Appendix A
The 1997 historical revision record of decisions: Financial Management System (FMS) revenue and expenditures

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Introduction

Two reports describe the changes made to the classification of the public sector entities, concepts and methodology used in the FMS. The changes were implemented in November 1997 with the release of the Canadian System of National Accounts (CSNA) historical series. A number of other decisions designed to enhance harmonization between the CSNA and the FMS were also implemented. These decisions are documented in the following documents:

1. The 1997 Historical Revision of the Canadian System of National Accounts (Catalogue no. 13F0031MIE). Record of changes in classification of sectors and transactions, concepts and methodology.

2. Remaining Differences between the 1997 Canadian System of National Accounts and the 1993 International System of National Accounts (Catalogue no. 13F0031MIE2000003).

Decisions related to the public sector are described below.

Decisions

1. Federal revenue from provincial lotteries

Issue : How should the revenue paid to the federal government from provincial lottery corporations be treated in the FMS?

Discussion : The federal government receives payments from provincial lottery corporations as a result of a bilateral agreement involving the formers' withdrawal from the lottery field. The agreement requires the provinces, on a combined basis, to make ongoing payments of $24.0 million in 1979 dollars annually on an inflation adjusted basis ($49.6 million in 1994/1995). Currently FMS treats this federal revenue in the form of transfers from government business enterprises, with no impact on provincial revenue or expenditures. The amounts have been deducted as an expense in the calculation of net income of lottery corporations by Statistics Canada (StatCan).

The payments are made by the lottery corporations on behalf of provincial governments. As such, one option would be to impute a receipt of the money by provincial governments (lottery profits received) and a subsequent transfer to the federal government (how would this be functionalized?). The provincial revenue would then (unless an exception is made, as with other historical FMS changes) have to be included in the revenue for the Fiscal Arrangements Certificate. Another option would be to show only the federal revenue as remitted lottery profits (but the federal government does not have any ownership rights over provincial lottery profits). Still another option would be to include it with either federal other consumption taxes or miscellaneous taxes—the proposal for the System of National Accounts (SNA) is to treat it as miscellaneous indirect taxes.

Decision : Revenue paid to the federal government from provincial lottery corporations will be deemed to be a distribution of the corporations' profits, but treated as federal miscellaneous consumption taxes in the FMS (miscellaneous indirect tax in the SNA), and not disseminated as "Gaming profits" in the way provincial lottery revenue data are disseminated. A separate series should be maintained at the working level.

2. Canada Mortgage and Housing Corporation (CMHC) housing subsidies

Issue : How should the federal government transfers to CMHC for social housing be treated?

Discussion : The SNA will treat the CMHC, which for its housing operations is considered to be a special fund, as an agent of the federal government with respect to its "Minister's office" expenditures. The implications for the FMS to follow this treatment, would be to classify the federal payments as housing expenditures rather than intrasectoral transfers and provincial/local receipts as transfers from the federal government rather than from government business enterprises.

Decision : CMHC will be treated as an agent of the federal government with respect to its Minister's office housing expenditures. These expenditures will then accordingly be classified under the "Housing" function in the FMS. The corresponding revenues of provincial and local housing authorities will be treated as transfers from the federal government rather than as transfers from government business enterprises.

3. Transfers to own enterprises

Issue : Maintain the current function "Transfers to own enterprises" or eliminate it and functionalize its content?

Discussion : The latter would help to ensure that a government's expenditures related to any one function is entirely included in that same function. Interprovincial comparisons of any given function would then be more independent of differing provincial vehicles (e.g., GBE versus general government) for delivering goods and/or services.

Decision : The function "Transfers to own enterprises" will be eliminated and its contents assigned to other functions as appropriate.

4. Operation and maintenance of government buildings

Issue : Should the FMS functionalize the costs of operating and maintaining government buildings or classify them all to one function, such as "General government services"?

