Vol. 137, No. 5 — February 26, 2003

Registration
SOR/2003-71 13 February, 2003

FEDERAL-PROVINCIAL FISCAL ARRANGEMENTS ACT

Regulations Amending the Federal-Provincial Fiscal Arrangements Regulations, 1999

P.C. 2003-201 13 February, 2003

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to section 40 (see footnote a)  of the Federal-Provincial Fiscal Arrangements Act (see footnote b) , hereby makes the annexed Regulations Amending the Federal-Provincial Fiscal Arrangements Regulations, 1999.

REGULATIONS AMENDING THE FEDERAL-PROVINCIAL FISCAL ARRANGEMENTS REGULATIONS, 1999

AMENDMENTS

1. (1) Subparagraphs 6(1)(a)(i) and (ii) of the Federal-Provincial Fiscal Arrangements Regulations, 1999 (see footnote 1)  are replaced by the following:

(i) in the case of each province other than the Province of Quebec, by adding surtaxes to and subtracting any rebate, credit or reduction given in relation to provincial personal income taxes from the product of the provincial income tax rates and the federal taxable income for that individual, and
(ii) in the case of the Province of Quebec, by subtracting an amount equal to 16.5% of the current year's adjusted federal income tax payable for that individual from the product of Quebec's average tax rate for the range of taxable income and the taxable income of that individual as determined under Quebec's tax legislation;

(2) Paragraphs 6(1)(c) and (d) of the Regulations are replaced by the following:

(c) divide the amounts determined in accordance with paragraph (b) by the aggregate for the 10 provinces of the current year's adjusted federal income tax payable for all individuals determined for each range of taxable income in accordance with the micro-simulation model;
(d) multiply the amount determined under paragraph (c) by the current year's adjusted federal income tax payable for all individuals determined for each range of taxable income in the province in accordance with the micro-simulation model; and

(3) Clause 6(3)(a)(ii)(A) of the Regulations is replaced by the following:

(A) numerator is the aggregate, over all individuals in the province, of the federal income tax payable for the taxation year that ends in the fiscal year as determined for each individual, and

(4) Description of G in paragraph 6(3)(d) of the Regulations is replaced by the following:

G is the aggregate, over each non-business sector industry, of the aggregate, over each intermediate input commodity, of the product of, as determined by Statistics Canada, total intermediate input expenditures for that intermediate input commodity by that non-business sector industry in the province and the ratio of the total of those intermediate input expenditures for that intermediate input commodity by that non-business sector industry in Canada from which provinces derive net provincial sales tax revenues to the total of those intermediate input expenditures for that intermediate input commodity by that non-business sector industry in Canada, and

(5) Subparagraph 6(3)(v)(ii) of the Regulations is replaced by the following:

(ii) if the difference referred to in subparagraph (i) is less than or equal to zero, that difference, and

(6) Clause 6(3)(v)(iii)(B) of the Regulations is replaced by the following:

(B) the difference that results after subtracting the aggregate, over the preceding fiscal years in the fiscal arrangements period, beginning with fiscal year 2000-2001, of the amount deducted under this subparagraph as the lesser difference mentioned in clause (A) or this clause, as the case may be, from the absolute value of the aggregate, over those preceding fiscal years, of any negative difference that resulted from the subtraction done under subparagraph (i);

(7) Subsection 6(4) of the Regulations is amended by adding the following in alphabetical order:

"current year's adjusted federal income tax payable", in relation to an individual in a province for a taxation year, means the amount of "tax otherwise payable under this Part", within the meaning of subsection 120(4) of the Income Tax Act, as computed in the following taxation year, excluding any amount related to trust funds. (impôt fédéral sur le revenu rajusté à payer au cours de l'exercice)

"federal income tax payable", in relation to an individual in a province for a taxation year, means the amount of "tax otherwise payable under this Part", within the meaning of subsection 120(4) of the Income Tax Act, as computed in the following taxation year

(a) taking into account additional assessments for earlier taxation years that have not been included in the amount of the assessment for those earlier years, and
(b) subtracting any amount related to refunds of federal capital gain taxes on mutual trust funds assessed as of and after December 31, 2002 for the fiscal year beginning on April 1, 2001. (impôt fédéral sur le revenu à payer)

