Print Page

TAXES

The Case for Provincial Control of Taxation Revenue

Of the three core items of the Alberta Agenda (pensions, police and tax collection), tax collection has been the least studied.

As a result, media comment has been infrequent, ill-considered, and even bizarre.

The proposal is that Alberta collect its own provincial personal income tax, and stop relying on Ottawa to do the job instead. (The present Tax Collection Agreement between Ottawa and Alberta has expired, and should be discontinued rather than renewed.)

Under the existing pass-along arrangement, the national government collects both federal and provincial income tax (usually at source), and then remits to participating provinces their full share. (Contrary to popular belief, it deducts nothing from the amount owing to each province.) Each province sets its own level of provincial personal income tax, usually (though not in Alberta’s case) as a percentage of the federal tax. (Alberta levies a straight 10% of federally-defined taxable income.)

The sole exception is Quebec, which has never allowed Ottawa to collect Quebec’s taxes. As a result, people in Quebec file two forms at income tax time, one federal and one provincial. To Quebecers, filing two forms is no big deal against having total control of their own provincial tax money. In reality, Albertans already fill out two forms in one. All that needs to be done is to send our provincial tax to Edmonton rather than Ottawa.

Any province may unilaterally opt to collect its own provincial income tax. Alberta chose to do this with corporate provincial income tax in the mid-1990s. The Alberta Department of Finance now collects over $2 billion annually from this source.

The Alberta government still needlessly relies on Ottawa to collect personal provincial income tax, which amounts to a little over $5 billion per year.

For reasons that can hardly be charitable, the national government charges the provincial government nothing for its collection service.

However, it is our understanding that the federal government holds onto Alberta's funds for an average of five months. At even as little as 3% interest on $5 billion that's over $150 million a year. It appears that by Alberta receiving the tax money five months sooner it would be a break-even situation, or better.

However, for several reasons the cost will be less than critics have claimed, and well worth paying. Federal collection of Alberta’s second largest revenue source creates an unnecessary sense of inferiority and political vulnerability among the people, politicians and government of Alberta. For this reason, Albertans should follow Quebec’s example and collect all of our own taxes.

Costs and Advantages

People coming new to this discussion naturally (and properly) have concerns about the added cost to Albertans of collecting their own personal provincial income tax. However, the costs may be less than we might assume, because Alberta already has considerable collection infrastructure in place.

The provincial government already collects corporate provincial income tax, health premiums, worker’s compensation premiums, and would (under the Alberta Agenda) collect pension plan premiums as well. It would therefore not be a major step for the Alberta government to collect provincial income tax.

The following factors, already in place, would simplify the provincial administration considerably:

1) Although federal and provincial NRTCs (non-refundable tax credits) are different, Alberta’s flat tax of 10% is still calculated on federal taxable income (as defined by the Federal Income Tax Act). As long as we continue to define taxable income in this fashion, the provincial tax system we currently have is relatively simple to administer. The Alberta tax schedule in your tax return would simply be remitted to the Alberta Treasury rather than the federal Receiver General.

2) The Alberta Finance Department already has the computer infrastructure to administer these returns, as they have been assessing Alberta corporate tax returns for several years, and collecting Alberta corporate income tax.

3) Most personal tax returns are now prepared using computerized software (either by accountants or individuals) which simplifies the work of tax calculations.

4) To the extent that Alberta Treasury must hire employees to administer personal returns, this will create jobs for Albertans and provide some spin-offs to our provincial economy.

5) Studies published by the C.D. Howe Institute (1999) and Fraser Institute (2003) put the savings available from an Alberta Pension Plan at 13% to 15% of the premiums Albertans now pay to the Canada Pension Plan. Current estimates are that Albertans will pay over $4 billion to the CPP this year. The annual savings of an Alberta Pension Plan are therefore over $500 million. Even if collecting our own personal income tax cost up to $50 million per year (10% of the revenues, which is a very high estimate), we would still be ahead by $450 million by adopting the Alberta Agenda. Since we already collect our own corporate tax, this would give us control of all our provincial taxation revenue, rather than leaving our biggest revenue source in the hands of the government in Ottawa.

The rebuttal to the McClelland Committee discussion of provincial income tax

1. There is a misconception widespread in the West that Quebec collects federal income tax in addition to its own. This myth sends people in all kinds of strange directions. It is not true. The federal and Quebec taxation departments operate separately.

2. It is not true (or at any rate impossible to establish) that federal income tax is unconstitutional, as a number of enterprising people have argued over many years. Section 91 of the British North America Act assigns to the national government “The raising of Money by any Mode or System of Taxation.” An argument can be made that this does not include income tax, but 85 years of federal income taxation argue otherwise.

3. Contrary to popular belief among opponents of the Alberta Agenda, Alberta does have a constitutional right to collect its own income tax. Section 92 of the Constitution assigns Provincial Legislatures the right to “Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes.”

4. Finally, just as Alberta has a sovereign right to collect its own taxes, so does Ottawa. It is futile to propose that Alberta enact a law claiming for itself the right to collect national (as well as provincial) income tax. The right and ability to tax citizens is the essence of sovereignty. The suggestion that Alberta might try to appropriate Ottawa’s right to collect its own tax is effectively a recommendation for separatism, and that is not part of the Alberta Agenda.

The aim of the Alberta Agenda is to disentangle and clarify the rights and responsibilities of both levels of government, not to change them. Sovereignty is shared in Canada’s federal system, and this should be reflected in tax collection.

Conclusion

Skeptics will insist that Albertans should not undertake tax collection because it’s cheaper to let Ottawa do it.

The counter-argument, which is stronger in our view, is that provincial tax collection is integral to the Alberta Agenda, and the Alberta Agenda is essential to reducing costly and needless unconstitutional intrusion by the national government in our provincial affairs.

In the absence of published and impartial studies, the Alberta Residents League (ARL) recommends:

1. That the Government of Alberta not renew the recently expired Tax Collection Agreement.

2. That the government strike a committee of external tax and auditing experts to discover the cheapest and most effective means of implementing provincial personal income tax collection. Keeping in mind the Alberta Agenda is part of a package deal which will strengthen Alberta’s place in confederation.