LS-333E
BILL C-65: AN ACT TO
AMEND THE FEDERAL-
PROVINCIAL FISCAL ARRANGEMENTS ACT
Prepared by:
Richard Domingue
Economics Division
5 February 1999
LEGISLATIVE HISTORY OF BILL C-65
HOUSE OF COMMONS |
SENATE |
Bill Stage |
Date |
Bill Stage |
Date |
First Reading: |
2 February 1999 |
First Reading: |
11 March 1999 |
Second Reading: |
15 February 1999 |
Second Reading: |
16 March 1999 |
Committee Report: |
5 March 1999 |
Committee Report: |
23 March 1999 |
Report Stage: |
9 March 1999 |
Report Stage: |
|
Third Reading: |
10 March 1999 |
Third Reading: |
24 March 1999 |
Royal Assent: 25 March 1999
Statutes of Canada 1999, c.11
N.B. Any substantive changes in this Legislative Summary which have
been made since the preceding issue are indicated in bold print.
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TABLE OF CONTENTS
BACKGROUND
DESCRIPTION AND
ANALYSIS
COMMENTARY
BILL C-65: AN ACT TO AMEND THE FEDERAL-PROVINCIAL
FISCAL ARRANGEMENTS ACT
BACKGROUND
Bill C-65, An Act to amend the Federal-Provincial Fiscal
Arrangements Act, was tabled in the House of Commons on 2 February 1999. Its purpose
is to renew the current Equalization Program, which expires on 31 March 1999, for a
further five-year period beginning on 1 April 1999.
The Equalization Program is a major federal government transfer
program; its purpose is to reduce disparities among the provinces revenue-raising
abilities, or fiscal capacities. The Equalization Program is the only transfer program
enshrined in the Constitution Act (section 36).
The federal governments purpose in redistributing wealth is to
allow the less prosperous provinces to provide public services of a quality and at
taxation levels comparable to those in other provinces. For example, 1998-99 equalization
payments will provide provinces applying the average national tax rate with revenue of
$5,431 per capita in order to fund public services (see graph). At present, seven
provinces are eligible for equalization payments: Newfoundland, Prince Edward Island, Nova
Scotia, New Brunswick, Quebec, Manitoba and Saskatchewan. These provinces may spend the
equalization payments unconditionally in accordance with their own priorities.
Equalization payments are calculated according to a formula set out in
the Federal-Provincial Fiscal Arrangements Act (the Act). First, each
provinces fiscal capacity is calculated by applying an average national tax rate to
provincial and local tax bases. Second, provincial fiscal capacities are compared to a
representative, composite, standard fiscal capacity based on Quebec, Ontario, Manitoba,
Saskatchewan and British Columbia. Third, if a provinces fiscal capacity is lower
than the standard, its per capita revenue is raised to the standard by means of
equalization payments; if a provinces fiscal capacity is higher than the standard,
the province does not receive equalization payments.
Source: Finance Canada, "Minister of Finance Tables Legislation to
Renew the Equalization Program," News Release, 2 February 1999 (Internet address http://www.fin.gc.ca/newse99/99-012e.html).
DESCRIPTION AND
ANALYSIS
Clause 1 of the bill, amending section 3 of the Act, would define a
renewed five-year period for the Equalization Program, from 1 April 1999 to 31 March 2004.
Clause 2(2) would update the definitions of revenue sources used in
calculating provincial fiscal capacities. Two major additions are noteworthy:
(1) third-tier oil revenues (from new, costly-to-extract deposits in
Saskatchewan and Alberta); and
(2) revenues from games of chance (from casinos and video lottery
terminals, for example).
In order to lessen the bills impact on the provinces, clause 2(1)
provides for the new calculation formula to be phased in over four years: for the
provinces eligible for equalization payments in 1999-2000, for example, 80% of fiscal
capacity would be calculated using the revenue sources as defined on 31 March 1999, and
20% using the newly defined revenue sources. Only starting in 2003 would the
provinces fiscal capacities be calculated using the new definitions alone.
Bill C-65 would also amend the provisions concerning floor and ceiling
equalization payments. Clause 2(4), amending section 4(6) and other sections of the Act,
would guarantee that an equalization payment to a province could not be lower than the
previous years payment, less a threshold amount defined in new section 4(7). Clause
2(5), amending section 4(9) of the Act, would prescribe the formula to be used if total
equalization payments exceeded a ceiling ($10 billion in 1999-2000), to be adjusted
in subsequent years depending on the rate of growth of the Gross Domestic Product (GDP).