(8) Subparagraph 6(5)(f)(i) of the Regulations is replaced by the following:

(i) for intermediate input expenditures, one of the business sector industries that constitute part of the intermediate input matrix as defined by Statistics Canada for the purpose of its W-level Interprovincial Input-Output Accounts, and

(9) Paragraphs 6(5)(g) to (i) of the Regulations are replaced by the following:

(g) "non-business sector industry" means the following non-business sector industries as defined by Statistics Canada for the purpose of its Provincial Economic Accounts and W-level Interprovincial Input-Output Accounts, namely non-profit, hospital, other health institutions, university, other educational institutions, and municipal government;
(h) "intermediate input commodity" means one of the intermediate input commodities that constitute part of the intermediate input matrix as defined by Statistics Canada for the purpose of its W-level Interprovincial Input-Output Accounts;
(i) "intermediate input expenditures" means

(i) in the case of expenditures by a business sector industry, expenditures on intermediate input commodities, as determined by Statistics Canada for the purpose of its W-level Interprovincial Input-Output Accounts, net of any federal or provincial sales taxes, as determined by Statistics Canada, and
(ii) in the case of expenditures by a non-business sector industry, expenditures on intermediate input commodities, as determined by Statistics Canada using data from its Provincial Economic Accounts, for the purpose of its W-level Interprovincial Input-Output Accounts, net of any federal or provincial sales taxes, as determined by Statistics Canada;

2. (1) The portion of subsection 9(2) of the Regulations before paragraph (a) is replaced by the following:

(2) The Chief Statistician of Canada shall, for each fiscal year in the fiscal arrangements period, prepare and submit to the Minister, at the end of the 29 month-period following the end of that fiscal year, a certificate for that fiscal year, based on the most recent information that has been prepared by Statistics Canada for that fiscal year, that sets out

(2) Section 9 of the Regulations is amended by adding the following after subsection (2):

(2.1) Where applicable, the Chief Statistician of Canada shall, for each fiscal year in the fiscal arrangements period, except for the fiscal year 1999-2000, prepare and submit to the Minister, 30 days after the day on which the certificate referred to in subsection (2) has been submitted to the Minister, a new certificate that sets out the adjustment relating to the population of the provinces for the fiscal year, based on the most recent information that has been prepared by Statistics Canada for that fiscal year.

NON-APPLICATION

3. Subparagraphs 6(1)(a)(i) and (ii), paragraphs 6(1)(c) and (d), clause 6(3)(a)(ii)(A) and the definitions "current year's adjusted federal income tax payable" and "federal income tax payable" in subsection 6(4) of the Regulations, as enacted by section 1 of these Regulations, do not apply in respect of the fiscal year 2000-2001.

COMING INTO FORCE

4. These Regulations come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

The regulations set out the time and manner for determining and making payments under various fiscal arrangements programs authorized by the Federal-Provincial Fiscal Arrangements Act, including the Equalization program.

The goal of the Equalization program is to ensure that provinces have sufficient revenues to provide reasonably comparable level of public services at reasonably comparable levels of taxation. Equalization entitlements are calculated according to a formula which measures and compares the ability of each province to raise revenues from all sources (its fiscal capacity) and makes payments to raise the revenues of lower income provinces up to a common standard.

Regulations define the revenue sources and tax bases (i.e., what a tax is levied on) for virtually all revenue categories exploited by provinces.

The amendments involve: changes to the definition of the personal income tax base; changes to the definition of the mining tax base; an adjustment to the timetable for receiving new population statistics for use in Equalization calculations; and, clarification of the sources of statistics for the measurement of the sales tax base.

Personal income tax base: The amendments (1.(1), 1.(2), 1.(3), 1.(7)) are intended to remove an anomaly in the measurement of provincial fiscal capacity for personal income tax revenues. On January 29, 2002, the Canada Customs and Revenue Agency announced that it had identified an accounting problem whereby some provinces were receiving higher payments than they should under the Tax Collection Agreements (TCAs). The federal government acted immediately to stop further overpayments under the TCAs and also announced that changes would be made to ensure that the measurement of fiscal capacity in the Equalization program accurately reflected the fact that the accounting error identified by the CCRA had been corrected.

