FISCAL FEDERALISMFISCAL FEDERALISMTHE QUEBECTHE QUEBEC--CANADA EXPERIENCESCANADA EXPERIENCES

Conference presented to1e encontro nacional de administradores tributários – 1e ENAT

14-15-16-17 Julho, 2004Salvador, BAHIA, BRAZIL

BYDaniel BourgeoisBAA, M. Fisc, LLB

President and Chief executive OfficerFiscal and Financial Planning Association

www.apff.org

SUMMARYSUMMARY1.1. What is APFF ?2. An overview of Canada’s Constitution

(separation of powers between the federal government and provinces).

3. Canadian taxation (federal, provincial (Quebec) and local taxation).

4. Selected and practical topics concerning the Canadian/Quebec experience.

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What is the APFF ?

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OrganisationOrganisation

! Non profit! Independent! Non governmental! Autonomous and self financed

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OBJECTSOBJECTS

! Improving its members competence by enhancing their know-how in the field of taxation and financial planning.

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! To regroup professionals from different backgrounds

! Different areas of professionals activities

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StatisticsStatisticsMEMBERS 2003MEMBERS 2003

60%25%

15%Accountants

Lawyers & notaries

Miscellaneous(financialplanners, advisers, securitiesbrokers, financial industry(insurances))

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Our member’s needs:Our member’s needs:

! To update their knowledge

! Evolution of tax laws! Jurisprudence! Doctrine! To meet with government officials (finance and

revenue departments) in order to discuss different topics concerning tax policies and tax administration.

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ACTIVITIES AND ACTIVITIES AND PUBLICATIONSPUBLICATIONS

! In 2003, we have organised 140 activities (annual tax conference, seminars, lectures, discussion lunches, round tables).

! We have published more than 12 000 pages on different tax topics (contents of seminars, lectures, quarterly revues, magazines, specialized publications, news letters, etc.)

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INTERNATIONAL RELATIONSINTERNATIONAL RELATIONS

! APFF is called upon to act as a resource organization by economic and social development assistance organizations, such as CIDA (Canadian International development Agency) in order to provide assistance to other countries.

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That’s what is APFF !

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FISCAL FEDERALISMFISCAL FEDERALISMIN CANADAIN CANADA

!! Canada is divided in 10 provinces and 3 territories.Canada is divided in 10 provinces and 3 territories.

!! Federal regime means that powers and responsibilities Federal regime means that powers and responsibilities are divided between the federal government and the are divided between the federal government and the provinces.provinces.

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JURIDICTIONS JURIDICTIONS –– DIVISION OF POWERSDIVISION OF POWERS

" FEDERAL GOVERNMENT- defence, banking system, postal service, criminal law,

immigration, international relations.

" PROVINCIAL GOVERNMENT- justice and civil law, property, education, health, environment,

cities and municipalities (local government).

" SHARED RESPONSIBILITIES- agriculture, transportation, welfare.

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TAXATION POWERSTAXATION POWERS

" “CONSTITUTIONAL ACT OF 1867”Power of taxation is divided between the federal government and the provinces – concurrent jurisdiction.

" FEDERAL- excise tax and custom duties- power to levy all kind of taxes (income tax, direct or indirect

taxes), but not on land and property owned by the provinces.

" PROVINCIAL- Power to levy income taxes and direct taxes within the limits of

their jurisdictions; power to tax (licenses and permits) and power to tax natural resources (renewable or non renewable).).

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TAX SYSTEMSTAX SYSTEMS

" INDIVIDUAL INCOME TAX

- Individuals resident in Canada are taxed on their worldwide income from all sources;

- Both the federal government and the provinces levy income tax;

- Federal collects I .T. for all provinces, except Quebec (pros and cons);

- Top marginal rates (combined federal and provincial) fluctuate from one province to the other.

