Chapter 5
Conventions used for government revenue and expenditures

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Introduction
Gross revenue and expenditures
Intragovernment and intergovernment transactions
Transactions within an individual government
Intergovernment transfers
Intergovernment purchases and sales
Intergovernment interest payments
Intergovernment fiscal arrangements
Transactions between government and GBEs

Introduction

5.01 Two major conventions have been established within the FMS to achieve its aim of producing financial statistics of government that are consistent, compatible and comparable. These are the "unification" and the "gross" conventions.

5.02 According to the "unification convention," the FMS ignores the demarcation between a government and special funds and consolidates the separate reports of their financial transactions into a single set of statistics for the federal and each provincial and territorial government. At the local level, unification is carried a step further. Data for all municipalities, regional municipalities, urban communities and local boards and commissions are consolidated into a single set of statistics for each province or territory to overcome differences in administrative structures. In addition, consolidated statistics are also produced for various components of the public sector. For example:

1. Each of the provincial or territorial general governments are consolidated with their education, health, and social services institutions.

2. Each of the provincial or territorial governments are consolidated with the local governments.

3. All three levels of government consolidated together.

5.03 The "gross convention," as its name implies, requires that transactions be reported gross, i.e., the netting of expenditures against revenue, and vice versa, be nullified. There are a few exceptions to the gross convention which are described in paragraphs 5.06 to 5.08.

5.04 For purposes of government finance statistics, revenue is defined as all monies received (and/or deemed to be received) by government, other than through borrowing or recoveries of previous lending. Expenditures are defined as all monies disbursed (and/or deemed to be disbursed) by government, excluding lending and repayments of loans. More specifically, revenue includes (a) proceeds from taxation (either actually received or deemed to be received on account of certain tax credits, as described in paragraph 5.09) and from the sale of goods (including sales of fixed assets) and services, (b) contributions of employers and employees to universal pension plans (Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)), to non-autonomous pension plans; and to other social insurance plans operated by the government, (c) transfers from other government sub-sectors and (d) return on investments. On the other hand, expenditures include all outlays made or deemed to be made by government to discharge its functions as described in Chapter 6. These outlays take the form of purchases of goods and services, the acquisition of capital assets and transfer payments and exclude repayments of loans.

Gross revenue and expenditures

5.05 To make revenue and expenditures reported by governments conform to the gross convention of the FMS certain categories of transactions require adjustments. These categories and the necessary adjustments are described below.

5.06 Refunds of revenue and refunds of expenditures - Refunds of revenue result from an excess revenue obtained by overtaxation or an overcharge for a good or service sold while refunds of expenditures result from an overpayment for a good or service purchased or an excessive transfer to a person, a business or another government. These refunds are often inconsistently reported in government source documents. For example, refunds of current year's expenditures are normally netted against the expenditures of the current period while refunds of previous years' expenditures are reported as revenue of the current year. In addition, it is not always clear, from the source documents if the refunds apply to the previous year only or several of the previous years.

5.07 Ideally, statistics should reflect the events of the particular time period to which they refer and consequently refunds of prior years which occur within a reference period should be applied to the statistics for those prior periods. Unfortunately, the absence of details (on the split between prior years and current year refunds) in source documents and a revision policy that allows revision of only the most recent four years preclude complete adjustment of prior years' expenditures.

5.08 For the reasons given above and in the interest of harmonization between the System of National Accounts (SNA) and FMS, current year and prior years' refunds of revenue and expenditures are considered as revenue and expenditure adjustments of the current year and treated as follows:

1. The revenue refunded is omitted from expenditures and netted against the appropriate revenue source.

2. The expenditures refund is omitted from revenue and netted against the relevant expenditure function.

However, exceptionally large refunds of prior years' revenue and expenditures are examined closely before applying the above decision.

5.09 Tax credits - The application of the gross convention in respect of tax credits depends on the adequacy of the definition of the concept of "tax proceeds." Proceeds of a particular tax should be the amount produced by the multiplication of the base of that tax by the rate of the tax. Tax credits can be grouped under two broad categories, namely (a) refundable tax credits, (b) non-refundable tax credits. Each of the categories is dealt with below.

