Regulations Amending Certain Regulations Made Under the Federal-Provincial Fiscal Arrangements Act: SOR/2023-230

Canada Gazette, Part II, Volume 157, Number 24

Registration
SOR/2023-230 November 3, 2023

FEDERAL-PROVINCIAL FISCAL ARRANGEMENTS ACT

P.C. 2023-1107 November 3, 2023

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, makes the annexed Regulations Amending Certain Regulations Made Under the Federal-Provincial Fiscal Arrangements Act under section 40^{footnote a} of the Federal-Provincial Fiscal Arrangements Act ^{footnote b}.

Regulations Amending Certain Regulations Made Under the Federal-Provincial Fiscal Arrangements Act

Canada Health Transfer, Canada Social Transfer and Wait Times Reduction Transfer Regulations

1 Section 2 of the Canada Health Transfer, Canada Social Transfer and Wait Times Reduction Transfer Regulations ^{footnote 1} is replaced by the following:

2 For the purposes of these Regulations and Part V.1 of the Act, the manner in which the Chief Statistician of Canada shall determine the population of a province for a fiscal year is by basing that determination on Statistics Canada’s official estimate of the population of the province on

• (a) June 1 of that fiscal year, for any fiscal year ending before April 1, 2024; or
• (b) July 1 of that fiscal year, for any fiscal year beginning after March 31, 2024.

2 Subsection 4(7) of the Regulations is replaced by the following:

(7) For the purpose of making an estimate under subsection (1), the population of a province for a fiscal year is the population of that province, as estimated by the Minister on the basis of population statistics made available to the Minister by the Chief Statistician of Canada, on

• (a) June 1 of that fiscal year, for any fiscal year ending before April 1, 2024; or
• (b) July 1 of that fiscal year, for any fiscal year beginning after March 31, 2024.

Federal-Provincial Fiscal Arrangements Regulations, 2007

3 (1) The definition adjusted number of litres of gasoline taxed at road-use rate in subsection 1(1) of the Federal-Provincial Fiscal Arrangements Regulations, 2007 ^{footnote 2} is replaced by the following:

adjusted number of litres of gasoline taxed at road-use rate

means, in respect of a province or territory, the number of litres of gasoline taxed at road-use rate that are sold in the province or territory during the calendar year that ends in the fiscal year, as determined by Statistics Canada for the purpose of table 23-10-0066-01, Sales of fuel used for road motor vehicles, annual (× 1,000), or, if Statistics Canada does not make the determination, as determined by the Minister on the basis of any relevant information, including the revenues of those sales divided by that tax rate minus, in the case of a province or territory where gasoline that is sold for use by farm trucks is taxed at road-use rate, the number of litres of gasoline that are sold for use by farm trucks in the province or territory. (nombre rajusté de litres d’essence taxés au taux d’utilisation routière)

(2) Subparagraph (a)(ii) of the definition adjusted number of litres of diesel fuel taxed at road-use rate in subsection 1(1) of the Regulations is replaced by the following:

• (ii) in any other case, taxed at road-use rate and sold in the province or territory during the calendar year that ends in the fiscal year, as determined by Statistics Canada for the purpose of table 23-10-0066-01, Sales of fuel used for road motor vehicles, annual (× 1,000), or, if Statistics Canada does not make the determination, as determined by the Minister on the basis of any other relevant information; and

(3) Subsection 1(1) of the Regulations is amended by adding the following in alphabetical order:

assessed market value of commercial-industrial property

means, in relation to a province or territory for a calendar year, the estimated market value, as of July 1 of the preceding calendar year, of non-residential property other than farm property in the province or territory on January 1 of the calendar year, as determined by the Minister on the basis of data compiled by Statistics Canada from the Census of Agriculture and from information regarding property assessments for tax purposes for the calendar year obtained from municipal assessment agencies and adjusted to ensure inter-jurisdictional comparability. (valeur marchande estimée des propriétés foncières commerciales-industrielles)

4 Paragraph (f) of the definition electricity enterprise in section 3 of the Regulations is replaced by the following:

• (f) Newfoundland and Labrador Hydro;

5 (1) The portion of paragraph 4(1)(d) of the Regulations before subparagraph (i) is replaced by the following:

• (d) in the case of revenues derived from property taxes referred to in paragraph (d) of that definition,

(2) Paragraph 4(1)(d) of the Regulations is amended by adding “and” at the end of subparagraph (ii), by repealing subparagraphs (iv) and (v) and by adding “and” at the end of paragraph (d).

(3) Subsection 4(1.1) of the Regulations is repealed.