Discussion : The 1984 FMS Manual is somewhat vague, but appears to imply that these expenditures should be functionalized. Under the "General government services" function there appears to be the following:

(b) Administration – encompasses all expenditures on administration that cannot be allocated to more specific function. It includes outlays for…the construction, repair and maintenance of multi-purpose public buildings.

Are operation and maintenance costs administrative expenditures? Through omission, are we to conclude that outlays for the construction, repair and maintenance of single-purpose public buildings be allocated to more specific functions? What exactly does maintenance include?

The current FMS practice is to include departmental expenditures on operation and maintenance of buildings largely in "General government services" (Federal, British Columbia, Quebec and Ontario, at least), while corresponding special fund expenditures are functionalized. Typically, governments centralize these expenditures in one department in their financial statements. However, in B.C. and Quebec, the departments also include these in their expenditures. They are paid to special funds (the B.C. Buildings Corporation in B.C. and the Société immobilière in Quebec) and the amounts are removed as intrasectoral payments in the FMS through adjustments. The expenditures of the two special funds are, in turn, classified to "General government services" in the FMS.

What methodology would the FMS use to functionalize these expenditures if that route were decided upon? Barring any other data such as actual costs by department (or even property values by department) from each jurisdiction, an allocator would have to be chosen. While not perfect, wages and salaries by function is one option. To the extent that operating costs are proportional to the size of the building, the size of the building is proportional to the number of employees, and the number of employees is proportional to the wage and salary bill, wages and salaries would be a suitable allocator. Examples of sources of imprecision would be where there are relatively large operating costs where there are few employees and where you have a skewed distribution of employee type (i.e., highly-paid versus low-paid) across buildings and across functions.

For the FMS historical revision, adjustments would have to be made back to 1988/1989, of course, to remove these from "General government services," if a decision to functionalize these expenditures were made. The actual allocation by function would be simplified by the fact that this operation could be combined with the functionalization of Supplementary Labour Income (SLI). If it were decided that these expenditures would be allocated to "General government services," do we also allocate corresponding expenditures of special funds and other public institutions such as hospitals, universities, colleges and school boards to "General government services"?

Decision : Expenditures for the operation and maintenance of government buildings will be functionalized i.e., assigned to the function to which they relate. If source data do not provide the necessary detail to allow proper functionalization, wages and salaries by function will be used as an allocator instead.

5. Grants in lieu of taxes

Issue : As grants in lieu of taxes are now considered to be part of operating costs and not transfers for SNA, how should they be classified in FMS expenditures?

Discussion : Ideally they should be spread across all functions based on property values associated with the provision of goods and services included in each category (i.e., function and sub-function). A less desirable (but more practical) option would be to functionalize grants in-lieu-of taxes, using the distribution of wages and salaries by sub-function, as is currently done with SLI. Other possibilities include classifying them to "General government services," where other centrally paid expenditures are currently found, or as "Other expenditures." What about special funds and other public institutions such as hospitals, where their grants in lieu of taxes paid may be realistically assigned to the same function as the rest of that institution's expenditures—will grants in-lieu-of taxes be assigned to that same function?

Decision : Grants in lieu of taxes will be assigned to the function to which they relate, using, where available, source data expenditures detail and local government receipt data. Where details do not permit, wages and salaries by function will be used as an allocator.

6. Expenditures of other health and social service institutions

Issue : To which function should expenditures related to other health and social service institutions be assigned? These include the expenditures of the entities (e.g., residential care facilities) themselves as well as government payments to the entities.

Discussion : 1) Currently, provincial government expenditures related to residential care facilities are classified to either "Health" or "Social services" functions, while the expenditures of residential care facilities that are included in municipal government are assigned to "Social services." In some provinces sufficient detail is available to make a distinction between health-related institutions, such as nursing homes, and social service-type institutions, and the expenditures are classified accordingly. More information would have to be obtained to have the same treatment with the other provinces. With a possible future blurring of the distinction between hospitals and other health and social service institutions (which is the rationale for grouping them in the same box in the chart of the Public Sector Universe Chart), it may be desirable to assign the more of the latter's expenditures to "Health." 2) To what extent should government transfers to institutions and the expenditures of institutions themselves be classified to the same function? For example, provincial government transfers to hospitals are currently assigned to "Health." Should the expenditures of hospitals, including debt charges, be then classified exclusively to "Health"?

