1. Intergovernmental Tax Policy Division, Finance Canada TAX COLLECTION AGREEMENTS & CANADIAN TAX ADMINSTRATION Fourth Symposium on Fiscal Federalism Institut d’Economia de Barcelona, May 31,2006 Paul Berg-Dick

2. Intergovernmental Tax Policy Division, Finance Canada Overview of Presentation Tax Responsibilities and Tax Collection Agreements Canada Revenue Agency Structure Challenges for the Future

3. Intergovernmental Tax Policy Division, Finance Canada In Canada there are three levels of government: Federal Provincial Municipal LEGAL SETTING Intergovernmental Tax Policy, Research & Evaluation Division, Department of Finance

4. Intergovernmental Tax Policy Division, Finance Canada The responsibilities of the federal and provincial governments are set out in our constitution. Municipalities receive their powers and responsibilities from provincial governments.

5. Intergovernmental Tax Policy Division, Finance Canada Responsibilities may be: exclusively federal, exclusively provincial, or shared.

6. Intergovernmental Tax Policy Division, Finance Canada Large provincial responsibilities are matched by large expenditures. Provincial governments spend more than the federal government.

7. Intergovernmental Tax Policy Division, Finance Canada Provinces raise more revenues than the federal government. Two main revenue sources: tax system federal transfers

8. Intergovernmental Tax Policy Division, Finance Canada Relatively decentralized structure. Provinces have access to most tax bases (restrictions limited to indirect taxes) Considerable flexibility in terms of design Decision to harmonize must be based on mutual interest

9. Intergovernmental Tax Policy Division, Finance Canada TAX FIELDS Variety of tax fields ensures no one item or activity bears an excessive tax burden. Federal and provincial governments jointly occupy most tax fields. Federal government levies taxes nationally. Provincial governments levy taxes within their own boundaries.

10. Intergovernmental Tax Policy Division, Finance Canada Main tax fields: personal income tax corporate income tax sales tax Federal government and many provincial governments have entered into agreements covering each of the three main tax fields.

11. Intergovernmental Tax Policy Division, Finance Canada Common revenue sources FederalProvincial (Number of agreements) Personal income taxes√√ (12) Corporate income taxes√√ (10) Sales taxes√√ (3) Payroll taxes√√ Total in 2005 (billions of dollars) 192.0130.0 Access to Major Tax Fields and Harmonization Agreements

12. Intergovernmental Tax Policy Division, Finance Canada TAX CO-ORDINATION Historical background: Provinces first taxed income in 1876. Federal government began taxing income in 1917 to finance First World War. Beginning of joint occupancy. Tax jungle prior to World War II

13. Intergovernmental Tax Policy Division, Finance Canada World War II to 1962 Provincial governments vacated income tax field. Federal government made guaranteed annual payments to provinces (tax rental arrangements) Single income tax system Federal tax abatements to allow provincial tax room

14. Intergovernmental Tax Policy Division, Finance Canada Tax Collection Agreements: Since 1962, joint occupancy of income tax field in a co- ordinated manner. Agreements with 9 provinces and 3 territories for personal income tax (all except Quebec) Agreements with 7 provinces and 3 territories for corporate income tax.

15. Intergovernmental Tax Policy Division, Finance Canada Purpose of TCAs: Provinces can impose income taxes while the federal interest of a harmonized national income tax system is assured. Provinces do not need elaborate administrative processes, leading to financial savings. Consistency and harmony in national tax system simplifies compliance for taxpayers.

16. Intergovernmental Tax Policy Division, Finance Canada Terms and conditions of TCAs: The federal government agrees to: – administer provincial personal and corporate income taxes, basically free of charge – pay provinces the value of income tax assessed, and – take responsibility for actual collection of both federal and provincial taxes.