6 (1) The portion of paragraph 5(b) of the French version of the Regulations before subparagraph (i) is replaced by the following:

• b) dans le cas des revenus relatifs aux revenus des entreprises visés à l’alinéa 4(1)b), cette définition vise la somme des éléments suivants :

(2) Paragraph 5(b) of the Regulations is amended by striking out “and” at the end of subparagraph (i), by adding “and” at the end of subparagraph (ii) and by adding the following after subparagraph (ii):

• (iii) the difference, as determined on the basis of data prepared by Statistics Canada for the purpose of the Government Finance Statistics, that is obtained by subtracting all remittances to the provincial government of the profits of an electricity enterprise for the fiscal year from the product of
  • (A) the aggregate, over all provinces, of the total profits, before the distribution of dividends, that are attributable to the province for the calendar year that ends in the fiscal year from electricity enterprises that have a profit in that calendar year and are owned 90% or more by that province, or by that province and one or more other provinces, and
  • (B) a fraction whose numerator is the amount of the total profits referred to in clause (A) that are attributable to the province less the amount by which any losses that were accumulated in the seven calendar years before that calendar year by an electricity enterprise referred to in that clause exceed the portion of those losses subtracted under this clause for that electricity enterprise in relation to that period, but only to the extent that the amount is not more than the total profits for that calendar year of that electricity enterprise, and whose denominator is the aggregate, over all the provinces, of those numerators;

(3) The portion of paragraph 5(d) of the Regulations before the description of B1 is replaced by the following:

• (d) in the case of revenues derived from property taxes, described in paragraph 4(1)(d), the weighted sum of three sub-bases, determined by the formula

  (B1 × 0.611) + (B2 × 0.378) + (B3 × 0.011)

  where

(4) The descriptions of B2 and B3 in paragraph 5(d) of the Regulations are replaced by the following:

• B2 is the market value commercial-industrial sub-base as determined by the formula

  (VC ÷ VC1 × 0.7) + (P ÷ P1 × 0.3)

  where

  VC

  is the assessed market value of commercial-industrial property in the province for the calendar year that ends in the fiscal year,

  VC1

  is the aggregate, over all provinces, of the amounts determined for VC,

  P

  is the population of the province for the fiscal year, as determined in accordance with section 11, and

  P1

  is the aggregate, over all provinces, of the amounts determined for P, and

• B3 is the market value farm sub-base as determined by the formula

  (VF ÷ VF1 × 0.7) + (P ÷ P1 × 0.3)

  where

  VF

  is the market value of the land and service buildings components of farm real estate in the province for the calendar year that ends in the fiscal year, as determined by Statistics Canada for the purpose of table 32-10-0056-01, Balance sheet of the agricultural sector as at December 31st,

  VF1

  is the aggregate, over all provinces, of the amounts determined for VF,

  P

  is the population of the province for the fiscal year, as determined in accordance with section 11, and

  P1

  is the aggregate, over all provinces, of the amounts determined for P.

7 Section 9 of the Regulations is amended by adding the following after subsection (2):

(3) Subject to subsection (4), the following constitute miscellaneous revenues for the purpose of paragraph (b) of the definition revenue to be equalized in subsection 3.5(1) of the Act:

• (a) any revenues derived by a province that are not included as revenues under subsection 4(1), including
  • (i) those derived from natural resources, other than those described in paragraph 4(1)(e),
  • (ii) those derived from fines and penalties imposed by the province, other than those imposed on businesses, and
  • (iii) those that are included in the “Other taxes on use of goods and on permission to use goods or perform activities”, “Other taxes on goods and services n.e.c.”, “Other taxes”, “Voluntary transfers other than grants” and “Miscellaneous and unidentified revenue n.e.c.” revenue categories of the Government Finance Statistics, including those received for gaming licences or permits issued to charities or other organizations; and
• (b) any revenues derived by a local government that are not included as revenues under subsection 4(1), including
  • (i) those derived from fines and penalties imposed by a local government, other than those imposed on businesses, and
  • (ii) those that are included in the “Other taxes on use of goods and on permission to use goods or perform activities”, “Other taxes on goods and services n.e.c.”, “Other taxes”, “Voluntary transfers other than grants” and “Miscellaneous and unidentified revenue n.e.c.” revenue categories of the Government Finance Statistics, including those received for gaming licences or permits issued to charities or other organizations.

(4) The following revenues are excluded from miscellaneous revenues:

• (a) revenues included in the “Sales of goods and services” revenue category of the Government Finance Statistics;
• (b) revenues included in the “Social contributions” revenue category of the Government Finance Statistics;
• (c) revenues included in the “Property income” revenue category of the Government Finance Statistics;
• (d) any transfer payments received from other governments;
• (e) payments to a province by the Government of Canada under section 99 of the Softwood Lumber Products Export Charge Act, 2006;
• (f) personal and commercial auto insurance premiums; and
• (g) agricultural insurance premiums.

8 Section 11 of the Regulations is replaced by the following:

11 For the purposes of Part I of the Act and this Part, the manner in which the Chief Statistician of Canada shall determine the population of a province for a fiscal year is by basing that determination on Statistics Canada’s official estimate of the population of the province on

• (a) June 1 of that fiscal year, for any fiscal year ending before April 1, 2024; or
• (b) July 1 of that fiscal year, for any fiscal year beginning after March 31, 2024.

9 (1) Subparagraphs 12(2)(b)(i) and (ii) of the Regulations are replaced by the following:

• (i) if the information is required on a fiscal year basis, for the three fiscal years immediately preceding the fiscal year in which the certificate is submitted, or
• (ii) if the information is required on a calendar year basis, for the calendar year that ends in the fiscal year immediately preceding the fiscal year in which the certificate is submitted and the two prior calendar years.