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FEDERAL INCOME TAX RATES (1)FEDERAL INCOME TAX RATES (1)(INDIVIDUAL)(INDIVIDUAL)

TAXABLE REVENUES RATES

0 – 32 182. $ 13,4 %

32 183. $ - 64 367. $ 18,4 %

64 368. $ - 104 647. $ 21,7 %

104 648. $ + 24,2 %

(1) Applicable to Quebec resident

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QUEBEC INCOME TAX RATESQUEBEC INCOME TAX RATES(INDIVIDUAL)(INDIVIDUAL)

TAXABLE REVENUESTAXABLE REVENUES RATESRATES

0 0 –– 27 094 $27 094 $ 16,0 %16,0 %

27 095. $ 27 095. $ -- 54 194. $54 194. $ 20,0 %20,0 %

54 195. $ +54 195. $ + 24,0 %24,0 %

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COMBINED FEDERAL COMBINED FEDERAL –– QUEBECQUEBECINDIVIDUAL INCOME TAX INDIVIDUAL INCOME TAX –– EFFECTIVE RATES / MARGINAL RATESEFFECTIVE RATES / MARGINAL RATES

48,22 %48,22 %39,90 %39,90 %59 846. 59 846. $$

30 944. $30 944. $28 902. $28 902. $150 000. $150 000. $

45,71 %45,71 %32,57 %32,57 %24 428. 24 428. $$

12 944. $12 944. $11 484. $11 484. $75 000. $75 000. $

38,37 %38,37 %27,30 %27,30 %13 648. 13 648. $$

7 112. $7 112. $6 536. $6 536. $50 000. $50 000. $29,36 %29,36 %18,00 %18,00 %4 500. $4 500. $2 196. $ 2 196. $ 2 304. $2 304. $25 000. $25 000. $

QuebecQuebec

(2)(2)

FederalFederal(1)(1)

Marginal Marginal raterate

Effective Effective raterate

TotalTotalIncome taxIncome taxTaxable Taxable revenuesrevenues

(1)(1) INCLUDES FEDERAL PERSONAL TAX CREDIT OF 1037.$INCLUDES FEDERAL PERSONAL TAX CREDIT OF 1037.$(2)(2) INCLUDES PROVINCIAL PERSONAL TAX CREDIT OF 1804.$INCLUDES PROVINCIAL PERSONAL TAX CREDIT OF 1804.$

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NON NON -- RESIDENTRESIDENT

NonNon--resident individuals are taxed on theirresident individuals are taxed on theirCanadian source revenues (employment,Canadian source revenues (employment,enterprises, dividends, interest, capital gains,enterprises, dividends, interest, capital gains,rents).rents).

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CORPORATE INCOME TAXCORPORATE INCOME TAX

-- Corporations that reside in Canada are liable to pay Corporations that reside in Canada are liable to pay income tax at different rates, depending of the types of income tax at different rates, depending of the types of revenues;revenues;

-- They are also subject to paid up capital tax.They are also subject to paid up capital tax.

-- Both the federal government and the Quebec government Both the federal government and the Quebec government levy the above taxes.levy the above taxes.

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SALES TAXSALES TAX

-- A federal GST (Goods & Service Tax) of 7% is applicable to all A federal GST (Goods & Service Tax) of 7% is applicable to all goods and services sold in Canada; (similar to a V.A.T.);goods and services sold in Canada; (similar to a V.A.T.);

-- QST (Quebec Sales Tax) of 7,5% is applicable to all goods and QST (Quebec Sales Tax) of 7,5% is applicable to all goods and services sold in Quebec (similar to a V.A.T.);services sold in Quebec (similar to a V.A.T.);

-- Total sales Total sales taxtax in in thethe province of province of QuebecQuebec: 15.04%: 15.04%

-- Export of goods and services are not subject to GST and Export of goods and services are not subject to GST and QST).QST).

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AGREEMENT BETWEEN THE FEDERAL AGREEMENT BETWEEN THE FEDERAL GOVERNMENT AND THE QUEBEC GOVERNMENT AND THE QUEBEC

GOVERNMENT CONCERNING THE GSTGOVERNMENT CONCERNING THE GST

-- The department of revenue Quebec assess and collects, The department of revenue Quebec assess and collects, for the federal government, the GST (a federal tax) on for the federal government, the GST (a federal tax) on goods and services sold within the province of Quebec;goods and services sold within the province of Quebec;

-- A good example of fiscal cooperation;A good example of fiscal cooperation;

-- This agreement is exclusive to Quebec, no other province This agreement is exclusive to Quebec, no other province having a provincial Revenue Department.having a provincial Revenue Department.

