- News Release 1996-034 - 

Memorandum of Understanding on Sales Tax Harmonization

BETWEEN:

The Government of Canada, represented by the Minister of Finance, hereinafter referred to as "Canada"

AND:

The Government of "XXXXX", represented by the Minister of Finance and Treasury Board, hereinafter referred to as "XXXXX" or the "province".

WHEREAS the parties agree that the federal and provincial sales taxes should be harmonized so as to act as a single tax applied to a common base with a single rate and a single administration;

AND WHEREAS the parties wish to replace the existing federal and provincial sales taxes with an economically efficient sales tax regime which will be fair to consumers, reduce duplication and administrative costs, simplify compliance for business and promote federal-provincial fiscal cooperation and harmonization;

AND WHEREAS commodity taxes in the form of value-added taxes having a common base and premised on common administrative principles would best achieve these objectives;

AND RECOGNIZING the needs of governments to maintain a tax system which is responsive to the citizens and business community and preserves the accountability of federal and provincial finance Ministers for the respective components of the tax system;

NOW THEREFORE, Canada and "XXXXX" agree by this memorandum of understanding as to the following principal features of sales tax harmonization which will form a framework for negotiating a detailed agreement between Canada and the province:

Harmonized Sales Taxes

Implementation Date

1. Subject to the signing of a detailed agreement in accordance with clause 20, the parties agree to work towards the implementation of a harmonized sales tax system by April 1, 1997.

Federal-Provincial Value Added Tax

2. "XXXXX" will introduce a provincial value added tax which will be harmonized with a federal value added tax, and the province will maintain uniformity as between the federal and provincial legislation.

Harmonized Base

3. The base of the federal and provincial value-added taxes will be harmonized.

Provincial Value Added Tax Rates

4. a) For a transitional period of 4 years the rate of the provincial value-added tax will be 8% on a base excluding federal tax. A protocol will be contained within the detailed agreement to provide for the maintenance of a common value-added tax rate with other harmonized Atlantic provinces.

b) A protocol regarding the accounting for and allocation of revenues attributable to a change in either the federal or provincial tax rate will be contained within the detailed agreement.

Single Administration

5. a) The "XXXXX" value-added tax will be initially administered by Revenue Canada. The parties will negotiate and conclude a comprehensive integrated tax coordination agreement which will be supplementary to the current Tax Collection Agreement for the administration of taxes in the province, prior to the implementation date specified in clause 1, which agreement could constitute a framework for provincial participation in the Canada Revenue Commission.

b) The parties will make best efforts to realize the goal of the administration of the harmonized sales taxes by the Canada Revenue Commission by January 1, 1998.

6. The comprehensive integrated tax coordination agreement shall establish a federal-provincial administration liaison committee of senior officials from the province and Canada which will be responsible for identifying and examining issues related to the single administration of the federal-provincial value added tax, including reviewing:

i) the administration of the harmonized tax, including the ongoing results and performance evaluation of the federal-provincial value added tax;

ii) standards for the assessment and collection policies for the administration of the federal-provincial value added tax, including the level of compliance monitoring and audit penetration; and

iii) procedures and mechanisms to ensure the information flows necessary to give the province ongoing input into plans and programs affecting the administration of the "XXXXX" tax.

7. The comprehensive integrated tax coordination agreement may only be amended by mutual consent.

Tax Policy

Tax Review Committee

8. A Tax Review Committee of senior officials from the province and Canada will be established with a mandate to review issues related to the uniform legislation, tax base, tax rate and tax structure and to provide timely advice to Ministers as appropriate. Changes to these elements shall be considered by the Committee in the first instance.

9. The Committee shall prepare recommendations in respect of matters considered which shall be delivered as advice to Ministers for decision.

10. The Tax Review Committee shall meet on a regular basis and at least once per year.

11. The Tax Review Committee will include other provinces that join the harmonized value added tax regime.

Increased Provincial Tax Policy Flexibility

12. Canada agrees to provide the province with added flexibility in the personal and corporate income tax fields. Specifically, Canada will, at the province's request:

i) agree to administer a flat tax of provincial design on personal income for the province at no cost; and

ii) allow the deductibility of incremental provincial payroll and capital taxes for federal corporate income tax purposes, not to exceed an amount equal to the retail sales tax that otherwise would have been collected from corporations had the province not harmonized with the value added tax and,

iii) agree to administer a corporate capital tax of provincial design for the province at no cost.