Decision : 1) Residential care facilities' source data for each province should be used to determine the split between "Health" and "Social services" expenditures of governments for the FMS. 2) Government transfers to other public sector sub-components will be classified to the appropriate function in their entirety. Expenditures of those institutions may be allocated to more than one function as appropriate.

7. General sales taxes

Issue : Should "General sales taxes" include the Nova Scotia cable tax, the Ontario amusement tax, and the Quebec insurance premiums tax as in the SNA?

Discussion : "General sales tax" should include at least the provincial retail sales taxes, the federal goods and services tax and the provincial harmonized sales taxes.

Decision : The series "General sales taxes" will include the provincial retail sales taxes, the federal goods and services tax, the provincial harmonized sales taxes, with adjustments to exclude the Nova Scotia cable tax and the Ontario amusement tax, which will be classified as "Amusement taxes" and the Quebec tax on insurance premiums which will be reported as "Other consumption taxes." The series will exclude tobacco taxes (to be included in "Alcoholic beverages and tobacco taxes") and other sales taxes, such as the hotel and motel taxes, telecommunications and advertising taxes (to be included in "Other consumption taxes").

8. Consumption taxes

Issue : Which taxes should be included in the group "Consumption taxes." Currently it includes general sales taxes, motive fuel taxes, alcoholic beverages and tobacco taxes, customs duties and other. Should liquor and gaming remitted profits be added?

Discussion : Liquor and gaming remitted profits are considered to be indirect taxes levied on final consumption of goods and services.

Decision : Remitted profits of liquor boards and lottery/gaming corporations will be treated as consumption taxes. Adjustments to reclassify associated revenue from licences imposed for regulatory purposes to the category "Miscellaneous taxes" will be made.

9. Employment insurance training expenditures

Issue : Should the federal government's employment insurance account's training expenditures be classified to "Social services" (current classification) or to "Education?"

Discussion : Treating these expenditures, as "Education" would be consistent with other governmental expenditures on general education programs and with the Centre for Education Statistics' definition of education.

Decision : Federal government employment insurance training related expenditures will be classified to "Education" in the FMS.

10. Workers' Compensation Board (WCB) medical aid payments

Issue : Should the WCBs medical aid payments be classified as "Social services" (where they are now) or as "Health?"

Discussion : The1984 FMS manual states that the "Labour force plans", which is a sub-function of "Social services" includes expenditures on administration and for benefits, other than hospital and medical care, related to unemployment insurance and workers' compensation schemes. Though it does not state where these exceptions should be classified, the implication is that they belong in "Health." Nevertheless, they are now largely classified as "Social services." The intent of the expenditures are undoubtedly for health purposes, although what is termed "Medical aid" in WCB financial statements often includes expenditures such as payments for income assistance and refunds of tuition expenses. The expenditures are like any other payment for health purposes, except that they are financed largely by premiums paid by businesses. The premiums are directly proportional to the degree of risk inherent in any industry and therefore follow a user-pay principle with respect to medical aid costs and possibly encourage businesses to promote safety in the workplace. The method of financing expenditures does not necessarily have anything to do with how the expenditures should be functionalized.

Decision : All medical aid expenditures of WCBs, including those for rehabilitation, will be classified to "Health."

11. Other capital transfers, etc.

Issue : Should the FMS include other capital transfers (i.e., other than capital assistance) as expenditures and, if so, how should they be functionalized? Should the FMS follow the SNA practice and include these only in the derivation of net lending?

Discussion : Other capital transfers include forgiveness of loans and assumption of debt, forgiven by governments, on the assumption that they are being forgiven by mutual agreement. Transfers of non-autonomous pension plan surpluses to households are also included in this other capital transfers.

Decision : Other capital transfers will be included in FMS expenditures and functionalized as appropriate. For example, non-autonomous pension plan surpluses, to be referred to, as "Changes in pension equity of households" will be classified as "Social services" expenditures.