(2) Paragraph 12(3)(b) of the Regulations is amended by striking out “and” at the end of subparagraph (ii) and by adding the following after subparagraph (ii):

• (ii.1) the assessed market value of commercial-industrial property referred to in the description of VC in paragraph 5(d), and

(3) Paragraph 12(3)(c) of the Regulations is replaced by the following:

• (c) for each province, information from the Government Finance Statistics regarding the revenues described in sections 4 and 7 and subsections 9(3) and (4), other than those described in subparagraphs 4(1)(e)(vii) and (viii) and 7(1)(z.5)(i) and (ii).

10 (1) The definition assessed market value of commercial-industrial property in section 17 of the Regulations is repealed.

(2) The definition payroll tax system in section 17 of the Regulations is replaced by the following:

payroll tax system

means the set of rules relating to the imposition, by a province or territory, of tax on the payroll of employers. (régime d’impôt sur la masse salariale)

11 (1) The portion of paragraph 18(1)(h) of the Regulations before subparagraph (i) is replaced by the following:

• (h) in the case of revenues derived from property taxes referred to in paragraph (h) of that definition,

(2) Paragraph 18(1)(h) of the Regulations is amended by adding “and” at the end of subparagraph (ii), by repealing subparagraphs (iv) to (vi) and by adding “and” at the end of paragraph (h).

(3) Subsection 18(2) of the Regulations is repealed.

12 (1) Subparagraphs 19(1)(f)(i) to (iii) of the Regulations are replaced by the following:

• (i) the revenue derived by all provinces and territories from the sale of spirits in the fiscal year, as determined by the Minister on the basis of information provided by the provinces, the territories and Statistics Canada, multiplied by a fraction whose numerator is the volume of spirits sold in the province or territory in the fiscal year, as determined by Statistics Canada for the purpose of table 10-10-0011-01, Value of sales of alcoholic beverages of liquor authorities and other retail outlets, by beverage type (× 1,000), and whose denominator is the aggregate, over all provinces and territories, of those numerators,
• (ii) the revenue derived by all provinces and territories from the sale of wine in the fiscal year, as determined by the Minister on the basis of information provided by the provinces, the territories and Statistics Canada, multiplied by a fraction whose numerator is the volume of wine sold in the province or territory in the fiscal year, as determined by Statistics Canada for the purpose of table 10-10-0011-01, Value of sales of alcoholic beverages of liquor authorities and other retail outlets, by beverage type (× 1,000), and whose denominator is the aggregate, over all provinces and territories, of those numerators, and
• (iii) the revenue derived by all provinces and territories from the sale of beer in the fiscal year, as determined by the Minister on the basis of information provided by the provinces, the territories and Statistics Canada, multiplied by a fraction whose numerator is the volume of beer sold in the province or territory in the fiscal year, as determined by Statistics Canada for the purpose of table 10-10-0011-01, Value of sales of alcoholic beverages of liquor authorities and other retail outlets, by beverage type (× 1,000), and whose denominator is the aggregate, over all provinces and territories, of those numerators;

(2) The portion of paragraph 19(1)(g) of the Regulations before the formula is replaced by the following:

• (g) in the case of revenues derived from payroll taxes, referred to in paragraph 18(1)(g), the aggregate, over all payroll tax systems, of the amount determined for each system by the formula

(3) The portion of paragraph 19(1)(h) of the Regulations before the description of B1 is replaced by the following:

• (h) in the case of revenues derived from property taxes, referred to in paragraph 18(1)(h), the weighted sum of three sub-bases, determined by the formula

  (B1 × 0.611) + (B2 × 0.378) + (B3 × 0.011)

  where

(4) The description of P in the description of B1 in paragraph 19(1)(h) of the Regulations is replaced by the following:

• P is the population of the province or territory for the fiscal year, as determined in accordance with section 27, and

(5) The description of P in the description of B2 in paragraph 19(1)(h) of the Regulations is replaced by the following:

• P is the population of the province or territory for the fiscal year, as determined in accordance with section 27, and

(6) The description of F in paragraph 19(1)(h) of the French version of the Regulations is replaced by the following:

• F représente la valeur des terres et immeubles agricoles dans la province ou le territoire, exprimée en dollars courants, déterminée par Statistique Canada pour sa publication intitulée Recensement de l’agriculture et ajustée afin d’exclure les maisons de fermes se trouvant sur une terre agricole, pour l’année civile la plus récente disponible dans la publication,

13 Section 20 of the Regulations is amended by adding the following after subsection (2):

(3) For the purpose of calculating the national average rate of tax, as defined in subsection 4(1) of the Act, the following constitute miscellaneous revenues for the purpose of paragraph (b) of the definition revenue to be equalized in that subsection:

