Towards Replacing the Goods & Services Tax : Background Papers
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Adjustment Assistance

Table of Contents

• Federal Assistance to Provinces.
• Timing.
• Impact on Deficit.
• Do Harmonization Benefits Outweigh Assistance Costs?
• Does Assistance Reward Over-Taxation?
• Why Not Phase In Changes.
• Are Provinces Being Bribed?

Adjustment assistance will be provided over a four-year period to those provinces which experience a revenue shortfall in excess of 5 per cent of their current provincial retail sales tax receipts. This will help qualifying provinces to offset some of the costs of structural change in implementing sales tax harmonization.

On previous occasions the federal government has provided adjustment assistance where major structural change occurs, such as the reduction or elimination of transportation subsidies.

The provinces which have announced their intention to harmonize today (Nova Scotia, New Brunswick and Newfoundland and Labrador) are all eligible for adjustment assistance on the basis of this set formula.

Prince Edward Island, Manitoba, and Saskatchewan will also qualify for adjustment assistance under harmonization. Quebec, Ontario, Alberta and British Columbia will not qualify.

For qualifying provinces (i.e. those provinces with shortfalls greater than 5% of current retail sales tax), adjustment assistance would offset:

• 100% of the amount of shortfalls greater than 5% of current retail sales tax in year one;

• 100% of the amount of shortfalls greater than 5% of current retail sales tax in year two;

• 50% of the amount of shortfalls greater than 5% of current retail sales tax in year three; and

• 25% of the amount of shortfalls greater than 5% of current retail sales tax in year four.

Adjustment assistance will end after four years, providing provinces with sufficient time to adjust to the harmonized system.

This formula provides about equal sharing between the federal government and qualifying provinces of the adjustment costs of harmonization over the four years.

This adjustment assistance can be drawn down by qualifying provinces over the four-year period commencing with the signing date of the detailed agreement.

The total adjustment assistance under the harmonization agreements with Nova Scotia, New Brunswick and Newfoundland and Labrador is $961 million over four years.

Federal Assistance to Provinces

Q. Why is the federal government providing adjustment assistance to harmonizing provinces?

A. Moving to a harmonized value-added tax system represents a major restructuring of provincial sales tax systems.

That's why the federal government will provide adjustment assistance over a four-year period to those provinces which experience a revenue shortfall in excess of 5 per cent of their current provincial retail sales tax receipts. This will help qualifying provinces to offset some of the costs of structural change in implementing sales tax harmonization.

Without this adjustment assistance, qualifying provinces would not be in a position to participate in the creation of a more efficient and competitive harmonized sales tax system.

This government has consistently acted on the principle that people and governments need to be able to plan and adjust to structural change. For example, we have provided resources to facilitate the adjustment flowing from the elimination of subsidies under the Western Grain Transportation Act, as we have with the Atlantic freight subsidies.

The adjustment assistance formula provides about equal sharing between the federal government and qualifying provinces of the adjustment costs of harmonization over the four years.

Q. Why is the amount of adjustment assistance different for each province?

A. The formula for calculating each province's adjustment assistance applies only to shortfalls in excess of 5% of current provincial retail sales tax revenues under a harmonized sales tax system at either a 14% or 15% tax rate.

Differences in adjustment assistance reflect differences in current retail sales tax bases among provinces.

Since each province's shortfall is different in terms of both the absolute value and the extent to which it exceeds 5% of current revenues, the amount of assistance available will also be different.

This ensures that adjustment assistance is sensitive to each province's particular situation, and is made available in a fair and balanced manner.

Q. Which provinces qualify? Why?

A. Moving to a harmonized value-added tax system represents a major restructuring of the sales tax system in Canada.

The federal government is offering all provinces adjustment assistance, based on a set formula, to help cover revenue losses associated with moving to a viable harmonized sales tax system.

Adjustment assistance will be available only to those provinces which experience a revenue shortfall in excess of 5 per cent of current retail sales tax receipts under a harmonized sales tax system at either a 14% or 15% rate.

The provinces which have announced their intention to harmonize today ( Nova Scotia, New Brunswick and Newfoundland and Labrador) are all eligible for adjustment assistance on the basis of this set formula.

Prince Edward Island, Manitoba, and Saskatchewan will also qualify for adjustment assistance under harmonization. Quebec, Ontario, Alberta and British Columbia will not qualify.

Q. What will be the total assistance amount paid out if other qualifying provinces agree to harmonize?

A. It is difficult to provide an exact amount, since the effect on revenues will depend upon their harmonizing rate.

When all qualifying provinces are included, the amount of adjustment assistance could total between $1.5 and $1.6 billion over four years.

