Shrinkflation deals a surprise ice cream tax to consumers

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When Björn Brown, a confessed “too-frequent buyer” of premium ice cream, reached for a tub of Ben & Jerry’s Coffee Coffee BuzzBuzzBuzz at his local grocer in Oakville, Ont., recently, he was miffed but not surprised to see the size of the container had shrunk, like so many other food products these days.

The real stunner came when he swiped item at the self-checkout. Instead of the stated price of $6.99, the final tally was $7.90.

The reason: a double-whammy courtesy of shrinkflation, the tactic used by many food producers to sneak through price increases by downsizing the packages for their products while leaving prices the same. In the case of ice cream and some other items, those shrunken packages are small enough to be considered single servings by the Canada Revenue Agency, and that means the items are now also subject to sales tax.

It’s the latest pitfall for consumers trying to navigate soaring food prices, and it reveals a tax system that experts say has fallen behind the times, failing to reflect changing industry trends and the reality of today’s financially- and time-stretched households.

The surprise ice cream tax is a case in point. Ben & Jerry’s, owned by Unilever PLC, and its premium ice cream rival Häagen-Dazs, a unit of Nestlé SA, have both downsized their tubs to below 500 millilitres, which is the line the federal government draws between ice cream products that are grocery items, and hence not taxable, and single-serve snacks, which incur the goods and services tax or harmonized sales tax, depending on the province.

“The shrinkflation is annoying enough because we get less ice cream for the same pretax price as before, but now you’re getting hit by the government with HST on top of that,” said Mr. Brown, who realized the link between the shrunken tub and the tax hit when he delved into the CRA’s memorandum on basic grocery products, a 2007 document that lays out the often-convoluted line between grocery and single-serve items.

Other consumers have taken notice. A recent review on the Häagen-Dazs website for its vanilla ice cream, which still lists its size as 500 ml instead of the new 450 ml on the site, criticized the company for the move. “That makes it taxable so now we are paying more and getting less,” wrote one individual. “It seems not well thought out and unfair to the consumer.”

Neither Nestlé Canada nor Unilever Canada responded to requests for comment, including the question of whether either company was aware of the tax hit consumers would face when the companies shrank packaging.

It’s difficult to imagine the ice cream tax wouldn’t have been on radar for the companies, said Timothy Dewhirst, a marketing professor at the University of Guelph, since businesses are acutely aware of the laws and regulations that apply to the products they sell, as well as what their competitors sell.

“For companies dealing with rising costs shrinkflation is a way of introducing a price difference that people don’t notice, but in this instance a higher price is being paid by the consumer even if the money is not being collected by the companies,” said Prof. Dewhirst, who said the move risks alienating customers. “As an outcome, it’s contrary to the purpose of shrinkflation.”

In the case of Ben & Jerry’s, which quietly announced the “difficult decision to make our tubs slightly smaller” last year, the new size, at 473 ml, now matches the pints sold in other countries.

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To avoid the tax, Mr. Brown said he will likely try a new “super premium plus” line of ice creams launched by Chapman’s, a Markdale, Ont.-based ice cream manufacturer. The new products, served in 500-ml tubs, have begun rolling out to stores.

When contacted about the tax fallout stemming from the scaled down Häagen-Dazs and Ben & Jerry’s products, Ashley Chapman, chief operating officer at Chapman’s, said he has been expecting such an inquiry. “I knew the media was going to pick up on this” he said, noting his company first heard through industry sources last year about the changes to package sizes by its rivals, and discussion in-house immediately turned to the tax implications.

“It’s a really sneaky way to bury a price increase, and to add insult to injury, throw a little extra tax in there on your loyal consumers,” he said. He added that Chapman’s doesn’t engage in shrinkflation, and that the company sees price increases to deal with higher costs as “unfortunately just a part of doing business.”

As it turns out, even Chapman’s new 500-ml line has been caught up in the ice cream tax, at least at Loblaws locations. In a statement the grocery giant admitted it has been erroneously charging consumers sales tax at some locations since the product launched. The company wouldn’t say how many consumers have wrongly been hit with tax, but said shoppers should contact the Loblaws customer service department if they were.

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Ice cream isn’t the only item where consumers could find themselves suddenly paying tax because of shrunken packaging, either. Some grocery stores have begun selling muffins in packs of four instead of the usual six. The CRA memorandum, in its only bolded section, states muffins and other baked goods sold in quantities of “less than six items” are taxable.

The “artificial line” set out by federal tax authorities that divides grocery and single-serve items needs to be refreshed, said Robert Kreklewetz, a tax lawyer in Toronto who specializes in indirect taxes such as the GST, HST and provincial sales taxes.

“However you want to quibble with how the tax was designed in 1989, now things are different,” he said. “The CRA or the Finance Department has to make changes to make that tax still apply fairly in 2023.”

When it comes to the question of fairness in how food is treated by the CRA, Mr. Kreklewetz points to what he sees as other tax imbalances at the grocery store. For instance, a family that can afford to choose that one parent stays home to chop vegetables and wash lettuce for a salad and roast a chicken will pay no tax on those individual items. But a family in which both parents must work to make ends meet that only has time to buy a bagged salad and rotisserie chicken must pay sales tax, he noted.

“From a moral perspective, how do you even defend taxing food?” he said. “The tax policy question is, should there be a tax on food at all, when people are struggling with higher costs for everything and wages haven’t kept up, yet the government is still collecting its tax on a grocery-store rotisserie chicken?”

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There are other lingering food tax questions that the current spate of inflation has brought to the fore, in Ontario at least. The province provides a point-of-sale HST exemption for food and beverages that are prepared for immediate consumption, such as fast food, if the price is $4 or less. That limit was originally set in 1989, long before the HST replaced the provincial sales tax and federal GST. If that $4 exemption had kept pace with inflation, it would be roughly $8.50 today.

As for the ice cream tax, Prof. Kreklewetz said the CRA’s definition of what counts as a single serving is due for a rethink. After all, a serving size on the nutrition label for what Health Canada considers a “multiple-serving” ice cream tub, such as those in question, is just 188 ml.

“You have to wonder where they came up with that number of 500 ml,” he said. “I’m not sure the government really wants to be suggesting that 473 ml of ice cream should be considered a single serving.”