Fact sheet

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Tax Collection Agreements

January 2002

The Canada Customs and Revenue Agency (CCRA) has identified a problem in tax accounting that resulted in overpayments to four provinces under the Tax Collection Agreements.

Under these agreements:

• The CCRA collects personal income taxes on behalf of all provinces and territories except Quebec; and
• The Department of Finance pays the appropriate share of the taxes collected to those provinces based on accounts provided by the CCRA.

Scope of the Problem

The four provinces significantly affected are Alberta, British Columbia, Manitoba, and Ontario. Mutual fund trusts are a type of collective investment vehicle allowing Canadians a simple way to invest indirectly in a broad range of stocks and bonds in a number of different markets.

Preliminary estimates indicate that a total of about $3.3 billion was overpaid for the 1993 to 1999 tax years. These estimated amounts break down as follows:

Alberta $4.4 m
British Columbia $121 m
Manitoba $408 m
Ontario $ 2.8 B
Total $ 3.3 B

Description of the Problem

This issue goes back to the introduction of Capital Gains taxes in 1972.

Overpayments to provinces prior to the 1990's are likely to be at a much less significant level than in the latter part of the 1990's. Overpayments for the 1993 - 1999 period are still under review.

Overpayments to the four provinces are the result of a tax accounting omission in CCRA reports, which the Department of Finance uses to determine how much tax revenue it distributes to the provinces.

Mutual fund trusts pay federal and provincial income tax on capital gains. Under circumstances set out in the income tax legislation, mutual fund trusts can receive a refund of both the federal and provincial portions of this tax paid, once the investors realize the gains and pay tax themselves.

Due to a problem in CCRA accounting processes, which are audited by the Auditor General and are used by the Department of Finance annually to dispense provincial shares of income taxes collected by the CCRA, the provincial portion of the capital gains refund claimed by mutual fund trusts has not been deducted in the computation of the provincial tax revenues. Instead, it has been deducted from federal revenues.

In other words, when mutual fund trusts pay provincial income tax on capital gains, the amount of tax paid is added to the payments to the provinces. However, when the mutual fund trusts receive a refund of provincial taxes paid, the amount is not deducted from the payments to the provinces.

The amounts of overpayments for the period prior to 1993 are likely to be much lower and an ongoing review aims at clarifying these amounts.

Identifying and Resolving the Problem

In the course of enhancing computer systems used for tax accounting, the CCRA identified a problem that resulted in initiating an in-depth review. With some 2200 separate accounts, CCRA's tax ledger system is very complex.

As soon as the CCRA's internal review process indicated that the omission of certain data in its reports to the Department of Finance was resulting in overpayments to the provinces, the Agency informed the Department of Finance and the Auditor General. Remedial measures were put in place as soon as the Auditor General confirmed that the problem was real.

Next Steps

The Federal Government is taking immediate action to prevent further overpayments for 2000 and future years.

In addition, for previous years, the Government is working with the Auditor General, and is discussing the issue with the provinces.

For media information

Date modified:

2002-01-29