The change will accomplish this by ensuring that the definition of the personal income tax base, which is used in the Equalization program to measure provincial fiscal capacity reflects the correction of the accounting error.

The Income Tax Act treats capital gains realized by mutual funds trusts as initially taxable in the hands of the trust. When these capital gains are passed on to the individual they are then taxed in the hands of the individual and the mutual fund trust receives a refund of the tax it had initially paid. These refunds were being paid entirely out of the federal share of income taxes when they should have been paid out of both the federal government's account and the provincial governments' accounts. Provinces therefore had received their share of the initial tax paid by the mutual fund trust and their share of the tax paid by the individual, but they did not pay their share of the refund.

This accounting error was reflected in the Equalization program and resulted in an overestimation of the fiscal capacity of provinces receiving tax overpayments. Those provinces either received lower Equalization entitlements or were assessed to be further away from qualifying for Equalization. Similarly, those provinces which did not benefit from the tax overpayments received higher Equalization.

The amendment clarifies the definition of the tax base used to measure fiscal capacity by ensuring that capital gains refunds made to mutual fund trusts are not included in the measure.

The amendment would become effective for the fiscal years beginning in 2001-2002, which remains open for adjustment until September 2004.

Mining tax base: the amendments (1.(5), 1.(6)) are intended to remove an anomaly in the way mining revenues are equalized. In the current Regulations, the measure of the mining tax base can be calculated to be less than zero even though in reality a tax base can never be less than zero. The amendment will remove this anomaly by setting amounts that are less than zero to equal zero and by allowing the carry-forward of negative amounts into future fiscal years.

Population submitted by the Chief Statistician: new wording (2.(1), 2.(2)) is to extend by one month, to 30 months after the end of a fiscal year, the time by which the Chief Statistician must submit to the Minister the estimates of provincial population used in the calculation of the Equalization program.

The purpose of extending the period is to make the population statistics used in calculating Equalization and the Canada Health and Social Transfer (CHST) the same. The cash component of the CHST is determined in part by Equalization. When different population statistics are used, the resulting calculations are inconsistent. The change rectifies that problem.

Sales Tax Base: The amendment (1.(4), 1.(8), 1.(9)) identifies the sources of information received from Statistics Canada to be used in the calculation of the retail sales tax base.

Alternatives

The changes to the personal income tax and the mining tax bases are the only feasible solutions to the problems. Continuing with the status quo would result in an inappropriate measurement of the fiscal capacity of provinces for those tax bases.

The amendment directing the Chief Statistician to submit provincial population numbers to the Minister after 30 months following the end of a fiscal year will allow the use of the same provincial population statistics for both Equalization and the CHST programs. The amendment is the only means of correcting the anomaly.

The changes add clarity to the regulations but make no substantive change.

Benefits and Costs

The amendment to the personal income tax base is made to implement a portion of the September 4, 2002 announcement by the Minister of Finance with respect to Tax Collection Agreement Overpayments. During the period from 1997 to 2000, Equalization payments in excess of $1 billion were paid to some provinces reflecting the impact of the TCA accounting error. The amendment will ensure that the Equalization calculation for 2001-2002 and forward will reflect the correction of the TCA accounting error and will not result in overpayments to some provinces and underpayments to others.

The change to the formula for calculating the mining tax base corrects a mathematical anomaly. This amendment will result in slight adjustments to payments to provinces but provinces are in agreement with the change.

The change in the timetable for introducing population statistics will have some distributional impacts among provinces. The exact impacts will not be known until new population statistics are published in September 2003.

The amendment related to the sales tax base has no financial impact.

Consultation

Provinces have been consulted on all proposed changes.

Compliance and Enforcement

Not applicable

Contact

Pierre Doucet
Department of Finance
Federal-Provincial Relations Division
L'Esplanade Laurier, 15th Floor, East Tower
140 O'Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: (613) 996-3598

Footnote a 

S.C. 1999, c. 31, s. 93

Footnote b 

S.C. 1995, c. 17, s. 45(1)

Footnote 1 

SOR/2000-100

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