and additional costs. Retailers, already operating on slim margins, will likely feel the strain.

READ: CFIB calls on Ottawa to compensate small firms for costs to implement GST holiday

Restaurants reap the rewards

The benefits are much more pronounced for restaurants. Since the average Canadian spends roughly $180 per month dining out, families could save between $60 and $90 over two months. For restaurant operators, this measure could provide a much-needed boost, as taxes normally apply to all menu items.

However, regional disparities in tax rates could lead to unintended consequences. Quebecers, for example, may cross the border to dine in Ontario or New Brunswick, where they can save nearly 10% in taxes. This puts Quebec restaurant owners at a disadvantage. While interprovincial shopping migration may be less pronounced in Western Canada, these inconsistencies create unnecessary regional tensions.

Inflationary risks and market instability

While the tax holiday offers temporary relief, it also introduces inflationary risks. Retailers and restaurants, faced with the sudden absence of tax revenue, may adjust prices opportunistically. When Prime Minister Stephen Harper reduced the GST by 1% in both 2006 and 2008, prices initially spiked before stabilizing. This history highlights the potential for short-term price increases following tax changes.

Taxes, particularly those tied to food, leave lasting effects. Whether introduced or eliminated, they alter market dynamics and often disadvantage consumers. The temporary nature of this tax holiday increases the likelihood of opportunistic pricing, leaving Canadians paying higher prices long after the tax is reinstated.

Taxing food is regressive and ineffective

Taxes on food disproportionately penalize low-income households, making them inherently regressive. Proponents of taxing "unhealthy" foods argue that it encourages better consumer choices, but the evidence tells a different story.

Consider Newfoundland and Labrador’s soda tax, introduced in 2022. While it generated $6.1 million in revenue in its first year, the projection for 2023-24 has doubled to $12 million. Rather than curbing soda consumption, the tax has simply become a revenue generator, with no significant improvements in public health outcomes.

At grocery stores, taxes on food are often hidden unless consumers carefully check their receipts—a practice fewer than 25% of Canadians engage in regularly. Transparent policies and informed choices, not stealth taxation, lead to better health outcomes over time.

A missed opportunity

Instead of implementing this temporary tax holiday, Ottawa could have eliminated the GST on food permanently. A permanent measure would shield consumers from market instability triggered by policy reversals and reinforce food affordability as a critical aspect of Canada’s social safety net.

While the GST/HST holiday might seem like a timely relief, it risks creating long-term instability. Food pricing is a delicate balance, and every policy shift has ripple effects across the supply chain. For many Canadians, the costs of this measure could outweigh the benefits, leaving them worse off in the long run.