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31 Tax Memo 1 (1962)

handle is hein.journals/taxmmo31 and id is 1 raw text is: TAX MEMO No.31 May, 1962 Summary of Federal.- Provincial Tax Arrangements The New Fiscal Arrangements in Principle Following twenty years of tax rental arrangements between the federal government and the provinces, Prime Minister Diefenbaker announced at the federal- provincial conference in February, 1961 that the tax rental system would be discontinued at the expiration of the Federal-Provincial Tax Sharing Arrangements on March 31, 1962. To permit the provinces to impose taxes in the corporation and personal income tax fields -a right restricted under the various tax rental agree- ments in effect since 1941-the federal government was prepared to withdraw in part from these areas. The federal withdrawal from the income tax fields takes the form of straight federal tax reductions-by 9 percentage points from the corporation income tax rate and by 16% in 1962 to 20% in 1966 progressively from the personal income tax. The reductions do not apply to income earned outside the provinces. The federal government has agreed to collect free of charge to the provincial governments any taxes on income that the provinces impose, provided the bases remain identical with federal definitions. For any prov- ince choosing not to impose succession duties, the federal government will continue to pay to the prov- ince half the yield of the federal estate tax in that province. Should a province levy a succession duty, the federal government will continue the present 50% abatement of the federal estate tax. Changes in the formula for calculating the equalization payments to the provinces were also announced. The former equalization formula, designed to increase a province's per capita yield from the stan- dard taxes' on income and inheritances to an amount equal to the average per capita yield of the two highest i~ The standard taxes were: (1) a personal income tax equivalent to 13% ot federal income tax collections excluding Old Age Security Tax; (2) a corporation profits tax of 9%; and (3) succession duties equivalent to 50% of federal duties. provinces, is being replaced by a national average yield formula under the new arrangements. The federal government felt that the old formula disregarded sources of provincial revenue other than the three standard taxes, and in particular ignored the wide variation in revenue received from natural resources. As a result the 1962-67 formula will include the yield of one-half of the three-year moving average of gross revenues from natural resources (as determined by the Dominion Bureau of Statistics) in addition to the yield from the three standard taxes. Under the new arrange- ments the equalization payments raise a province's yield from the three standard taxes plus its yield from 50% of natural resource revenues to the national average per capita yield from these sources. A floor is provided to ensure that no province entitled to equalization under the new formula will receive less than it would have received under a con- tinuation of the old equalization formula and tax rental agreements, including the Atlantic Provinces Adjust- ment Grants and special grants to Newfoundland; and no province will receive less in total than it had received on the average in the final two years of the old agreements. Adjustment Grants paid to the Atlantic provinces to supplement receipts from the standard taxes and equalization payments have been continued for the term of the new agreements but will be increased from $25 million to $35 million a year; $3½ million of this sum will go to Prince Edward Island and $10½ million each to New Brunswick, Nova Scotia and Newfound- land. In addition to its share of the Adjustment Grants, Newfoundland will continue to receive the special grant of $8 million per annum recommended by the McNair Commission to help it maintain its public ser- vices at the level prevailing in the other Atlantic provinces. The stabilization element contained in the old agreements is carried forward to assure the provinces that their revenue from the yield of the standard taxes Additional copies of this Memo may be obtained at a price of 15¢. CANADIAN TAX FOUNDATION

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