Lesson 1

Topic: Sales taxes – What are they and where did they come from? (40-50 mins)

Goal: For students to learn about the history of sales taxes, what they are and why they were introduced. To be introduced to the various different sales taxes that exist in Canada and what they are charged on and finally how to calculate sales tax on the price of an item for purchase.

Lesson Overview:

1. Class discussion – What do they know about taxes?

2. Video – Middle School Money Matters Video #6 – Taxes

3. Background information on taxes

4. Paper Activity – calculating sales tax

5. Wrap-up or Extension activity

Class discussion

Ask questions to see what they know: What is sales tax? When was it ‘invented’? Why was it invented? What different types of sales tax are there? PST, GST, Liquor/cigarette tax, luxury tax, transfer taxes for cars and real estate are all types of sales taxes, taxes that are collected when a financial transaction takes place. What is the difference between a value added tax, a consumption tax or a flat tax, and percentage taxes. (They are different from income taxes which will be covered in another lesson.)

Video : Middle School Money Matters Video 7-1 ‘Sales Taxes’

Background Information/Lecture material:

Sales taxes in Canada are a relatively new invention. During World War 1 the Canadian government introduced a ‘temporary’ income tax to help pay for the war efforts, then in 1920 they introduced sales taxes as well as there was still debt and war expenses that were not being covered by income tax. Prior to this the bulk of federal government revenue was generated through customs and excise taxes (which were essentially import/export taxes). In 1948 British Columbia introduced its provincial sales tax, initially at 3% but quickly rose to 7% - a rate it has been at ever since. Most other provinces also have a provincial sales tax. In 1991 the Canadian federal government introduced the 7% Goods and Services Tax (GST) which is a blanket tax on almost all items and services provided in Canada. The GST was brought in to replace the hidden 13% manufacturers sales tax. This meant the burden of the tax was put on consumption as opposed to production (no tax was paid unless the item was actually bought) also this put a tax on people’s time for services provided – if you ever hire a plumber to fix your sink, you will notice on their bill a charge for GST. The GST has been lowered twice since its inception and now stands at 5%, but when added to BC’s provincial sales tax of 7%, British Columbians now pay 12% tax on most items they buy (the most notable exception being food at the grocery store). Both GST and PST are considered value added taxes meaning they are charged on the value of the transaction (as opposed to a flat tax which would be a specific amount charged regardless of the transaction value – like an airport tax) One of the main differences between the PST and GST is that the GST is applied in such a way that it is only charged once for the end sale of an item even if that item has been part of other transactions, whereas the PST is charged on every transaction regardless. For example, if you buy a new car you will pay PST and GST on that purchase, but if, a year later you decide to resell that car, the new buyer will only pay PST. Because PST is charged on second hand items, it actually has the ability to generate revenue for the government over and over again, some people consider this a flaw in BCs tax system and unfair, but it generates millions of dollars in revenue for the BC government.

There are other, extra, more specific sales taxes that are applied to specific types of goods, the most common ones you have likely heard of are Gas tax, cigarette tax, liquor tax. Next time you go to a restaurant with your parents, if they have ordered an alcoholic drink, ask if you can look at the bill as there will be a separate line item called ‘Liquor tax’, which is currently at 10%, 3% higher than the standard PST. Gas tax is even higher at nearly 50% of current prices, although gas tax is applied as a per litre tax, it is really a collection of little taxes put together. Currently around 55 cents per litre of gas bought is tax.

Math work/lesson: How to calculate sales tax on a price

Calculating a percentage-based, value added tax on a price is a simple mathematical calculation. We know from previous lessons that percentages can be represented as decimals, so for example, 10% is equivalent to the decimal 0.1, 25% equals 0.25 and 100% equals 1.0 and so on. So to calculate the tax owing on an item, we simply multiply the item price by the decimal equivalent of the tax.

Example: An item purchased in BC that costs $5.00 would generally have a 12% tax applied (7% PST and 5% GST together). $5.00 x 0.12 = 60 cents in tax for a total purchase price of $5.60 . This does not seem like too much but let’s think about buying a new car for $40,000. 40,000 x 0.12 = $4,800, you are paying nearly $5000 in tax on a new vehicle!!.

Classwork - Tax calculation problems: Use the included ‘Simple Tax Calculations’ worksheets provided in this handbook to help students see what taxes are applied where and help students practice calculating taxes on purchases.

Group Activity/Extension:

1) What sales taxes are applied to what items in Canada? Look up a list of all the sales and transaction taxes in BC and Canada and find out how much each one is. Examples include – GST, PST, Liquor tax, Gas Tax, Cigarette tax, vehicle and real estate transfer tax. What percentage are charged and how do these affect the overall prices of the items they are applied to. Which items are exempt from sales tax in British Columbia?

2) Have some students specifically look up vehicle and real estate transfer taxes to see what a huge source of revenue these are for the provincial government. Do an online search then price out an item that tax would be applied to and see how much is costs or changes the price of the item. Key examples are things like gas tax which significantly increase the price people pay at the pumps for gas. This could lead to an environmental discussion of whether it is actually a good idea to charge people more for gas so that it will provide an incentive for alternate fuel cars?