Regulations Amending the Federal-Provincial Fiscal Arrangements Regulations, 2007: SOR/2023-45

Canada Gazette, Part II, Volume 157, Number 7

Registration
SOR/2023-45 March 9, 2023

FEDERAL-PROVINCIAL FISCAL ARRANGEMENTS ACT

P.C. 2023-190 March 9, 2023

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, makes the annexed Regulations Amending the Federal-Provincial Fiscal Arrangements Regulations, 2007 under section 40^{footnote a} of the Federal-Provincial Fiscal Arrangements Act ^{footnote b}.

Regulations Amending the Federal-Provincial Fiscal Arrangements Regulations, 2007

Amendments

1 Paragraphs 32(a) to (d) of the Federal-Provincial Fiscal Arrangements Regulations, 2007 ^{footnote 1} are replaced by the following:

• (a) a statement that indicates the total amount of the provincial personal income taxes that are payable as the result of assessments or reassessments made in each of the calendar years that begin in the fiscal year and in the immediately preceding fiscal year, as determined in accordance with subsection 34(1), and the amount of each element referred to in that subsection that is used in determining that total amount;
• (b) a statement that indicates the total amount of the provincial corporation income taxes that are payable as the result of assessments or reassessments made in each of the calendar years that begin in the fiscal year and in the immediately preceding fiscal year, as determined in accordance with subsection 34(1.1), and the amount of each element referred to in that subsection that is used in determining that total amount;
• (c) a statement that indicates the total revenues of the province for the fiscal year and for the immediately preceding fiscal year from the revenue source described in subparagraph 7(1)(b)(ii);

2 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 subsection (1), to be a change in the rate or in the structure of that tax or other mode.

3 The Regulations are amended by adding the following after section 33:

33.1 (1) The Chief Statistician of Canada shall, on or before December 1 of each year, prepare and submit to the Minister a certificate that sets out

• (a) the population of Canada as of July 1 of the year in which the certificate is submitted and of each previous year beginning with 2018;
• (b) the population of each province as of July 1 of the year in which the certificate is submitted and of the two previous years;
• (c) the nominal gross domestic product of Canada for the calendar year before the year in which the certificate is submitted and for each previous calendar year beginning with 2018; and
• (d) for each province, information from the Government Finance Statistics regarding the revenues described in section 7, other than those described in paragraph 7(1)(a), subparagraph 7(1)(b)(i), paragraph 7(1)(z.4) and subparagraphs 7(1)(z.5)(i) and (ii), for the fiscal year that ends in the calendar year in which the certificate is submitted and for each of the two previous fiscal years.

(2) The information set out in the certificate shall be based on the most recent publication of Statistics Canada — or the most recent information of Statistics Canada if the publication is not available, its contents have been superseded by more recent information or these Regulations require information that is not published — that is available on or before November 22 of the year in which the certificate is submitted.

(3) The Chief Statistician of Canada shall indicate in the certificate, as the case may be,

• (a) any amount that is set out in the certificate that represents the aggregate of two or more revenue sources; and
• (b) any information that is required to be set out in the certificate that is not available.

33.2 (1) When determining, for the purpose of subsection 6(3) or subparagraph 6(4)(a)(i) or (ii) of the Act, the total revenue derived by a province for a fiscal year from a revenue source described in the definition revenue source in subsection 3.9(1) of the Act, the Minister shall use the following information that is available as of the second December 1 following the end of that fiscal year:

• (a) in respect of revenues from personal income taxes, as described in paragraph 7(1)(a), and corporation income taxes, as described in subparagraph 7(1)(b)(i), for a province that has entered into a tax collection agreement respecting those taxes, the information that is available to the Minister for the administration of the tax collection agreement; and
• (b) in respect of all other revenues described in subsection 7(1), the information contained in the province’s application and the information set out in the certificate referred to in section 33.1.

(2) If any information referred to in subsection (1) is incorrect, missing or unavailable, the Minister may use in place of that information an estimate based on any information that is available to the Minister at the time of the determination.

4 Subsection 34(1) of the Regulations is replaced by the following:

34 (1) For the purpose of paragraph 6(5)(b) of the Act, the total amount of provincial personal income taxes that are payable as the result of assessments or reassessments made in a calendar year is equal to the sum of

• (a) all provincial personal income taxes that are assessed or reassessed in that year, net of all corresponding provincial non-refundable tax credits, non-refundable tax rebates, income tax reductions and capital gains refunds,
• (b) in respect of a province that has entered into a tax collection agreement respecting personal income tax, the province’s share of unapplied payments for the previous calendar year, as estimated in accordance with the tax collection agreement, and
• (c) in respect of a province that has not entered into a tax collection agreement respecting personal income tax, the amounts — net of the value of any special abatement referred to in subsection 3.9(2) of the Act — that have not been assessed as of December 31 of the calendar year and that were, according to the information returns submitted by employers and other payers to the province during the one-year period beginning on March 1 of the previous calendar year, deducted at source as personal income tax for the province for any previous calendar year.