12. Low-income grants for specific purposes

Issue : Should grants to assist individuals to meet a single type of living costs, e.g., rent, health insurance premiums, etc., be classified to "Social services" or the function to which they relate (e.g., "Housing," "Health," etc.)?

Discussion : According to the FMS manual, such program expenditures should not be classified to "Social services," but to the function to which they relate, i.e., "Housing," "Health," etc. The FMS manual does not deal specifically with rental assistance to renters, except to state that "transfers to persons to enable them to rent accommodation, which are included in general assistance payments, are classified to social welfare assistance"; i.e., where data availability is a problem. These types of payments would appear, however, to be more appropriately considered instruments of social policy. The intent is to render a social service rather than promote a particular industry [although rent is debatable, it could be argued that rent supplements (and home buyers assistance) are as much geared towards stimulating the housing market as they are to providing a social service].

Decision : Grants to low-income persons for various purposes that are of a social policy nature will be classified to "Social services." Incentives to persons to purchase homes will be classified to "Housing."

13. Functionalization of the supplementary labour income

Issue : Should employer contributions to the Canada Pension Plan (CPP), Quebec Pension Plan (QPP), other pension plans, employment insurance, and other employee benefits considered as payment for employees' services be functionalized in the FMS according to the same function as the associated wages and salaries, or should they be classified to only one function?

Discussion : The current FMS manual states that government employer contributions to pension plans not operated by government should be classified as "General services." In the interest of the inter-government comparability it was decided to functionalize SLI payments on the same basis as the associated wages and salaries.

Decision : Employer contributions to employee benefit plans, including the CPP, QPP, employment insurance, etc., will be assigned to the function to which they relate.

14. Functionalization of non-autonomous pension plan benefits

Issue : How should non-autonomous pension plan benefits paid to retired persons be classified?

Discussion : Non-autonomous pension plans will now be included as sub-component of government in the FMS. To allocate the benefits paid by non-autonomous pension plans (to retired persons) based on the function to which the corresponding contributions (on behalf of current employees) actually relate would be to double-count expenditures related to pension plans in that same function, as the employer contributions would already be included in that function, in many cases. A consolidation of a given level of government with its corresponding non-autonomous pension plans would not eliminate the contributions as an intrasectoral transaction as they are deemed to be paid to persons as SLI. This would particularly be the case in Quebec, where there are a number of non-autonomous pension plans. If functionalized, one separate sub-function for a number of pension plan benefits could be satisfactory for plans such as those for teachers or police officers, but would not be so for public servant plans, for whom benefits would have to be spread across a number of different functions. An alternative would be to allocate all non-autonomous pension plan benefits paid to one particular function, such as "General services" as expressed in the now-outdated reference in the FMS manual, "Other expenditures," or perhaps a new function.

Decision : Non-autonomous pension plan benefits will be classified to "Social services" under a separate sub-function called "Pension plan benefits and other expenditures".

15. Tax credits and rebates

Issue : Should there continue to be a separate sub-function for tax credits and rebates within the social services function?

Discussion : Property and sales tax credits have been introduced to assist low-income people. Tax credits to corporations are used by governments as incentives to attract industries and to encourage further investment. The number of tax credits and rebates included as expenditures will be reduced as a result of the decision to gross up only those that are refundable. Those that remain could be classified to other social services sub-function, such as "Social assistance."

Decision : Refundable tax credits delivered through the personal income tax system (such as sales and property tax credits) will be classified to "Social services" under the sub-function "Social assistance" with the exception of refundable learning tax credit that will be classified to "Education" while tax credits delivered through the corporate income tax system will be classified to the function to which they relate.

16. Natural resource revenues

Issue : Should the FMS eliminate the series "Natural resource revenues"?

Discussion : A separate series for "Natural resource revenues" in the FMS has been disseminated in previous years due to the importance of natural resources as a source of revenue for a number of governments. In view of FMS/SNA harmonization, the contents of the "Natural resource revenues" series could be classified to other revenue sources such as taxes, investment income or sales of goods and services, in order to produce comparable series.