• (a) subject to subsection (4), any revenues derived by a province or territory that are not included as revenues under subsection 18(1), including
  • (i) those derived from fines and penalties imposed by the province or territory, other than those imposed on businesses, and
  • (ii) those that are included in the “Other taxes on use of goods and on permission to use goods or perform activities”, “Other taxes on goods and services n.e.c.”, “Other taxes”, “Voluntary transfers other than grants” and “Miscellaneous and unidentified revenue n.e.c.” revenue categories of the Government Finance Statistics, including those received for gaming licences or permits issued to charities or other organizations;
• (b) subject to subsection (4), any revenues derived by a local government that are not included as revenues under subsection 18(1), including
  • (i) those derived from fines and penalties imposed by a local government, other than those imposed on businesses, and
  • (ii) those that are included in the “Other taxes on use of goods and on permission to use goods or perform activities,” “Other taxes on goods and services n.e.c.”, “Other taxes”, “Voluntary transfers other than grants” and “Miscellaneous and unidentified revenue n.e.c.” revenue categories of the Government Finance Statistics, including those received for gaming licences or permits issued to charities or other organizations; and
• (c) territorial quarry revenues that are not included as resource revenues under the Yukon Northern Affairs Program Devolution Transfer Agreement and territorial forestry revenues that are not included as resource revenues under the Northwest Territories Lands and Resources Devolution Agreement.

(4) The following revenues are excluded from paragraphs (3)(a) and (b), as applicable:

• (a) revenues included in the “Sales of goods and services” revenue category of the Government Finance Statistics;
• (b) revenues included in the “Social contributions” revenue category of the Government Finance Statistics;
• (c) revenues included in the “Property income” revenue category of the Government Finance Statistics;
• (d) any transfer payments received from other governments;
• (e) payments to a province by the Government of Canada under section 99 of the Softwood Lumber Products Export Charge Act, 2006;
• (f) personal and commercial auto insurance premiums; and
• (g) agricultural insurance premiums.

14 The portion of subsection 24(2) of the Regulations before paragraph (a) is replaced by the following:

(2) For the purpose of subsection (1), the provincial local government expenditures for a fiscal year shall be calculated on a not seasonally adjusted basis and be based on the data from Statistics Canada’s publication entitled National Gross Domestic Product (GDP) by Income and by Expenditure Accounts that is available to the Minister at the time of the calculation referred to in section 4.3 of the Act. The expenditures shall be equal to the sum of

15 Section 27 of the Regulations is replaced by the following:

27 For the purposes of this Part, the manner in which the Chief Statistician of Canada shall determine the population of a province or territory for a fiscal year is by basing that determination on Statistics Canada’s official estimate of that population on

• (a) June 1 of that fiscal year, for any fiscal year ending before April 1, 2024; or
• (b) July 1 of that fiscal year, for any fiscal year beginning after March 31, 2024.

16 (1) Subparagraphs 28(2)(b)(i) and (ii) of the Regulations are replaced by the following:

• (i) if the information is required on a fiscal year basis, for the three fiscal years immediately preceding the fiscal year in which the certificate is submitted, or
• (ii) if the information is required on a calendar year basis, for the calendar year that ends in the fiscal year immediately preceding the fiscal year in which the certificate is submitted and the two prior calendar years.

(2) Paragraphs 28(3)(a) and (b) of the Regulations are replaced by the following:

• (b) the population of all provinces and territories, including that for the seven prior fiscal years if the fiscal year is one in which Statistics Canada releases Census population results, as determined by the Chief Statistician of Canada in accordance with section 27;

(3) Paragraph 28(3)(d) of the Regulations is replaced by the following:

• (d) for each province and territory, information from the Government Finance Statistics regarding the revenues described in section 18 and subsections 20(3) and (4), other than those described in paragraph 20(3)(c); and

17 (1) The portion of subsection 33(1) of the French version of the Regulations before subparagraph (a)(i) is replaced by the following:

33 (1) Pour corriger le revenu sujet à stabilisation d’une province pour un exercice en application du paragraphe 6(2) de la Loi, le ministre, à la fois :

• a) ajoute au revenu par ailleurs déterminé le montant de la diminution des revenus de la province au cours de l’exercice qui résulte de changements apportés aux taux ou à la structure soit des impôts provinciaux, soit des autres mécanismes de prélèvement du revenu de la province, notamment les changements suivants :

(2) The portion of paragraph 33(1)(b) of the French version of the Regulations before subparagraph (i) is replaced by the following:

• b) soustrait du revenu par ailleurs déterminé le montant de l’augmentation des revenus de la province au cours de l’exercice qui résulte de changements apportés aux taux ou à la structure soit des impôts provinciaux soit des autres mécanismes de prélèvement du revenu de la province, notamment les changements suivants :

(3) Subsection 33(1) of the Regulations is amended by striking out “and” at the end of paragraph (a), by adding “and” at the end of paragraph (b) and by adding the following after paragraph (b):

• (c) if there is an absence of indexation in the province’s personal income tax system, subtracting, from the amount that would otherwise be determined, the amount, if any, by which the revenues of the province in the fiscal year exceed what they would have been had the province’s personal income tax thresholds, basic personal amount and spouse or common law-partner amount that were not subject to an indexation provision referred to in subsection (3) each been adjusted by the percentage change in the Consumer Price Index for the province for the 12-month period ending on September 30 of the previous fiscal year over the preceding 12-month period, rounded to one decimal place, the digit at that first decimal place being increased by one if the digit at the second decimal place is 5 or more.