(1.1) For the purpose of paragraph 6(5)(c) of the Act, the total amount of provincial corporation income taxes that are payable as the result of assessments or reassessments made in a calendar year is equal to the sum of all provincial corporation income taxes that are assessed or reassessed in that year, net of all corresponding provincial non-refundable tax credits, non-refundable tax rebates, capital gains refunds and tax remission orders and of the corresponding provincial small business deduction.

(1.2) For greater certainty, for the purpose of paragraph (1)(a) and subsection (1.1), if a reassessment results in a greater amount of tax payable than the initial assessment or the most recent previous reassessment, as the case may be, the difference — not the full amount of the reassessment — is to be added to the sum referred to in those provisions. If it results in a lesser amount payable, the difference is to be subtracted from that sum.

5 Subsection 38(1) of the Regulations is replaced by the following:

38 (1) The Minister shall make a final computation of any fiscal stabilization payment that may be paid to a province for a fiscal year under section 6 of the Act within 21 months after the end of the fiscal year for which an application under that section is made and shall provide the province with a statement that describes the manner in which that computation was made.

Coming into Force

6 (1) Subject to subsection (2), these Regulations come into force on the day on which they are registered.

(2) Section 5 comes into force on December 1, 2023.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The federal government announced the modernization of the Fiscal Stabilization Program (the Program) in the Fall Economic Statement 2020 in response to requests by academics and provincial and territorial governments to reform the Program. Legislative changes to implement the modernization were made through the Budget Implementation Act, 2021, No. 1 (BIA1 2021). Supporting technical changes are required to the corresponding regulations to complete the modernization.

Background

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 Program is administered by the Minister of Finance and is legislated under the Federal-Provincial Fiscal Arrangements Act (FPFAA) and its supporting regulations. The FPFAA and its supporting regulations also enable and define the equalization and territorial formula financing (TFF) programs. Equalization enables less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation, while TFF provides territorial governments with funding to support public services, in recognition of the higher cost of providing programs and services in the north.

Provinces must submit a claim to access the Fiscal Stabilization Program. A province may apply for an advance fiscal stabilization payment once five months of data are available for the fiscal year.

The federal government has provided payments totalling nearly $2.6 billion through the Program since its creation in 1967, with all provinces having benefitted at some point in time. Most recently, fiscal stabilization payments were provided to Alberta ($503 million for 2015–2016 and 2016–2017), Newfoundland and Labrador ($32 million for 2015–2016), and Saskatchewan ($39 million for 2016–2017). Historical payment amounts prior to 2015-2016 can be found in this backgrounder.

The following changes to modernize and provide a more effective backstop to provinces that face an extraordinary drop in revenues through the Fiscal Stabilization Program were announced in the Fall Economic Statement 2020:

1. Make the Program more generous when provinces need help the most by indexing the existing $60 per capita cap, in place since 1987, to per capita nominal gross domestic product (GDP) growth since that time, nearly tripling the cap to about $170 per person in 2019–2020 and 2020–2021. The cap will grow thereafter in line with Canadian economic growth per person. From 2018 onward, the cap cannot decline; in the event of negative nominal GDP per capita growth, the cap will remain constant, then return to growth indexed from 2018 in future years.
2. Enable claims to be finalized approximately one year earlier, with final determinations being completed 21 months, instead of 32 months, after the end of the fiscal year.
3. Include revenues from transferred tax points in revenues eligible for fiscal stabilization.
4. No longer treat the indexation of the personal income tax system as a policy change, which will make it easier for provinces to qualify for fiscal stabilization payments. The Program previously treated indexation as if the provincial government were making a policy change every year to reduce the tax burden. Most provinces and the federal government have adopted the practice of indexing their personal income tax systems to account for inflation since the Fiscal Stabilization Program was last reviewed. The federal government began fully indexing its personal income tax system in 2000. All provinces, except Prince Edward Island and Nova Scotia, have indexed their tax systems. Alberta de-indexed its tax system for the 2020 and 2021 tax years, but intends to reintroduce indexation for tax year 2022.
5. Eliminate an inconsistency in the Program’s treatment of declines between 0% and 5% in resource and non-resource revenues.

