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Federal
transfer payment update
Since
the 2002-2003 Budget last November, the transfer revenue paid
by the federal government to Québec has been revised
downward significantly. For the period 2001-2002 to 2003-2004,
it will be reduced by over $1.8 billion. Close to half of
these revisions are explained by Statistics Canada's decision
to change the method of calculating a single variable, the
stock of residential capital. Furthermore, substantial downward
adjustments of up to an additional $1 billion could be made
beginning in 2002-2003, due to the impact of a Canada Customs
and Revenue Agency (CCRA) error on equalization payments.
On
March 9, 2001, the Québec government created the Commission
on Fiscal Imbalance, which tabled its report on March 7, 2002.
The report deals successively with the nature and magnitude
of fiscal imbalance, its causes and consequences, and possible
solutions. It includes some 20 recommendations for effecting
major transformations in intergovernmental fiscal relations
within Canada.
The
change in methodology introduced by Statistics Canada
The
nature of the revisions to equalization raises major issues.
Close to half of these revisions are attributable to Statistics
Canada's decision to change the method of calculating one
of the variables?the stock of residential capital?which the
federal government uses to try to approximate the property
tax base for equalization. This change in methodology reduces
the funds payable to Québec by $470 million in 2001-2002
and by $185 million over each of the following years.
The
method used relies on a complex formula based on a set of
economic variables that, most often, have no direct relation
to the property assessment rolls drawn up by municipalities.
For over 15 years, Québec has maintained that municipal
property assessment rolls are the true measure of the capacity
to collect revenue from property taxes. Accordingly, equalization
of property taxes should be based on these assessment rolls,
not on a calculation formula such as the one used by the federal
government.
The
equalization program is reviewed by committees of federal
and provincial officials. The results of these reviews can
give rise to revisions to the program. However, these changes
can only be introduced once every five years. The program
as it now stands covers the period 1999 to 2004. Accordingly,
no change in methodology should be made to the program before
2004.
The
error made by Canada Customs and Revenue Agency
Canada
Customs and Revenue Agency (CCRA) had been making, since 1972,
a significant error with regard to the personal income tax
it collects. For example, between 1993 and 1999, CCRA overpaid
$3.3 billion to Ontario, Manitoba, British Columbia and Alberta.
Québec is not affected by the federal government's
overpayments to these provinces, as it collects its own taxes.
However, correction of the error could lead to significant
downward revisions to Québec's equalization payments.
Recovery
of the overpayments to the provinces would reduce the amount
of personal income tax, which would lead to a downward revision
of equalization payments for all the recipient provinces.
In
addition, measurement of the fiscal capacity of the provinces
could also be affected. If that is the case, the impact on
equalization could be substantial. For the period 1993 to
1999, Québec would lose $170 million in regard to revenue
subject to equalization, plus a further $452 million if the
measurement of fiscal capacity is changed. The year 2000 alone
could add losses of $55 million in terms of revenue subject
to equalization and of $148 million in terms of tax base.
The total impact for Québec for the period 1993 to
2000 could reach $825 million.
Moreover,
in view of the additional impact of CCRA's error for the period
1972 to 1992, it is reasonable to believe that it could result
in a total revenue shortfall for Québec of $1 billion.
Accordingly, the financial stakes are considerable.
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