(4) Subsection 33(2) of the Regulations is replaced by the following:

(2) A change that results from an indexation provision that has the effect of periodically changing the rate or structure of a tax, or other mode of raising the province’s revenue, as a consequence of a change in the level of prices in the economy as a whole or in the actual or deemed price of certain goods or services shall not be considered, for the purpose of paragraphs (1)(a) and (b), to be a change in the rate or in the structure of that tax or other mode.

(3) For the purpose of paragraph (1)(c) and paragraph 6(2)(b) of the Act, there is an absence of indexation in a provincial personal income tax system if at least one of the province’s personal income tax thresholds, the province’s basic personal amount or the province’s spouse or common-law partner amount is not subject to an indexation provision that has the effect of periodically changing the rate or structure of personal income tax as a consequence of a change in the level of prices in the economy as a whole or in the actual or deemed price of certain goods or services.

(4) For the purpose of paragraph (1)(c), the reference to the Consumer Price Index for a province for any 12-month period means the average of the Consumer Price Index (not seasonally adjusted) for that province, as published by Statistics Canada under the authority of the Statistics Act, for each month in that 12-month period.

18 (1) The portion of subsection 41(1) of the Regulations before subparagraph (a)(i) is replaced by the following:

41 (1) The Minister shall, for each province in relation to each fiscal year in the period beginning on April 1, 2007 and ending on March 31, 2029, calculate the net aggregate of overpayments to be recovered from that province by adding

• (a) the net total of all underpayments and overpayments in relation to the following payments made under the Act or a tax collection agreement concluded under the Act, that are shown in that fiscal year to have been made in relation to each previous year within the period beginning on April 1, 1994 and ending on March 31, 2028:

(2) Subsection 41(2) of the Regulations is replaced by the following:

(2) On the request of a province, the Minister shall not, during a fiscal year, recover any amount of the net aggregate of overpayments that is more than $174 per capita, based on the population of the province as determined under section 11.

Coming into Force

19 (1) Subject to subsections (2) and (3), these Regulations come into force on the day on which they are registered.

(2) Section 17 comes into force on December 1, 2023, but if these Regulations are registered after that day, that section comes into force on the day on which these Regulations are registered.

(3) Subsection 18(2) comes into force on April 1, 2024, but if these Regulations are registered after that day, that subsection comes into force on the day on which these Regulations are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

Budget 2023 announced the Government’s intention to renew the Equalization and Territorial Formula Financing (TFF) programs for a five-year period beginning April 1, 2024, along with technical changes to improve the accuracy and transparency of the calculation of entitlements. It also proposed to make a technical change to the Fiscal Stabilization program. Legislative amendments to the Federal-Provincial Fiscal Arrangements Act (FPFAA) were subsequently made through the Budget Implementation Act, 2023, No. 1 (BIA1 2023) to extend the authority of the Minister of Finance to make Equalization and TFF payments for a five-year period beginning on April 1, 2024, and ending on March 31, 2029, and to implement some of the technical changes; most of the technical changes must be made through regulatory amendments to the Federal-Provincial Fiscal Arrangements Regulations, 2007 (FPFAR). The regulatory amendments must be in place before the December 2023 determination of Equalization and TFF payments for 2024–2025.

Background

The Government of Canada provides significant financial support to provincial and territorial governments on an ongoing basis to assist them in the provision of programs and services. There are four main transfer programs: the Canada Health Transfer (CHT), the Canada Social Transfer (CST), Equalization and TFF.

The CHT provides long-term predictable funding for health care and supports the principles of the Canada Health Act. The CST is intended to support three broad areas of social programs: post-secondary education, social assistance and social services, and early childhood development and early learning and childcare. Both are made on an equal per capita basis to provide comparable treatment for all Canadians, regardless of where they live.

Equalization and TFF are unconditional transfers from the Government of Canada to provincial and territorial governments designed to reduce fiscal disparities among provinces and territories. Equalization enables provincial governments with lower fiscal capacity to provide reasonably comparable levels of public services at reasonably comparable levels of taxation. Similarly, TFF provides funding to enable territorial governments to provide a range of public services comparable to those offered by provincial governments at comparable levels of taxation, taking into account the higher cost of providing programs and services in the North.

The broad parameters of the formulae which determine Equalization and TFF entitlements are contained in the FPFAA. The FPFAR contain the details of the calculations for each formula, such as which Statistics Canada data series are to be used in determining entitlements.

Equalization is based on fiscal capacity measured across the following five bases:

1. personal income taxes;
2. business income taxes;
3. consumption taxes;
4. property taxes; and
5. natural resources.

The FPFAR set out how fiscal capacity is measured for each of these five bases. In general, fiscal capacity is the measure of how much revenue a province could raise from a base if it were to apply the national average tax rate. For a given base, the national average tax rate is calculated by dividing total provincial tax revenues to be equalized on that base by total provincial taxable activity in that base.

A province’s fiscal capacity for a base will generally differ from the actual revenues it collects. For example, for a province which chooses to have a lower tax rate for a certain tax base, the revenues it actually collects will be below its measured fiscal capacity (its ability to raise revenues at nationally representative tax rates) for that base.

Generally speaking, Equalization payments fill the gap between a province’s fiscal capacity and the average fiscal capacity of all ten provinces, on a per capita basis. This means that, in general, provinces which have per capita fiscal capacities below the national average receive payments to raise their fiscal capacities to the national average. Provinces with fiscal capacity above the national average do not receive payments.