Exchange of Information

13. There will be full cooperation between Canada and the province with regards to information sharing. Canada and the province will exchange information during the transition period and after the implementation of a provincial value-added tax as detailed in an information exchange agreement to be concluded pursuant to clause 20.

Transitional Measures

Human Resources

14. Within the context of current policies of both governments, each administration agrees to continue ongoing efforts to meet respective government targets for streamlined administration of respective taxes and to manage the related human resource impacts of the streamlining.

15. Within the context of the federal legislative and administrative framework, Canada will make best efforts to offer employment to "XXXXX" tax administration employees, to the greatest extent possible in "XXXXX" and in numbers that are commensurate with the workload related to administering the tax and where appropriate matches can be made between federal needs and requirements with the skill sets of the affected provincial employees.

Provincial Retail Sales Tax

16. a) The province will be responsible for winding down the administration of all aspects of its provincial retail sales tax which is to be replaced by the provincial value-added tax. Canada will assume all aspects of the administration of the provincial value added tax as agreed to in this memorandum of understanding and the detailed agreement, on the date of implementation.

b) In the transition period, there will be joint responsibility with respect to providing information to registrants of the provincial retail sales tax and the general public on the impact of harmonization and federal administration of the provincial value-added tax. The specifics of this joint responsibility will be negotiated and coordinated between Canada and the province.

Cost of Administration

17. Canada will administer a provincial value-added tax that is fully harmonized with a federal value-added tax with respect to the tax base and tax structure at no cost to "XXXXX".

Revenue Allocation

18. Canada and the province agree to share total assessed revenues based on consumption patterns in the province. Canada and the province will jointly develop the details of the method for allocating revenues between the parties as part of the detailed agreement which will include an efficient revenue forecasting methodology.

Other Harmonizing Provinces

19. If Canada should enter into a sales tax harmonization agreement with another province that differs from the then existing agreement between Canada and "XXXXX", "XXXXX" may, at its option, request a succeeding agreement on the same terms as that agreement with the other province.

Detailed Agreement

20. Canada and the province will conclude, within six months of this memorandum of understanding, a detailed agreement elaborating the principles set out herein, which agreement will define the common tax base, provide for the single

administration of federal and provincial value-added taxes initially by the Department of National Revenue and provide for, inter alia;

i) provisions respecting the accounting for and allocation of revenues and the payment and reconciliation of the respective revenue shares;

ii) the protocol regarding the accounting for and allocation of revenues attributable to a change in the federal or provincial rate;

iii) a protocol regarding changes to the harmonized base;

iv) the details of the comprehensive integrated tax administration agreement, including parameters for provincial flat taxes and deductibility of payroll and capital taxes;

v) the implementation of the harmonized taxes and single administration, subject to the enactment of all necessary legislation;

vi) the responsibility for the conduct of litigation relating to the federal tax and the provincial tax;

vii) a mechanism for dispute resolution;

viii) amendment and termination;

ix) the mechanism by which interprovincial transactions may be taxed;

x) border collection;

xi) tax-inclusive pricing -- through the introduction of measures to ensure that the full cost of a good or service is known in advance of its purchase;

xii) procedures for information exchange and maintaining uniformity as between federal and provincial legislation; and

xiii) transitional matters, including the administration of transitional measures.

Constitutional Jurisdiction Not Waived

21. It is understood that neither Canada nor the province shall be deemed, by reason of having entered into this memorandum of understanding, to have surrendered or abandoned any of its powers, rights, privileges or authorities under the Constitution Acts, 1867-1982, and any amendments thereto, or otherwise, or to have impaired any such powers, rights, privileges, or authorities.

Execution Of The Memorandum Of Understanding

22. This memorandum of understanding may be executed in counterparts each of which so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument and, notwithstanding the date of execution, will be deemed to bear date as of the date hereof. Facsimile signatures shall be accepted the same as original signatures.

This memorandum of understanding executed in duplicate, in the English and French languages, both texts being equally authentic.

- News Release 1996-034 -