Tax Transfers

What is a Tax Transfer?

• A federal tax transfer involves the federal government transferring some of its “tax room” to provincial and territorial governments. Specifically, a tax transfer occurs when, upon agreement, the federal government reduces its tax rates and provincial and territorial governments simultaneously raise their tax rates by an equivalent amount.
• Tax transfers are associated with both the Canada Health Transfer (CHT) and the Canada Social Transfer (CST), and provide important support to provinces and territories for health, post-secondary education, and social services.
• As a result of the restructuring of the Canada Health and Social Transfer (CHST) into the CHT and the CST, the cash and tax components of the CHST were apportioned between the two new transfers in the same ratio as overall provincial spending in the areas covered by the two transfers.
• The tax transfer was part of a federal-provincial-territorial arrangement that took effect in 1977. The federal government then transferred 13.5 percentage points of its personal income tax and one percentage point of its corporate income tax to the provinces and territories.

Impact of a Tax Transfer

• With a tax transfer, since all governments act in a coordinated way, the changes in federal and provincial and territorial tax rates offset one another and there is no net financial impact on the taxpayer. Revenues that would have flowed to the federal government flow instead to provincial and territorial governments.
• In this way, a tax transfer has the same impact on federal and provincial/territorial budgets as a cash transfer. It represents forgone revenue to the federal government each and every year, and additional revenue to provincial and territorial governments. Tax transfers provide a significant source of revenue for provinces and territories since they increase in value over time with growth in their respective economies.

Significant Support for Provinces and Territories

• Tax transfers provide a significant amount of money to the provinces and territories.
• In 1977–78, major tax transfers to provincial and territorial governments were worth $2.7 billion. Today, these tax transfers are worth 8 times as much and continue to grow in line with the economy.
• In 2010–11, provinces and territories will receive a total of $57.7 billion in CHT and CST. Of this, $21.1 billion will be in tax transfers and $36.6 billion in cash transfers.

- Major Federal Transfers -