The provision regarding floor equalization payments would protect the provinces against
excessive reductions from one year to the next. The provision regarding ceiling
equalization payments would protect the federal government from too-rapid growth in
equalization payments.
Clause 2(6) would make minor amendments to section 4(11) of the Act, in
order to solve the problem of taxback. The Act limits excessive taxbacks--large reductions
in equalization payments for provinces with concentrated revenues from natural resources.
Taxbacks are considered excessive when they are roughly equivalent to provincial revenue
increases from particular sources. The Act allows provinces in this situation to choose
whether to have the revenue source fully subject to equalization, or to have only 70% of
it subject to equalization, but without receiving equalization offset payments under the Canada-Nova
Scotia Offshore Petroleum Resources Accord Implementation Act or the Canada-Newfoundland
Atlantic Agreement Implementation Act.
In order to offset decreased provincial tax revenues, the Minister of
Finance may make stabilization payments to provinces. Clause 3 would make minor changes to
this provision in accordance with the new list of revenue sources. Interestingly, Ontario
is the province that has benefited most from stabilization payments in recent years.
Clause 4 would renew for a further five-year period the agreement on
provincial personal income tax revenue guarantee payments. The revenues of provinces that
participate in tax collection agreements could be considerably decreased in a given year
as a result of federal tax policy amendments; thus the Act provides guarantees in order
partially to offset provincial tax revenue reductions.
COMMENTARY
The provinces all support renewal of the Equalization Program. The
reason is simple: strong economic growth in Ontario means higher equalization payments to
all recipient provinces. Finance Canada anticipates a $700 increase in total equalization
payments over the next five years. Saskatchewan (because of the farm income crisis and
lower revenues from energy resource extraction fees), the Atlantic provinces (because of
weak economic growth), and perhaps even Quebec should receive amounts higher than
projected. Saskatchewan would prefer that the new formula not be phased in over four
years.
This year, Newfoundland will receive $30 million more than projected,
an amount that will fully cover its deficit. Equalization payments and transfers under the
Canada Health and Social Transfer (CHST) already account for 40% of Newfoundlands
revenues.
Against this background of increasing equalization payments, the
provinces are not opposed to the newly defined revenue sources either. In his 1997 report,
the Auditor General of Canada had pointed out that revenue sources used in calculating
provincial fiscal capacities should be corrected to include sales taxes, resources, and
lotteries, for example. Bill C-65 and the regulations that will accompany it should
correct a number of the discrepancies noted by the Auditor General.
Nor are the provinces opposed to including casino revenues in revenue
sources, an approach that would increase Ontarios fiscal capacity and benefit
equalization recipient provinces.
As well, Quebec and New Brunswick are very satisfied with the new
formula for calculating forestry revenues. The old formula expressed forestry revenues in
cubic metres of timber cut. Since revenue depends on production value, not production
volume (for example, Quebec spruce is worth much less than British Columbia cedar), the
old formula overestimated provincial fiscal capacities, something the new formula would
correct.
Alberta and Saskatchewan are also satisfied with the new classification
of certain petroleum deposits. Some locations use expensive extraction methods and thus
have lower revenues. The old formula, using the average national tax rate per barrel of
oil produced, overestimated provincial revenues. The new formula, by adding another class
of petroleum extraction, will no longer overestimate these provinces fiscal
capacities.
However, the bill will not solve some basic problems of the
Equalization Program. For example, provincial fiscal capacities are compared with a
representative, composite, standard fiscal capacity made up of Quebec, Ontario, Manitoba,
Saskatchewan and British Columbia. While increased Ontario fiscal capacity would increase
equalization payments, any increased Alberta or Newfoundland fiscal capacity would have no
effect on those payments. On the other hand, increased individual income tax rates in
Newfoundland would increase equalization payments across Canada, by increasing the average
national income tax rate. A number of provinces claim that in making these calculations
the federal government should include all the provinces, not just five.
Another basic criticism of the Equalization Program persists. As is
indicated in a recent study by the C.D. Howe Institute, "income is transferred from
poorer Canadians in richer regions to richer Canadians in poorer regions." For
example, a poor Vancouver East family (British Columbia) helps provide equalization
payments that benefit a rich Westmount family (Quebec). As a result, the federal
government should perhaps review the impact of equalization payments on the redistribution
of wealth in Canada.
Lastly, increased equalization payments will give the federal
government less room to manoeuvre, and can be achieved only at the expense of debt
paydown, lower taxes, increased program spending on health and social services, or all
three.
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