Decision : "Natural resource revenues" will be redistributed to "Corporation income taxes" (mining and logging taxes), "Miscellaneous taxes" (natural resource taxes), "Investment income" (royalties) or "Sales of goods and services" as appropriate. However, due to its importance for certain provinces and to provide for historical continuity, a series will be maintained as a special aggregate in disseminated data to show the amount of natural resource-related revenue that is included in the primary classification of revenues.

17. Broadcasting

Issue : How should expenditures related to broadcasting be treated in the FMS?

Discussion : The largest impact of this decision will be in relation to federal transfers to the Canadian Broadcasting Corporation (CBC), as the corporation moves from being a government business enterprise, where transfers to it are currently classified to "Transfers to own enterprises" in the FMS, to a special fund. As a special fund, should the expenditures of the corporation now be interpreted as "Recreation and culture," "Industrial development" or "Communications"? Similarly, how should the expenditures of the Ontario Educational Communications Authority (TVOntario) be treated? With its significant education programming, it may be appropriate to leave it as "Education," where it is now. As well, should the current classification as "Telecommunications" expenditures of the Canadian Radio-television and Telecommunications Commission (CRTC) be reconsidered? (This expenditure had, at one time, been treated as "Protection of persons and property"). Internationally, entities such as the CBC fall under "Recreation and culture" because they produce cultural programs.

Decision : CBC expenditures will be classified to a new "Recreation and culture" sub-function, "Broadcasting." The CRTC expenditures will remain under "Tele-communications." With respect to provincial entities such as TVOntario, and Télé-Québec, their mandate will determine the function to which their expenditures are allocated.

18. Contributions to social insurance plans

Issue : How should employee and/or employer contributions to WCBs, the employment insurance account, the CPP and QPP and non-autonomous pension plans be characterized in the FMS?

Discussion : The current FMS classifies these types of contributions as "Health and social insurance levies" and the values are net of the government contributions (as employer) paid for its own employees (SLI). The 1997 SNA record of decisions maintains that the SNA should continue to show these contributions gross of the government contributions paid for its own employees but that these revenues will no longer be shown as direct taxes, but under a separate category, "Contributions to social insurance plans."

Decision : Harmonize completely with the SNA and: 1) show the contributions gross of the government contributions paid for its own employees; 2) classify the contributions under "Contributions to social insurance plans."

19. General payroll taxes

Issue : Should general payroll taxes be disseminated as a separate series?

Discussion : There are four general payroll taxes currently in existence in the provinces of Newfoundland and Labrador, Quebec, Ontario and Manitoba. These payroll taxes are general in the sense that the funds are not earmarked for a particular purpose, as are payroll taxes such as employment insurance, CPP and QPP or workers' compensation premiums. General payroll taxes in previously published FMS data are found under "Health and social insurance levies" in the case of Quebec (on the grounds that the proceeds are used specifically in financing their hospitalization and medial care programs), and in "Miscellaneous taxes" for the other provinces. Data on these payroll taxes are of great interest to clients and are an important source of revenue to provincial governments, totaling more than $6 billion in 1995/1996. The series will also now be disseminated separately in the SNA.

Decision : Disseminate general payroll taxes as a separate series in the FMS.

20. Alcoholic beverages and tobacco taxes

Issue : Should liquor gallonage taxes be added to the FMS series "Alcoholic beverages and tobacco taxes" and should that series be split, and disseminated?

Discussion : These taxes have long been combined in FMS published data. With the addition of the liquor gallonage taxes ($681 million in 1995/1996) to the alcoholic beverages taxes portion of the series, however, the size of the series would become significantly larger.

Decision : Separate alcoholic beverage taxes from tobacco taxes in disseminated data. The former will include the Yukon and Prince Edward Island liquor taxes as well as the three provincial liquor gallonage taxes (Newfoundland and Labrador, Quebec and Ontario).