Since payments are measured on a per capita basis, the total amount received by a province also depends upon the size of its population. Equalization entitlements are adjusted downward or upward, equally per capita, to ensure that total Equalization payments grow in line with a three-year moving average of nominal gross domestic product (GDP).

The TFF program uses a gap-filling formula to recognize the higher cost of providing programs and services in the North. Each territory’s payment is based on the difference between a proxy of its expenditure needs and a measure of its fiscal capacity. The fiscal capacity measure for TFF is similar to that of Equalization but includes additional bases such as fuel and payroll taxes.

The Minister of Finance is authorized under the FPFAA to make Equalization and TFF payments. This authority is typically renewed every five years to ensure the Equalization and TFF programs are meeting their objectives and using the most up-to-date and accurate measures in the determination of provincial and territorial entitlements. Following consultations with provincial and territorial governments, Budget 2023 announced the Government’s intention to renew these programs for a five-year period beginning April 1, 2024, along with technical changes to improve the accuracy and transparency of the calculation of entitlements. It also proposed to make a technical change to the Fiscal Stabilization program.

Legislative amendments to the FPFAA were made through BIA1 2023 to extend the authority to make Equalization and TFF payments for a five-year period beginning on April 1, 2024. BIA1 2023 also made one legislative technical change for renewal, which was to include miscellaneous revenues in revenues to be equalized for all relevant non-resource revenue sources (personal income taxes, business income taxes, consumption taxes and property taxes) rather than including them only with property taxes. These amendments came into force on the royal assent of BIA1 2023, which took place on June 22, 2023. The remainder of the technical changes must be made through regulatory amendments.

The Fiscal Stabilization program is another program administered by the Minister of Finance and legislated under the FPFAA and its supporting regulations. The Fiscal Stabilization program provides temporary assistance to a provincial government that experiences an extraordinary drop in its revenues due to economic factors outside its control. Specifically, the program provides financial help to any province with a year-over-year decrease of more than 5% in its non-resource revenues or of more than 50% in its resource revenues, with adjustments for interactions between the revenue sources. In addition, adjustments are made when measuring revenue declines to remove the impact of policy changes on provincial revenues.

The Fiscal Stabilization program was enriched and modernized through the Budget Implementation Act, 2021, No. 1 (BIA1 2021) and through amendments to the FPFAR that came into force on March 9, 2023 (PC number: 2023-190). One of the changes was to no longer penalize provinces for indexing their personal income tax systems to account for inflation. To complete the modernization of the program, BIA1 2023 built on this change by enabling the Minister of Finance to make an adjustment to a province’s revenues if it does not index its provincial personal income tax system to account for inflation. Taken together, these changes will make it easier for all provinces to qualify for the program. Supporting regulatory amendments are required to implement this measure.

The FPFAA provides authority for Canada to make payments to provinces and territories in respect of the Tax Collection Agreements, which are bilateral agreements whereby Canada collects and administers provincial and territorial income taxes (except for Quebec). Under these agreements, the federal government makes income tax payments to provinces and territories in a given calendar year on the basis of estimates of taxes that will be assessed in respect of that calendar year. These payments are reconciled with actual taxes assessed fifteen months after the end of that year. The FPFAR outline a mechanism for the recovery of net overpayments, in respect of Equalization, Fiscal Stabilization and the Tax Collection Agreements. Should a province or territory so request, the federal government shall not, during a fiscal year, recover any amount of the net aggregate of overpayments that is more than $140 per capita (“maximum recovery limit”). The full repayment of overpayments can be deferred for a period of up to three years, after which any outstanding balance in respect of the overpayments becomes payable.

Objective

The main objective of the regulatory amendments is to complete the renewal of the Equalization and TFF programs as announced in Budget 2023 and legislated through BIA1 2023. Specifically, they aim to implement technical changes to improve the accuracy and transparency of the calculation of provincial and territorial entitlements under the Equalization and TFF programs. They also make other small housekeeping changes to ensure that the Equalization and TFF formulae remain accurate.

The regulatory amendments also build on a recent change to the Fiscal Stabilization program to no longer penalize provinces for indexing their tax systems to account for inflation by enabling the Minister of Finance to make an adjustment to a province’s revenues when determining Fiscal Stabilization payments if the province does not index its personal income tax system to account for inflation.

Description

The following technical changes are being made to the Equalization and TFF programs by amending the RAFGFP:

1. Use population estimates for July 1 instead of June 1 for all major transfers to improve transparency.
2. Include unremitted net income of hydro-producing government business enterprises in the business income tax base to improve accuracy by measuring fiscal capacity that is currently excluded.
3. Modernize the fiscal capacity measure for property taxes by
   • updating relative weights for residential, commercial and industrial and agricultural property tax revenues to improve accuracy;
   • updating references and definitions in the FPFAR to support a legislative amendment made through BIA1 2023 which included miscellaneous revenues in revenues to be equalized for all relevant non-resource revenue sources (personal income taxes, business income taxes, consumption taxes and property taxes), rather than including them only with property taxes; and
   • measuring the non-residential property tax base using non-residential property market values (70% weight) and population (30% weight).
4. Update the TFF payroll tax base to automatically incorporate the adoption or elimination of a payroll tax by a jurisdiction (such as British Columbia’s adoption of a payroll tax in 2019), to avoid having to amend the RAFGFP every time a jurisdiction adopts or eliminates a payroll tax.
5. Update the maximum per capita recovery limit for net aggregate overpayments to be recovered in a fiscal year in relation to Equalization, Fiscal Stabilization and Tax Collection Agreement payments, including an increase to $174 from $140, to account for inflation since it was last adjusted in 2010.

