Federal Administration of Provincial Taxes: 1
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Foreword

The framework for federal-provincial-territorial co-operation in the area of tax policy has evolved constantly since 1941, the beginning of the "tax rental" agreements between the two orders of government. The objective of this document is to articulate significant changes that are again steering us in new directions and establishing a new era for co-operative administration of federal and provincial/territorial taxes.

The "new directions" outlined in this document are the product of much work on the part of both federal and provincial/territorial officials over the past two years. The core papers that provide the foundation for the new directions are the paper Tax on Income (1998) and the new guidelines for the Federal Administration of Provincial Taxes (1997). As new issues arise in both of these areas, federal and provincial officials will continue to work, as in the past, to resolve them in a mutually-satisfactory fashion.

The reasons that brought federal and provincial/territorial governments together as partners in tax collection agreements for close to sixty years continue to exist today: these agreements allow the two orders of government to co-ordinate their tax policies, while providing substantial tax policy flexibility to provinces and territories, to simultaneously achieve national and regional social and economic objectives, all in the interest of taxpayers. In a federal system such as Canada's, such agreements provide the balance that is essential for the federal government to focus on national social and economic performance and for the provinces and territories to concentrate on regional social and economic issues, which is rightly their domain.

The face of federal-provincial-territorial relations and, in particular, tax co-ordination is ever changing. The Federal-Provincial Tax Collection Agreements, that replaced the tax rental agreements, were signed in 1962. Since that time, the Agreements have continued to evolve within the same basic framework, and have provided both orders of government with an effective mechanism for the administration of income taxes.

As a 1991 discussion paper on tax co-ordination1 stated:

"… the Tax Collection Agreements serve the national interest. They help to reduce complexity and duplication; promote tax harmony and thus the free flow of labour and capital across Canada and economic prosperity; help Canadians identify which order of government is responsible for their taxes; and, at the same time, provide provinces with a degree of flexibility over their tax systems."

In recent years, some provinces and territories have increasingly sought enhanced tax policy flexibility as a means of meeting their own evolving social and economic priorities. Since tax policy and tax administration are inherently linked, this implies that this flexibility applies to both. In recognizing this, the federal government has worked with provinces and territories to identify ways of improving and enhancing the evolution of our tax policy and tax administration arrangements with the provinces and territories in taxation matters. Both orders of government recognize that, in order to move forward together, the framework for change should ensure a balance between the federal objective of a co-ordinated tax system nationally, and the provincial/territorial objective of policy flexibility.

Four recent developments have contributed to the evolution of the tax policy framework. The first major development under this new balanced approach to provide more flexibility to provinces and territories is federal and provincial/territorial agreement on tax on income. Provinces and territories that are interested in moving to a tax-on-income system are free to do so.

A second development under this approach is the new "guidelines." The federal government administers various tax measures for provinces and territories and collects provincial/territorial revenue, subject to tax collection guidelines developed in 1981. Over time, both the federal government and provinces/territories have expressed dissatisfaction with these guidelines, in principle as well as in application. The federal government has developed new guidelines in close consultation with provincial and territorial governments to address both the provincial/territorial desire for enhanced policy flexibility and the federal objective of maintaining a core degree of harmonization through costing incentives. These new guidelines came into force in January 1998, with appropriate transition for existing measures in existence prior to that date. The guidelines establish the criteria that will be applied by the Department of Finance in determining whether or not provincial tax measures will be administered under the Tax Collection Agreements, and under what costing framework. Revenue Canada will be responsible for the details pertaining to administration.

Another important development is the transformation of Revenue Canada into the Canada Customs and Revenue Agency (CCRA). One of the reasons for the establishment of the CCRA is to create a vehicle that will be able to work closely with provinces and territories in the delivery of programs. By using the services available from the CCRA there is the potential to reduce overall administration costs by eliminating inefficient overlap and duplication between federal and provincial/territorial tax administrations and compliance costs for taxpayers.

A final important aspect that has improved federal-provincial-territorial tax co-ordination, so governments do not work at cross-purposes, is the work of the Federal-Provincial Committee on Taxation. This Committee does, and will continue to, discuss all important federal and provincial/territorial tax policy and administrative changes to ensure that their national and regional consequences are well understood before policy changes are implemented.

The combination of the tax-on-income option for provincial and territorial personal income tax and the new guidelines for federal administration of provincial and territorial taxes represents significant changes to the Federal-Provincial Tax Collection Agreements. Along with the new CCRA and the continuing work of the Committee on Taxation, we are quite convinced that these changes will substantially improve Canadian tax policy and tax administration.