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LOCAL TAXATIONLOCAL TAXATION

-- Constitution Act of 1867: cities are under the jurisdiction Constitution Act of 1867: cities are under the jurisdiction of the provinces;of the provinces;

-- Cities are created by law adopted by the Quebec National Cities are created by law adopted by the Quebec National Assembly and the provincial legislatures;Assembly and the provincial legislatures;

-- Federal government cannot intervene directly with taxing Federal government cannot intervene directly with taxing measures;measures;

-- Local revenues consist mainly in real estate taxes Local revenues consist mainly in real estate taxes collected by cities (based on evaluation);collected by cities (based on evaluation);

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LOCAL TAXATION (CONTINUED)LOCAL TAXATION (CONTINUED)

- The legal ‘’backbone’’ which enables local taxation: land registry and evaluation;

- Quebec territory is itemized electronically in a cadastral plan;

- Each immoveable property is registered and a number is assigned to each property;

- Registration information (boundaries, measurements, areas, name of owner, indication of the mode of acquisition);

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LOCAL TAXATION (CONTINUEDLOCAL TAXATION (CONTINUED))

-- Municipal Municipal responsibilities ((within the city limits):within the city limits):roads, police, water, fire department, garbage collection, snow removal, local sport and cultural infrastructure, etc.

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LOCAL TAXATION (CONTINUEDLOCAL TAXATION (CONTINUED))

-- Sources of revenuesSources of revenues

-- Real estate taxes (based on property Real estate taxes (based on property valuation) ;valuation) ;

-- Transfer duties (on immoveable)Transfer duties (on immoveable)example:0 – 50 000 0.5% tax50 000 – 250 000 1% tax250 000 + 1.5% tax

- Other specific taxation

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SELECTED AND PRACTICAL TOPICS ON FISCAL SELECTED AND PRACTICAL TOPICS ON FISCAL FEDERALISMFEDERALISM

- BENEFITS OF COOPERATION (Canada/Quebec):

- Audit and assessments procedures;

- Exchange of information between RCA and RQ;

- Formal agreement between RCA and RQ concerning the GST;

- Meetings between RCA and RQ;

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FISCAL FEDERALISM FISCAL FEDERALISM IN CANADAIN CANADA

PROBLEM:

- Fiscal imbalance between the federal government and the provinces.

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FISCAL IMBALANCE (CONTINUED)FISCAL IMBALANCE (CONTINUED)

- This has been a major issue (contentious) of the Canadian Federation.

- Nature of the problem:

1. Major cuts by the federal government under the Canada Health and Social Transfer (CHST);

2. Demographics imposes huge pressure on social spending (provincial jurisdiction) (sharp rise in recent years).

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FISCAL IMBALANCE (CONTINUED)FISCAL IMBALANCE (CONTINUED)

- The Quebec government formed, in 2001, a Commission to study this problem and its actual consequences andalso to find practical solutions that could be implementedto correct it.

- www.desequilibrefiscal.gouv.gc.ca

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FISCAL IMBALANCE (CONTINUED)FISCAL IMBALANCE (CONTINUED)

- The fiscal imbalance between the federal government and the provinces stems essentially from three separate causes:

- the categories of expenditures and revenues by the two (2) levels of government;

- inadequate intergovernmental transfers;

- the ‘’federal spending power’’ in areas of provincial jurisdictions;

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FISCAL IMBALANCE (CONTINUED)FISCAL IMBALANCE (CONTINUED)

- Recommendations proposed by the Quebec Commission:

- to restore fiscal balance within the Federation (by changing the terms and conditions of existing transfer programs);

- to counteract ‘’federal spending power’’ in areas of provincial jurisdiction;

- to create a genuine process of exchanges and discussion between the 2 levels of government, on all aspects of intergovernmental fiscal relations;

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COUNCIL OF THE FEDERATIONCOUNCIL OF THE FEDERATIONwww.councilofthefederation.cawww.councilofthefederation.ca

- A new institution created on Dec 5th, 2003 by the Provincial Prime Ministers.

- Purpose:improving federal-provincial relations