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The Tax and Spend newsletter will return Aug. 15.

There I was at my local ice-cream shop in Eastern Ontario, about to pay for my single scoop of salted-caramel ice cream. The price was $3, according to the chalkboard hanging from the ceiling. The after-tax tally on the register was $3.39.

That was a problem – a 24-cent problem to be precise.

If you don’t know why, that’s not surprising, as the owner of the ice-cream shop was also surprised to learn that my cone should have been exempt from the provincial portion of the harmonized sales tax.

I could have paid the full tax, then mailed in a seven-page rebate application to obtain my 24 cents. Instead, I asked nicely. The owner and I had a good chat, with her discovering the existence of Ontario’s point-of-sale exemption for prepared food and beverages costing less than $4.

I got my tax rebate; the ice cream was a welcome treat on a sweltering summer day.

But that incident illustrated the increasing irrelevance of Ontario’s tax exemption, whose threshold has been stuck at $3.99 since it was first put in place in 1989. If adjusted for inflation, that threshold would be something more akin to $8 today. Add in expected inflation of about 7 per cent this year, and the inflation-adjusted threshold would be well on its way to $9 by 2023.

However, Ontario’s exemption has remained frozen in place for more than three decades, and most food purchases easily exceed that $3.99 threshold. With inflation surging, its value is melting away faster than my salted-caramel cone on that hot summer day.

Increasing that limit would be a modest way for the provincial government to reduce the cost of cheap meals – fast food for the most part. The Ontario Liberals did propose such a measure during the recent election campaign, although the party would have boosted the threshold to $20, far in excess of the inflation-adjusted value of the current exemption.

Given that sales taxes are inherently regressive, it would help out lower-income households the most. The usual objection to any sales tax cut at the moment is that it will add to inflationary pressures by encouraging consumption.

On that front, I wonder if Ontario’s point-of-sale rebate could be an exception. For one, you’d need to believe that consumers are itching to buy a McDonald’s Big Mac (menu price $5.89), if only it were 47 cents cheaper. More to the point, if the threshold were adjusted significantly higher, it could encourage retailers to push their prices down to match it – or at least hold them there.

A Big Mac combo is $9.99; set the new threshold there, and you might just encourage the Golden Arches and others to stick to that price point.

Taxing questions

Responding to a recent Tax and Spend on federal healthcare transfers, one online reader contended that such payments must be used for healthcare and that provinces are penalized if they fail to do so.

That’s incorrect in theory, although in practice, the question is likely a moot point. The federal government has indeed clawed back payments to the provinces under the Canada Health Act and details those actions in an annual report. But those deductions result from patients being charged for medically necessary services.

Those clawbacks, however, have not kicked in when provinces trim their health budgets. In fiscal 2018-19, for instance, Saskatchewan reduced its healthcare spending by $62.3-million, according to data from the Canadian Institute for Health Information. In that same year, the province’s payment as part of the Canada Health Transfer (CHT) rose by $42-million. Saskatchewan, of course, faced no clawback because of its budget reduction.

There are numerous conditions attached to the CHT, but the enabling legislation lays out broad principles such as universality and portability, not specific dictates on how federal transfers are used. However, there are other health payments that Ottawa has made that are tied to specific initiatives, such as mental health.

That said, questions on provinces diverting the CHT to other purposes is a moot point, given that the CHT still accounts for less than a quarter of provincial and territorial health budgets. Any province or territory could clearly assert that every penny of federal money was used on the healthcare system – and then three times as much of its own money was added on top of that.

Line Item

Cheesed off: Canada’s dairy and poultry supply management systems are highly regressive, transferring cash from the country’s poorest households, particularly those with children, to much better-off farmers, Université Laval economics professor Stephen Gordon notes in a Twitter thread.

For those interested in reading more, Prof. Gordon helpfully supplies a link to a 2009 study, Milked and Feathered, that estimated that supply management cost the poorest households 2.3 per cent of their incomes, while the higher-earning households bore a cost of just 0.5 per cent of their incomes.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.

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