In addition, a technical change is being made to the Fiscal Stabilization program to define the absence of indexation in a province’s personal income tax systems as: if at least one of the province’s personal income tax thresholds, the province’s basic personal amount or the province’s spouse or common-law partner amount is not subject to an indexation provision. In addition, the FPFAR are amended to specify the adjustment to be made to a province’s revenues to account for the absence of indexation. This adjustment is only to be made if inflation is positive.

Other small updates are also being made. These changes include correcting a spelling error, correcting a section reference, updating Statistics Canada CANSIM table numbers and updating the number of years of data required in a Statistics Canada data certificate.

Regulatory development

Consultation

The package of renewal amendments was developed based on extensive consultations among federal-provincial-territorial officials. Eight meetings were held among federal-provincial-territorial officials since the 2019 renewal, and four additional meetings were held among federal and territorial officials. These meetings were used to establish priorities for the 2024 renewal; review and discuss officials’ work on options, which led to requests for analysis of new options; and discuss implementation of the measures in regulations.

The change to the measurement of the non-residential property tax base was previously proposed as part of the 2019 renewal of Equalization and TFF, but some provinces requested further analysis and consultation before implementing the change. To address these concerns, since the last renewal, federal officials prepared additional analysis and consulted provincial-territorial officials on the availability and quality of the market value data for commercial-industrial properties; the degree of variation in taxation practices for various commercial-industrial property subclasses across jurisdictions; the appropriateness of the revenues equalized on the property tax base (leading to the change in the treatment of miscellaneous revenues that is also being implemented as part of this renewal); and updates to the sectoral weights assigned to each sub-base within the property tax base (another change being implemented as part of this renewal).

The Minister of Finance consulted her provincial-territorial counterparts on the package of changes developed by officials at the February 3, 2023 Finance Ministers’ Meeting. While there was not unanimous support for every element of the package, there was general agreement to proceed with the proposed technical changes.

Provincial and territorial officials from the Federal-Provincial Committee on Taxation were consulted on the proposed increase in the maximum recovery limit per capita in December 2022 and did not express concerns.

A consultation draft of the regulatory amendments was shared with provinces and territories and a detailed discussion of the proposed regulatory amendments was held on July 11, 2023, with federal-provincial-territorial officials. At that meeting, some provinces asked about the inclusion of the spousal or common-law partner amount as a parameter when defining what constitutes the absence of indexation in a provincial personal income tax system for the purpose of determining Fiscal Stabilization payments, as it was not part of the draft list of parameters. Following these discussions, the draft regulations were adjusted to include the spousal or common-law partner amount in the list of parameters for the definition of the absence of indexation. Provincial-territorial officials did not raise other concerns with the regulatory amendments.

Modern treaty obligations and Indigenous engagement and consultation

This initiative is not expected to impact potential or established Aboriginal or treaty rights, which are recognized and affirmed in section 35 of the Constitution Act, 1982.

Instrument choice

Regulatory amendments are required to align the regulatory framework with the new legislative framework implemented by BIA1 2023. The legislation requires that regulations define revenues that constitute miscellaneous revenues for the purpose of determining revenue to be equalized. For the other regulatory amendments, there are no other appropriate instruments to implement the technical changes required in a transparent manner that ensures program integrity.

Regulatory analysis

Benefits and costs

These amendments are brought forward to align the regulatory framework with the new legislative framework implemented by BIA1 2023 and improve the accuracy and transparency of the calculation of provincial and territorial entitlements under the Equalization and TFF programs. The regulatory amendments will also improve the operation of the programs by ensuring that the Statistics Canada data series cited in the regulations remain current.

The changes made through regulation are not expected to have a significant impact on the cost of the programs. While the distribution of payments among provinces and territories will be influenced by these changes, no net cost to the Equalization program will occur since the program has a fixed envelope that grows in line with GDP. Incremental distributional impacts of these changes will vary each year depending on variations in future economic activity across provinces and territories and on their relative economic position. The impact on the cost of the TFF program is expected to be very small, less than 0.1% of annual TFF payments (less than $5 million).

Changes to the Fiscal Stabilization program would only impact program costs in the event of an extraordinary economic downturn, if a province were to qualify for the program and its claim were not subject to the legislated cap, and if there was an absence of indexation in that province’s personal income tax system as defined in the regulations.

Small business lens

The small business lens does not apply, as there are no associated impacts on businesses.

One-for-one rule

The one-for-one rule does not apply, as there is no impact on business.