Honourable Martin Cauchon,
P.C., M.P.
Minister of National Revenue

Honourable Paul Martin,
P.C., M.P.
Minister of Finance


A Provincial Tax-on-Income System for Personal Income Tax:  Highlights

This note sets out the highlights of the joint federal/provincial/territorial tax-on-income (TONI) paper that, after extensive discussions, was completed by the Committee on Taxation in October 1998. All Assistant Deputy Ministers of taxation of the eleven provinces/territories with whom the federal government has a Tax Collection Agreement confirmed their acceptance of the document, which was then transmitted to Deputy Ministers of Finance for review and approval. The Deputy Ministers subsequently affirmed their agreement on behalf of their governments. This paper is Annex 2 of this document.

The joint federal/provincial/territorial paper accommodates the provinces' desire for increased tax policy flexibility. For those provinces or territories that choose to move from tax-on-tax to tax-on-income, technical issues particular to their situations may arise. These issues will be resolved jointly, as plans for the implementation of tax-on-income move forward. The resolution of these technical issues will be based upon the principles set in the tax-on-income report included in this document as Annex 2.

Key Points

  1. Provinces now have the option of levying their personal income taxes either on taxable income or on basic federal tax.

  2. Provinces are required to use the federal definition of taxable income, thus ensuring a common tax base.

  3. Provinces/territories will have increased flexibility in establishing their tax structure, with control over:

  • the number of tax brackets (including a zero rate on a first income bracket, if desired)

  • tax rates to go with these brackets

  • any number of surtaxes

  • low-income tax reductions

  • a distinct block of provincial/territorial non-refundable tax credits (to be multiplied by the lowest non-zero provincial tax rate)

  • any number of refundable tax credits.

  1. With respect to the distinct block of provincial/territorial non-refundable tax credits:

  1. Provinces may supplement federal credits or add any additional unique provincial credits.

  2. Provinces would have the flexibility to not follow any federal increases in a credit in the future as they would be able to maintain the value of a gross provincial credit equal to the minimum of the 1997 value and the current year value of the corresponding federal credit.

  3. For expenditure-based credits (e.g. CPP, EI, tuition fees, medical expenses, charitable donations), provinces would have the flexibility to increase credits beyond the level of the gross federal credit, although they would not have the option of falling below the federal level.

  4. Provinces would have the flexibility of crediting charitable donations below a threshold at their lowest non-zero provincial tax rate and the balance at their highest provincial tax rate, while maintaining the two-tier credit structure for charitable gifts.

  5. To ensure simplicity and consistency, provincial credits would use the same definitions as federal credits, where federal definitions exist.

Federal Administration of Provincial Taxes:  Highlights

The new guidelines for the administration of provincial taxes were discussed at the December 1997 meeting of Finance Ministers. These guidelines allow federal administration of provincial taxes with minimal constraints on what these taxes could be (see Annex 3).2 Provinces would not "poach" â€" provide incentives available only to taxpayers outside the province to encourage them to relocate to within their province.3

Key Points

  1. The federal government would administer provincial tax measures that are both harmonized in a policy sense and unharmonized.

  2. Harmonized tax measures, within the Tax Collection Agreements and the Comprehensive Integrated Tax Co-ordination Agreements, would be administered either:

  • free of charge if they mimic their national counterparts; or

  • at the incremental cost of administration, if they are harmonized but somewhat different from their national counterparts.4

The costing structure, therefore, offers provinces incentives for harmonization through a virtual elimination of the cost of tax collection for them.

  1. For measures that are not harmonized, provinces would be charged the average cost of administration.

  2. Following discussions at the Federal-Provincial Committee on Taxation, and for consistency between the personal and corporate income tax systems, it was decided that, to provide further provincial flexibility, provinces may alter, for the purpose of calculating provincial income tax, the value of various federal expense-related deductions through the use of province-specific tax credits.

  • Given that provinces are to follow the federal definition of taxable income, it follows that provinces will apply the same tax rates on the various sources of income.

  1. As for transition to the new system, all new provincial measures introduced after January 1, 1998 are being administered under the new guidelines. Measures in existence prior to that date will continue to be costed as per the existing agreements, until January 1, 2001, when they would fall under the new guidelines. It would be necessary to renegotiate some existing agreements during this period.


1

Personal Income Tax Coordination: The Federal-Provincial Tax Collection Agreements, June 1991, page i.

2

These criteria include: legality, an agreed set of basic principles (self-assessment, no double taxation), and mutually acceptable contractual arrangements between Revenue Canada (Canada Customs and Revenue Agency) and the province (fairness, feasibility). See Annex 3, Federal Administration of Provincial Taxes, December 1997.

3

See Annex 3, Federal Administration of Provincial Taxes, December 1997.

4

Provinces will be charged when their measures differ from federal measures. These differences may arise either because the federal or the provincial governments have made changes.

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