Legislative changes were made through BIA1 2021 to implement all of the above proposals except for item 4, which must be addressed through the regulatory changes. In addition, supporting regulatory changes are required to align the regulatory framework with the new legislative framework for items 1 and 2. Items 3 and 5 are fully implemented and require no regulatory amendments. Per BIA1 2021, the increase in the cap on payments applies to claims from 2019–2020 onward, while the technical changes are to be applied from 2021–2022 onward.

Objective

The main objective of the regulatory changes is to complete the implementation of the modernization of the Fiscal Stabilization Program, which was announced in the Fall Economic Statement 2020 and legislated through BIA1 2021. Specifically, the regulatory changes will address items 1, 2 and 4 that are described above in the Background section.

These changes are required to align the tax information required on a provincial application to be consistent with the new definition of personal and corporate income tax revenues set out under the Act as amended by BIA1 2021; define elements that should be included in the calculation of personal and corporate income tax revenues; specify elements that must be included in the annual certificate prepared by the Chief Statistician of Canada to the Minister of Finance to support the calculation of fiscal stabilization payments; and advance the deadline for finalization of claims so that they may be paid out to eligible provinces roughly one year earlier, as promised when the government announced the modernization. Together with the legislative changes made in BIA1 2021, these regulatory changes will enable claims to be finalized in a more timely manner.

Provincial revenues eligible for stabilization are adjusted to exclude the impact of provincial policy decisions (for example, changes in provincial tax rates or credits). To address item 4 in the Background section, the regulatory changes will specify that the indexation of the personal income tax system will no longer be treated as a policy change for the purpose of fiscal stabilization claims (previously indexation was treated as a policy change and, therefore, an adjustment was made to reduce the size of claims for provinces that index to their income tax system). This change will make it slightly easier for a province that indexes its tax system to inflation to qualify for the Program, improving the responsiveness of the Program.

The regulatory changes will also improve the operation of the Program by enabling the Minister of Finance to use alternative data sources when data may be incorrect or missing, a provision which is already in place for other federal transfer programs, such as equalization and TFF. This will allow more accurate and timely determination of stabilization claims, as described in items 1 and 2 in the Background section.

Description

The following regulatory technical changes are being made to the Fiscal Stabilization Program by amending the Federal-Provincial Fiscal Arrangements Regulations, 2007:

1. Align the information required on a provincial application to be consistent with the new definitions for personal and corporate income tax revenues set out under the Act, as amended by BIA1 2021.
   • This regulatory change is required to ensure that there is no inconsistency between the Act and the Regulations following the changes made in BIA1 2021.
2. Define elements that should be included in the calculation of personal and corporate income tax revenues.
   • Providing greater detail in the Regulations with respect to the determination of personal and corporate income tax revenues will reduce uncertainty and ensure a consistent treatment in the measurement of personal and corporate income tax revenues across provinces.
3. Change the date for finalization of claims to 21 months after the end of the fiscal year for which the claim is being made, instead of 32 months. This will facilitate an earlier final determination of payments.
   • One of the objectives of the modernization was to shorten the timeline to finalize claims, which was originally 32 months after the end of the fiscal year. The legislative changes in BIA1 2021 included two elements to enable claims to be finalized roughly one year earlier: the data required for the new measure of personal and corporate income tax revenues is available one year earlier; and provinces are required to apply six months earlier. This regulatory amendment shortens the time frame for the Minister to finalize claims from 32 months to 21 months after the end of the fiscal year for which the claim is made.
4. Specify elements that must be included in the annual certificate prepared by the Chief Statistician of Canada to the Minister of Finance to support the calculation of fiscal stabilization payments.
   • This change mirrors provisions already in place for other transfer payments, such as equalization and TFF. It will ensure that the data required to complete the determination of fiscal stabilization payments will be available to the Minister of Finance.
5. Specify the information to be used in the determination of fiscal stabilization payments.
   • This change aligns with the provisions which specify the information, such as the appropriate estimates for population, GDP and government revenue, used to calculate equalization and TFF payments. It specifies that the information used must be that available as of the second December 1 following the end of the fiscal year for which the claim is being made. These changes provide certainty on when the determination of payments will be made and what data will be used.
6. No longer treat the indexation of the personal income tax system as a policy change in the Program, meaning provinces would no longer be penalized for adjusting their tax system for inflation.
   • As announced in the Fall Economic Statement 2020, the regulatory changes would no longer treat the indexation of tax systems as a policy change for the purpose of the Fiscal Stabilization Program. Previously, the Program treated indexed systems as though the provincial government were making a policy change every year to raise the thresholds of its tax system in line with inflation. As a result, an adjustment was made to reduce the size of claims for provinces with indexation as it was treated as a policy change to reduce tax rates. This change will make it slightly easier for a province that indexes its tax system to account for annual inflation to qualify for the Program, improving the responsiveness of the Program.
7. ermit the Minister of Finance to use alternative information if the revenue information or other information prescribed for use in the determination of fiscal stabilization claims is incorrect or missing (a mechanism already in place for other federal transfer programs).
   • The equalization and TFF programs include a regulatory provision that allows the Minister of Finance to use alternative information if the data supplied by the information source identified in the regulations is incorrect or missing. Introducing the same regulatory provision that is part of equalization and TFF for the Fiscal Stabilization Program will ensure that the Minister is able to use alternative sources for incorrect or missing data.