17. Intergovernmental Tax Policy Division, Finance Canada Terms and conditions of TCAs for Personal Income Tax (prior to 2001): Provincial governments agreed to base their tax as a fraction of federal tax i.e. federal government determined both tax base and tax progressivity Provincial policy flexibility limited to providing tax credits and imposition of surtaxes

18. Intergovernmental Tax Policy Division, Finance Canada Terms and conditions of TCAs for Personal Income Tax (2001 onwards): Provincial governments agree to use the federal definition of taxable income, thus ensuring a common tax base. Provincial policy flexibility expanded by setting both tax rates and providing tax credits

19. Intergovernmental Tax Policy Division, Finance Canada Terms and conditions of TCAs for Corporate Income Tax Provincial governments agree to use the federal definition of taxable income, thus ensuring a common tax base. Provincial policy flexibility provided by setting both tax rates and providing tax credits Non-agreeing provinces (Quebec, Ontario, and Alberta) all start with federal definition of income (i.e. default is harmonization with a federal tax change)

20. Intergovernmental Tax Policy Division, Finance Canada Federal government will generally administer provincial tax credits provided that they do not change the effective taxation of an income element i.e. they are focussed on outlays and expense they are not designed to attract the tax base of other provinces They are consistent with Canada’s legal obligations Charges are waived if similar to an existing federal credit Terms and Conditions for Administering Provincial Tax Credits

21. Intergovernmental Tax Policy Division, Finance Canada All provincial governments (whether in a TCA or not) have adopted similar allocation rules Usually a two part formula is applied using gross revenue and wages and salaries of the PE Special rules for some industries (banks, transportation companies etc) Informal discussions to resolve double taxation issues Provincial Income Allocation Task Force looking at some technical problems Allocation of Income between Permanent Establishments (PEs) in various Provinces

22. Intergovernmental Tax Policy Division, Finance Canada Provincial governments also enter into a Service Management Framework Agreement with the federal government. Sets out expectations of provinces and responsibilities of CRA CRA undertakes to audit the allocation of income provided by taxpayer Province can pay for additional audit coverage of provincial credits if standard audit deemed insufficient. Terms and Conditions for CRA Administration of Provincial Tax

23. Intergovernmental Tax Policy Division, Finance Canada Purpose of Harmonized Value Added Tax (called the Harmonized Sales Tax (HST)): Provinces have access to a value added tax harmonized with the federal value added tax (called the Goods and Services Tax (GST)) Provinces save on administrative costs. Consistency simplifies compliance for taxpayers i.e. no need to track tax to individual province

24. Intergovernmental Tax Policy Division, Finance Canada Terms and conditions of HST Agreement: The federal government agrees to: – administer provincial value added tax free of charge – pay provinces the value of sales tax allocated to province based on macro variables (input – output table), and – take collection responsibility for HST.

25. Intergovernmental Tax Policy Division, Finance Canada Terms and conditions of Harmonized Value Added Taxes Three Atlantic provinces have agreed to enter into value added tax agreements, using federal value added tax rules and agree to a common tax rate of 15% Provincial policy flexibility limited to providing level of tax rebates to municipalities, universities, charities, and hospitals.

26. Intergovernmental Tax Policy Division, Finance Canada Quebec Value Added Tax (Quebec Sales Tax) Quebec is the only other province to levy a value added tax Structure similar to the federal base but not explicitly harmonized, and province retains full discretion as to base and rate Federal government has agreed for Quebec to collect the federal VAT on a fee-for-service basis One collector results in some compliance savings for businesses.

27. Intergovernmental Tax Policy Division, Finance Canada ADMINISTRATION Three departments involved: Finance Canada is responsible for policy matters and for paying provinces their share of assessed income taxes. Canada Revenue Agency collects, assesses, audits and enforces provincial legislation. The Auditor General of Canada conducts an audit annually of the tax collection account

28. Intergovernmental Tax Policy Division, Finance Canada Summary of Overview Canada’s income tax system : Decentralized - practically no constraints on provinces. Harmonized - the tax structures of both federal and provincial governments complement one another; harmonization agreements reflect mutual interest

29. Intergovernmental Tax Policy Division, Finance Canada Tax Collection Agreements result in a co-ordinated system that: has a high degree of harmonization, while providing provinces with policy flexibility, in a structure that is relatively simple for both taxpayers and tax administrators.

30. Intergovernmental Tax Policy Division, Finance Canada Provincial Value Added Tax Agreements result in a co-ordinated system that: has a very high degree of harmonization, providing provinces with an efficient and stable revenue source with no administrative costs, in a structure that is simple for both taxpayers and the tax administration

31. Intergovernmental Tax Policy Division, Finance Canada Overview of Presentation Tax Responsibilities and Tax Collection Agreements Canada Revenue Agency Structure Challenges for the Future

32. Intergovernmental Tax Policy Division, Finance Canada Canada Revenue Agency - Creation In 1996, Canada announced the creation of a “revenue commission” to replace one of the oldest Departments in the federal government, with the following objectives: Provide better service to Canadians Improve efficiency and effectiveness Establish a closer partnership with provinces and territories Resulting agency is unique to Canada with a complex governance structure reflecting federal government, private sector and provincial interests.