Timing

Q. Why is adjustment assistance being paid before provinces actually incur any harmonization losses?

A. Harmonization represents major structural change for participating provinces.

This will entail considerable pre-implementation costs as a result of winding down existing retail sales tax systems, and putting in place transitional measures and procedures in preparation for implementing the harmonized sales tax.

Access to structural assistance following conclusion of a detailed harmonization agreement is necessary to ensure that these costs do not impose an unreasonable burden on provinces prior to implementation, and to provide provinces with the financial certainty they need for fiscal planning.

Impact on Deficit

Q. Will the adjustment assistance threaten the government's ability to meet its deficit targets?

A. The adjustment assistance will not jeopardize the federal government's deficit targets.

The government's goal is to create a stronger economy -- higher economic growth and increased employment for Canadians. Reducing the federal deficit is a means for achieving this goal. Similarly, reforming Canada's tax system to make businesses more competitive in domestic and foreign markets will also contribute to the goal of a stronger economy. The government has been in multi-lateral and bi-lateral negotiations with the provinces since the tabling of the Finance Committee's report in June of 1994.

The federal government's harmonization plans were signalled in the March 1996 budget and the commitment to provide a specific amount of compensation to the three Atlantic harmonizing provinces was made later in March. As a result, the cost of the adjustment assistance for these provinces will be accounted for in the 1995-96 fiscal year. Financial results published through February 1996 indicate that these costs can be accommodated within the government's deficit target of $32.7 billion for 1995-96.

Do Harmonization Benefits Outweigh Assistance Costs?

Q. Will the benefits of harmonization ever equal the $961 million in adjustment assistance being paid to harmonizing provinces?

A. Yes, and quickly.

Beginning right away with implementation, reduced business compliance costs and elimination of government overlap and duplication will save in the range of $50 million a year in the three harmonizing provinces.

Even more significant, in fairly short order, the positive impact of harmonization will generate a substantial, permanent gain in economic output for the three harmonizing provinces.

It is clear from these gains that adjustment assistance is a solid economic investment which will more than pay for itself.

Moreover, substantial benefits will occur in other provinces which harmonize, whether or not they are eligible for adjustment assistance.

In the case of these provinces, adjustment assistance is essential to ensure that they have the opportunity to participate in a single sales tax system on the same basis as Quebec, and other larger provinces such as Ontario and British Columbia.

Does Assistance Reward Over-Taxation?

Q. Doesn't assistance reward over-taxation by being available only to provinces which must lower their sales tax rates to harmonize on a single system?

A. No. Adjustment assistance has very little to do with rate changes -- even if Manitoba harmonizes with no rate reduction, it would qualify for adjustment assistance. High sales tax rates in other provinces in part reflect a narrower range of alternative revenue sources. Adjustment assistance will provide them with the option of developing these alternative revenue sources while gaining the economic benefits of a harmonized sales tax system.

Adjustment assistance is made available to address the major structural changes involved in provinces moving to a more efficient tax system.

Why Not Phase In Changes

Q. Why can't provinces phase-in full harmonization over several years, thereby eliminating the need for assistance?

It is important to move as fast as possible to end the complexities and costs of operating two separate sales tax systems in Canada.

Provinces that are now agreeing to harmonize have chosen to move to a harmonized sales tax system all at once -- consumers and businesses in these provinces will be in a position to gain the full benefits of harmonization beginning with implementation on April 1, 1997.

All other provinces have the same option, with adjustment assistance ensuring that Prince Edward Island, Manitoba, and Saskatchewan can immediately move to a harmonized sales tax system on the same basis as larger provinces such as Ontario and British Columbia.

Are Provinces Being Bribed?

Q. Is this a case of provinces being bribed by the federal government with taxpayers' money through adjustment assistance?

A. Moving to a harmonized value-added tax system represents a major restructuring of provincial sales tax systems. Even with the adjustment assistance, participating provinces will still have revenue losses. The federal government is offering adjustment assistance based on a set formula to provinces which experience a revenue shortfall in excess of 5 per cent of current retail sales tax receipts under a single harmonized sales tax system at either 14% or 15%.

This government has consistently acted on the principle that people and governments need to be able to plan and adjust to structural change. For example, we have provided resources to facilitate the adjustment flowing from the elimination of subsidies under the Western Grain Transportation Act, as we have with the Atlantic freight subsidies.

Without this adjustment assistance for harmonization, qualifying provinces would not be in a position to participate in the creation of a more efficient and competitive harmonized sales tax system.

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