Ottawa, October 7, 2005
Archived - Minister of Finance Introduces Legislation for a "Balanced Approach" to Unanticipated Surpluses
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Bill C- 67, An Act respecting the allocation of unanticipated surpluses and to amend the Income Tax Act
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Minister of Finance Ralph Goodale today introduced legislation in Parliament that would allow the Government to allocate future unanticipated federal surpluses equally between cutting personal income taxes, spending on social and economic priorities, and reducing the federal debt ("accumulated deficit").
The bill-An Act respecting the allocation of unanticipated surpluses and to amend the Income Tax Act-would apply to any surplus over the $3-billion Contingency Reserve that arises between the time the budget is presented and when the federal books are closed for each fiscal year. This would start with the current fiscal year, 2005-06.
The proposed legislation would change the current practice whereby all of the surplus at the end of each fiscal year is applied exclusively to reducing debt.
"Canadians have consistently made it clear that they want us to pursue a balanced approach to how we manage the tax dollars they entrust to us by allocating resources among tax relief, social and economic spending, and debt reduction. This legislation would extend that approach to future unanticipated surpluses," said Minister Goodale.
Under the proposed legislation, one-third of any surplus in excess of the $3-billion Contingency Reserve would be allocated to spending priorities approved by Parliament.
Another third of the unanticipated surplus amount would be used to deliver tax relief to all taxpayers in the form of a one-time credit. As well, this tax relief could be made permanent in following years by increasing the basic personal amount (the amount of income that Canadians may earn without paying federal income tax) and making corresponding changes to the other personal amounts-as long as this was determined by the Minister to be fiscally sustainable.
"This approach confirms our commitment to further easing the tax burden of Canadians as resources allow. This is important to promoting productivity and competitiveness, and a better quality of life for all Canadians and their families in the years ahead," the Minister said.
Minister Goodale said that the proposed legislation also confirms the Government's commitment to balanced budgets and sustained debt reduction. The bill would ensure that the first $3 billion of any surplus (the Contingency Reserve)-if not required for unanticipated economic and fiscal shocks-would continue to be dedicated to debt reduction. And one-third of any unanticipated surplus would also be applied to the debt.
The legislation would take effect for the next five fiscal years, that is 2005-06 to 2009-10.
The Minister also explained that the legislation has been designed so that the Government can allocate resources to affordable housing, post-secondary education, the environment and foreign aid, as set out under An Act to authorize the Minister of Finance to make certain payments (Bill C-48), which was passed by Parliament earlier this year. "The Government will continue to move forward on those priorities as resources allow," he said.
A backgrounder providing more information on the proposed legislation is attached.
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Legislation Regarding Unanticipated Federal Surpluses
The Government believes that balancing budgets each and every year and reducing the burden of national debt are keys to Canada's ongoing prosperity. It also believes in continuing to enhance the transparency of the budget-planning process, so that Parliament can make the most effective decisions regarding the allocation of available resources.
In recent years, this firm commitment to balanced budgets or better has, more often than not, translated into final surpluses exceeding the annual $3-billion Contingency Reserve used in budget planning. This is one of the reasons why, in 2004, the Minister of Finance asked economist Dr. Tim O'Neill to review the Government's fiscal-forecasting processes.
One of Dr. O'Neill's recommendations was that, if the Government is to retain its no-deficit rule, it should "adopt a more formal and structured process for dealing with fiscal surprises" by setting out in advance the contingent allocations among tax cuts, spending initiatives and reducing debt from any unanticipated surpluses.
The Government is following through on this recommendation-and its commitment to greater transparency and accountability in public finances-through the legislation it has introduced.
How the Legislation Would Work
The bill-An Act respecting the allocation of unanticipated surpluses and to amend the Income Tax Act-would grant authority for the Government to allocate any unanticipated increase in the surpluses over the $3-billion Contingency Reserve among tax relief, social and economic spending, and reducing the federal debt ("accumulated deficit"). The guiding principle will be to allocate the unanticipated surplus equally among these priorities, but the precise allocation could vary in any given year according to the absolute size of the funds available and government priorities.
The legislation would apply to any increase in the surplus over the $3-billion Contingency Reserve that arises between the time the budget is presented and the time the fiscal results are finalized. The proposed legislation would be effective for fiscal years 2005-06 to 2009-10, after which it would have to be renewed by Parliament.
The spending authority sought in the bill would apply to purposes and recipients set out in that year's budget or statement by the Minister of Finance, and in legislation that is tabled in the House of Commons before the end of the fiscal year. This would ensure appropriate parliamentary review, debate and approval. As well, the extent to which one-third of the unanticipated surplus is allocated to spending in every year would depend upon the spending priorities identified by the Government.
The tax relief provided under the legislation would be delivered to taxpayers through a one-time tax credit at the time Canadians receive their tax assessment. One-third of the unanticipated surplus would be allocated to such relief.
As well, the bill would allow the Government to make the tax relief permanent, subject to the Minister of Finance's assessment that the fiscal impact in following years is affordable. This permanent relief would be effected through adjustments to the basic personal amount (the amount of income that Canadians may earn without paying federal income tax) and the spouse or common-law partner amount.
The timelines involved in the tax component of the proposed legislation would be as follows, using the 2005-06 fiscal year as an example:
- Any unanticipated surplus for 2005-06 would be determined in September 2006, with the release of the Annual Financial Report of the Government of Canada. At that time the tax relief related to the 2005-06 surplus would be announced and included on the 2006 notice of tax assessment as a credit amount (normally delivered early in 2007).
- At the same time, the Minister of Finance would announce if individual taxes would be permanently cut, starting in the 2007 tax year, by an equivalent amount to the credit (effected through adjustments to the basic personal amount and the spouse or common-law partner amount). Withholdings at source would be changed in January 2007 to reflect the permanent increase in the basic personal amount.
It is anticipated that, in the vast majority of years, the tax relief would indeed be affordable.
The New Legislation and Bill C-48
The proposed legislation would take into account the spending priorities set out in An Act to authorize the Minister of Finance to make certain payments (Bill C-48), passed earlier this year. It proposes that the unanticipated surplus allocation would be triggered to the extent that this surplus is higher than $3 billion, after including spending on C-48 initiatives. The Government is committed to funding the initiatives set out in C-48 on a priority basis.