Regulatory cooperation and alignment

The Equalization, TFF and Fiscal Stabilization programs are federal transfer programs to eligible provincial and territorial governments. The amendments will not have a regulatory impact on other jurisdictions.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

No gender-based analysis plus (GBA+) impacts have been identified for these regulations.

Rationale

The regulatory amendments are required to complete the renewal of the Equalization and TFF programs. The amendments ensure that the regulatory framework is aligned with the new legislative framework and improve accuracy and transparency of Equalization and TFF entitlements. The rationale for each amendment is outlined below.

1. Use population estimates for July 1 instead of June 1 for all major transfers.
   • [This change will improve transparency, as it will align the calculation of major transfers (i.e. CHT, CST, Equalization and TFF), with the July 1 population estimates, the main population estimates published by Statistics Canada, rather than the unpublished June 1 population estimates.]
2. Include unremitted net income of hydro-producing government business enterprises (GBEs) in the business income tax base.
   • [Some hydro GBEs earn positive net income but do not make any remittances to the provincial government or remit only a small portion. Since the Equalization program only measures remittances from GBEs, it underestimates the fiscal capacity from these GBEs. This change will include the unremitted portion of their net income in the business income tax base for the purpose of Equalization. This will improve accuracy by measuring fiscal capacity that is currently excluded, and aligns with the program’s treatment of other GBEs, whose net income is equalized on the business income tax base.]
3. Modernize the fiscal capacity measure for property taxes by
   • updating relative weights for residential, commercial and industrial and agricultural property tax revenues;
     • [Previous weights were fixed in regulations in the 2014 renewal of Equalization and TFF and were based on data from 2005–2009. The weights will become 0.611 for the residential sub-base (instead of 0.575), 0.378 for the commercial-industrial sub-base (instead of 0.410) and 0.011 for the agricultural properties sub-base (instead of 0.015). These updated weights, based on data from 2016–2020, will improve accuracy by using updated and publicly available (i.e. from Statistics Canada and municipal financial information provided online by provincial governments) information in the calculation of Equalization.]
   • updating references and definitions in the FPFAR to support a legislative change made through BIA1 2023 which included miscellaneous revenues (e.g. fines and penalties, business licenses and permits) in revenues to be equalized for all relevant non-resource revenue sources (personal income taxes, business income taxes, consumption taxes and property taxes), rather than including them only with property taxes; and
     • [This amendment will enable the application of a legislative change which improves accuracy because miscellaneous revenues are related to all non-resource revenue sources, not just property taxes.]
   • measuring the non-residential property tax base using non-residential property market values (70% weight) and population (30% weight).
     • [The Equalization program has measured fiscal capacity related to residential property taxes using property market values since 2004. However, non-residential fiscal capacity is still being measured using a complex proxy measure dating from 1977–1978 that is based on capital stock, GDP, and several factors that are fixed or rarely updated. The change to adopt market values to measure fiscal capacity for non-residential property taxes will simplify the measure and no longer rely on outdated factors, align it with current provincial-territorial tax practices (market value is the statutory tax base provinces use in levying property taxes) and align it with the program’s treatment of residential property taxes. It will also align the treatment in Equalization with that under the Territorial Formula Financing program.]
4. Update the TFF payroll tax base to automatically incorporate the adoption or elimination of a payroll tax by a jurisdiction.
   • [This will improve accuracy by automatically including or removing a jurisdiction’s payroll tax in the calculation of the TFF payroll tax base, such as the British Columbia payroll tax introduced in 2019. This will avoid having to change the regulations every time a jurisdiction adopts or eliminates a payroll tax.]
5. Update the maximum per capita recovery limit for net aggregate overpayments to be recovered in a fiscal year in relation to Equalization, Fiscal Stabilization and Tax Collection Agreement payments, including an increase to $174 from $140.
   • [This increase will account for inflation since the limit was last adjusted in 2010.]

The legislative change in BIA1 2023 and the supporting regulatory change to the Fiscal Stabilization program will ensure policy neutrality of the program by treating provinces that do not index their personal income tax systems to inflation in a manner consistent with provinces that do index their tax systems to account for inflation. This builds on a change to the program made through BIA1 2021 and associated regulatory amendments to no longer penalize provinces for indexing their tax systems to account for inflation; with this additional change, it will be easier for all provinces to qualify for the program.

Implementation, compliance and enforcement, and service standards

Implementation

The renewal changes will be implemented in the calculation of Equalization and TFF payments for the 2024–2025 fiscal year and the following four fiscal years. They will come into force on the day on which the regulations are registered.

The change increasing the maximum per capita recovery limit for net aggregate overpayments to be recovered in a fiscal year in relation to Equalization, Fiscal Stabilization and Tax Collection Agreement payments will come into force on April 1, 2024, or later (if the regulations are registered after that date), in order to apply for the reconciliation of income tax payments for 2023 onwards.

The changes concerning the Fiscal Stabilization program come into force on December 1, 2023, or later (if the regulations are registered after that date).

The Department of Finance is in a position to implement the regulations and process Equalization and TFF payments and Fiscal Stabilization claims immediately when the regulations come into effect.

Contact

Suzanne Kennedy
Senior Director
Equalization and Territorial Formula Financing Policy
Federal-Provincial Relations Division
Department of Finance Canada
Telephone: 613‑291‑4935