33. Intergovernmental Tax Policy Division, Finance Canada Canada Revenue Agency - Structure Minister of National Revenue retained and responsible to Parliament for administration of federal tax and benefit programs A private sector Board of Management created to over see human resource (HR) functions Strong provincial involvement since 11 of 15 members are nominated by them A Commissioner responsible to Minister for program and benefit legislation and to Board of Management for HR Partnership provisions allow for CRA to implement other programs of federal and provincial governments

34. Intergovernmental Tax Policy Division, Finance Canada Canada Revenue Agency - Results Service Management Framework Agreements drawn up in most provinces to better manage relationship and expectations New or updated agreements with 31 federal departments In addition to the TCAs and sales tax agreements noted earlier, CRA now administers many of the credits and benefits of provinces, runs the Workman’s Compensation program in one province, and has administered one-time special payments e.g. energy rebates at the request of provinces

35. Intergovernmental Tax Policy Division, Finance Canada Canada Revenue Agency - Results HR functions streamlined Administration costs reduced Joint registration for businesses now possible Strong emphasis on information technology upgrades Individuals and businesses can now file on-line and have secure on-line access to their accounts

36. Intergovernmental Tax Policy Division, Finance Canada Canada Revenue Agency - Challenges Continuing efforts to pursue efficiency gains Need to maintain quality assurance, particularly of electronic data, provided to both federal and provincial clients Continuing interest in administering other federal and provincial programs Continue to improve relationships with tax professional community and increase training opportunities for staff

37. Intergovernmental Tax Policy Division, Finance Canada Overview of Presentation Tax Responsibilities and Tax Collection Agreements Canada Revenue Agency Structure Challenges for the Future

38. Intergovernmental Tax Policy Division, Finance Canada Ontario Corporate Tax Negotiations nearing completion for federal government to administer Ontario corporation tax Ontario would sign TCA and commit to a common tax base Will involve some transitional measures since tax base not currently matched and “pools” of accumulated deductions e.g. capital cost allowances have been claimed at different rates

39. Intergovernmental Tax Policy Division, Finance Canada Inter-Provincial Tax Avoidance Concern expressed by Ontario and other provinces that corporations were entering into arrangements to reduce overall provincial tax with schemes to avoid provincial tax altogether, or by transferring their tax base to lower rate provinces Federal government committed to work with provinces to address the issue

40. Intergovernmental Tax Policy Division, Finance Canada Fiscal Balance Discussion Federal government released a paper with May budget addressing fiscal relations with provinces with following objectives: Accountability by clarifying roles and responsibilities Federal fiscal responsibility and transparency in budget planning Predictable long term arrangements Competitive and efficient economic union Effective collaborative management of the federation

41. Intergovernmental Tax Policy Division, Finance Canada Competitive, efficient economic union Specific reference to lack of harmonization of sales tax agreements Clear statement that provincial retail sales taxes raise effective tax rates on investment thereby harming competitiveness Strong willingness on the part of federal government to work with provincial governments to increase tax harmonization

42. Intergovernmental Tax Policy Division, Finance Canada More efficient sharing / allocation of tax bases? Provinces reducing or eliminating corporate capital taxes following federal lead Less disparity across provincial corporate tax rates (Alberta still the wildcard) Federal government reducing federal VAT rate from 7% to 5% Potential for provincial VATs, ideally harmonized?

43. Intergovernmental Tax Policy Division, Finance Canada Conclusions Tax Collection and Harmonization Agreements play a key role in improving efficiency of Canadian tax structure Canada Revenue Agency structure helpful in facilitating improved administration Federal government clearly committed to attempting to broaden scope of these agreements,

44. Intergovernmental Tax Policy Division, Finance Canada TAX COLLECTION AGREEMENTS & CANADIAN TAX ADMINSTRATION Fourth Symposium on Fiscal Federalism Institut d’Economia de Barcelona, May 31,2006 Paul Berg-Dick