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Ottawa, September 4, 2002
2002-072

Overpayments to Provinces to Be Recovered and Used to Pay Down Debt

Related document:

• Backgrounder.

John Manley, Deputy Prime Minister and Minister of Finance, announced today that the Government of Canada will recover $1.4 billion of the amounts overpaid to provinces under the tax collection agreements (TCAs) for the years 1997-1999 and will use the money to pay down the debt.

“Our approach is fair and fiscally responsible,” said Minister Manley. “Canadian taxpayers expect us to recover amounts owed. We will use that money to pay down debt.”

“We are protecting the equalization-receiving provinces from any negative impacts resulting from these recoveries, providing comparable benefits to the provinces that received TCA overpayments, and administering the repayments in a way that minimizes the fiscal implications,” the Minister added.

Minister Manley explained that, in implementing the recovery in a fair and fiscally responsible way, the federal government will:

• restrict the recovery of TCA overpayments to amounts relating to 1997-1999, the period for which the Auditor General has provided audit-level verification;

• protect equalization-receiving provinces from any negative impacts these recoveries would normally have on equalization payments, and provide comparable benefits to the TCA-affected provinces;

• for equalization-receiving provinces, make adjustments for 2000 and going forward to accurately reflect changes in provincial revenue-raising ability resulting from the correction of the TCA accounting problem; and

• allow the repayments to take place over a 10-year period starting in 2004-2005.

On January 29, 2002, the Canada Customs and Revenue Agency announced that it had identified an accounting problem whereby some provinces were receiving higher payments than they should under the TCAs. The Government indicated it would deal with this situation in a fair and fiscally responsible manner.

After consulting with the Auditor General, the Government moved immediately to correct the TCA payment systems for 2000 and going forward to prevent further overpayments.

At the time, the Government indicated it would deal with the overpayments for prior years once the Auditor General had an opportunity to audit the numbers and the Government had a chance to discuss the issue with the provinces.

The federal and provincial finance ministers discussed the issue on April 25 and 26, 2002. The Auditor General submitted her final report to the Minister of Finance on July 15, 2002.

A backgrounder containing further details is attached.

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Backgrounder

Overpayments Under the Tax Collection Agreements

On January 29, 2002, the Canada Customs and Revenue Agency (CCRA) announced it had identified a problem in tax accounting that resulted in significant overpayments to four provinces under the tax collection agreements (TCAs).

As soon as the Auditor General of Canada determined that a problem existed, the federal government took immediate action to prevent further overpayments related to 2000 and subsequent taxation years. At the same time, the Government indicated that it was working with the Auditor General to confirm the amounts involved for years prior to 2000.

The CCRA identified the following amounts of overpayments to the provinces:

Overpayments Under the TCAs

On June 3, 2002, the Auditor General delivered four reports on this issue. With respect to the overpaid amounts, the reports indicate that:

1. the amounts for 1997 to 1999 can be verified and represent fairly the overpayments made to provincial governments;

2. the amounts for 1993 to 1996 cannot be fully verified to an audit level of certainty, with the result that she is unable to express an opinion on the amounts;

3. the necessary financial information does not exist to determine the amount of the overpayments relating to the period prior to 1993.

Given that the Auditor General is unable to provide audit-level assurance for the amounts related to the TCA overpayments for 1993 to 1996, the federal government has decided to restrict the recovery of TCA overpayments to amounts relating to the 1997-1999 period.

Interaction With the Equalization Program (See Attached Table)

Recovery of monies from the provinces reduces total provincial revenues and lowers the measured fiscal capacity of any province from which monies are recovered. Recoveries would therefore affect payments under the equalization program, just as the overpayments increased equalization payments to most receiving provinces during the years the TCA overpayments occurred.

In this context, the recovery of $2.5 billion in TCA overpayments would lower equalization payments to Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, Quebec, Saskatchewan and British Columbia. It would increase payments to Manitoba because the amount to be recovered from Manitoba would lower its relative fiscal capacity, thus triggering further equalization payments to bring it back up to the equalization standard. The combined effects on equalization would be to lower payments by approximately $1 billion.

The Government of Canada will take steps to ensure that the recovery of overpayments will not have negative effects on equalization payments. The positive impact on Manitoba will be protected. Together, this provides a “benefit” of roughly $1 billion to the equalization-receiving provinces. The average value of this benefit is about $62 per capita.

To ensure that the provinces that received TCA overpayments are treated fairly, a corresponding benefit will be given to them in the form of a reduction in the amounts of TCA overpayments to be recovered. This will reduce the amounts to be recovered from Alberta and British Columbia to zero. It will reduce the amount to be recovered from Manitoba from $364 million to $91 million, and the amount to be recovered from Ontario from $2.1 billion to $1.33 billion.

Changes will be made to ensure that the measurement of fiscal capacity in the equalization program accurately reflects the fact that the accounting error identified by the CCRA has been corrected. This change will be put in place on an ongoing basis in the equalization program starting with 2001-02 and the Government will make a one-time payment of $140 million to Manitoba to help in the transition.

Therefore, the total amount to be recovered will be $1.4 billion. To minimize the impact on the two affected provinces, recoveries will not start until fiscal year 2004-05, and will be spread out over 10 years.

The amounts recovered will be applied to reduce the federal debt burden.

1993-1999 Tax Collection Agreement Overpayments and Amounts to Be Recovered