Regulatory development

Consultation

The federal government announced the modernization of the Fiscal Stabilization Program in the Fall Economic Statement 2020 in response to requests by provincial and territorial governments to reform the Program, including a request made by provincial-territorial Finance ministers at the December 2019 Finance Ministers’ Meeting and reiterated by the Council of the Federation.

A consultation draft of the regulatory changes was shared with provinces and territories and a detailed discussion of the proposed regulatory changes was held on October 12, 2022, with federal-provincial-territorial officials.

While some provincial-territorial officials reiterated their jurisdiction’s support for the Council of the Federation request, provincial-territorial officials did not raise any concerns with the regulatory amendments.

Some jurisdictions inquired as to whether, for jurisdictions that do not index their personal income tax systems to inflation, a policy change made to account for multiple years of inflation in one year would be considered indexation for the purpose of the Fiscal Stabilization Program. Federal officials clarified that the Program’s preferential treatment of indexation applies to the one-year impact of inflation. Any change beyond the one-year inflation amount would be considered a policy change and would therefore result in an adjustment to the claim.

Since provinces and territories are the main stakeholders for the Fiscal Stabilization Program, it is not expected that further public consultations would have resulted in modifications to the amendments. Therefore, the regulatory amendments were exempted from prepublication in the Canada Gazette, Part I.

Modern treaty obligations and Indigenous engagement and consultation

The Regulations explicitly clarify that the prohibition in the Act does not apply in circumstances where it would conflict with Indigenous rights recognized and affirmed by section 35 of the Constitution Act, 1982. These Regulations do not impact Indigenous peoples and do not trigger the Crown’s duty to consult.

Instrument choice

Regulatory changes are required to align the regulatory framework with the new legislative framework implemented by BIA1 2021. The legislation requires that the Regulations define the elements included in the calculation of personal and corporate income tax revenues. For the other regulatory changes, there are no other appropriate instruments to implement the technical changes required to modernize the Fiscal Stabilization Program 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 2021.

The regulatory changes will also improve the operation of the Program by permitting the Minister of Finance to use alternative information if the revenue information or other information prescribed for use in the determination of fiscal stabilization claims is incorrect or missing, similar to what is done for other transfers.

The changes made through regulation are not expected to have a significant impact on the cost of the Program. No longer counting indexation as a policy change will make it easier for provinces to qualify for stabilization payment. This change will apply to claims for 2021–2022 onward. However, the change 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 was not subject to the legislated cap.

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 businesses.

Regulatory cooperation and alignment

The Fiscal Stabilization Program is a federal transfer program to eligible provincial governments. The proposed changes would 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 implementation of the modernization of the Fiscal Stabilization Program announced in the Fall Economic Statement 2020 and legislated through BIA1 2021. It ensures that the regulatory framework is aligned with the new legislative framework, assisting in updating the Program and enabling claims to be finalized roughly one year earlier. The change in the treatment of the indexation improves the responsiveness of the Program. The introduction of the possibility for the Minister to address missing or incorrect data improves the operation of the Program.

Implementation, compliance and enforcement, and service standards

Implementation

These Regulations will come into force on the day on which they are registered, except for the amendment to subsection 38(1) concerning the shorter time frame for the finalization of claims, which will come into force on December 1, 2023.

The technical changes enacted by BIA1 2021 take effect for claims for 2021–2022 and onward, and the legislation specifies that any related regulatory amendments will also take effect for claims for 2021–2022 and onward. The deadline for provinces to submit claims for 2021–2022 is March 31, 2023.

The Department of Finance is in a position to implement the Regulations and process claims for 2021–2022 and onward immediately when the Regulations come into effect.

Contact

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