1. The first category called "refundable tax credits" consists of the tax credits aimed at assisting particular groups of individuals such as low and middle income people, pensioners, etc., or at granting incentives to industries. They are more and more frequently granted through the personal and corporation income tax mechanisms rather than the normal budgetary expenditure appropriations. Because they are similar to expenditure programs, a "refund" cheque for the excess credit-the portion remaining after the tax liability is reduced to zero-is issued to the beneficiary.
   
   The most significant provide tax credits for certain aged persons, tax credits relating to sales taxes, to property taxes and to the cost of living, child tax credits, tax credits for research and development incentives to industries. This category of fiscal compensation is in effect in some provinces and territories, while comparable relief measures are implemented by means of direct transfer payments or subsidies, such as homeowner's subsidies, in other provinces and territories. Clearly, this category of credits affects the normal proceeds of the tax. Accordingly, in order to obtain the full weight of the revenue and expenditures transactions related to such fiscal measures, and to maximize intergovernment comparability, revenue and expenditures are "grossed up" by the amounts of the total refundable tax credits. The same procedure applies to the federal child tax credit and Goods and Services Tax (GST) tax credit.
   
   
2. The non-refundable tax credits include tax credits that constitute limited tax relief (because the credit is only applicable to reduce the tax liability by a certain percentage or to reduce it to nil) for supporting eligible organizations and industries and tax credits established to avoid double taxation. These tax credits are an integral part of the tax system and contrary to refundable tax credits, they do not constitute a regular government assistance program delivered through the budgetary expenditure appropriations or the income tax mechanism. Various non-refundable tax credits are allowed. For example, the political contribution tax credit, the foreign tax credit established to eliminate or minimize double taxation and dividend tax credits implemented to harmonize the corporation income tax with the personal income tax and minimize double taxation are examples. The non-refundable tax credits are not subject to the gross convention.

5.10 Sales revenue, licences and other charges - Government derives revenue from the sale of goods and services, and from licences and other charges paid to conduct certain activities. For programs that have identifiable clients, a few governments will permit to deduct the proceeds of these charges from gross expenditures to which they relate. In accordance with the gross convention, this revenue is included in gross revenue, thereby restoring expenditures to a gross basis.

5.11 Cost recoveries under federal and provincial agreements - In a few provinces, transfers from another level of government are netted out of the expenditures to which they relate in government financial reports. In conformity with the "gross convention," the transfers are included in both revenue and expenditures.

5.12 Dedicated revenue - A few provinces dedicate a percentage of specific taxes collected from their crown corporations and agencies. Where the amounts of dedicated revenue are not recorded in the source documents, values are added back to gross revenue and expenditures in order to reflect the entire proceeds of the taxes and the full amount of the expenditure transactions.

5.13 Interest on defeased trust funds - Defeased trust funds represent investments set aside to repay outstanding term debt and related interest payments. These defeased debts have been removed from the balance sheet of government and are considered extinguished for financial reporting purposes. Where defeased debts have taken place, the interest revenue and interest expense related to the investment set aside and debt removed from the balance sheet are added back to gross revenue and expenditures in order to improve intergovernment comparability.

5.14 Interest revenue and expense recovered from other entities - In some provinces and territories, governments borrow on behalf of government business enterprises, municipalities, school boards, educational institutions, etc. These borrowings translate into higher assets and liabilities in the provincial and territorial balance sheets even though the borrowings including any associated debt charges are completely recoverable from these entities. Where the interest revenue recovered is netted against interest expense in the source documents, interest values are added back to revenue and expenditures to present them on a gross basis.

5.15 Commissions - Most governments pay commissions to persons or business establishments acting as agents for the collection of various taxes. These commissions are either a percentage of the taxes collected or a flat amount. Where netting has taken place, amounts equivalent to the commissions are added back to gross revenue, on the grounds that government's entitlement is the tax base multiplied by the rate of the tax (see paragraph 5.09). This amount is also added back to expenditures since they are a cost of collecting the taxes.

5.16 Loans treated as expenditures - Loans, when acknowledged uncollectable by the lending authority (assumed to have been forgiven by mutual agreement), are included in expenditures. The amounts forgiven in the year in respect of loans carrying forgiveness clauses are also included in expenditures. In these cases the original debtor is deemed to have received a transfer in the amount concerned.

5.17 Special cases affecting local government - While tax revenue at the federal, provincial and territorial levels is reported largely on a cash basis in source documents, property tax revenue of local government is reported on an accrual basis, i.e., the total amount reported and included in revenue is the total assessed regardless of collections. This constitutes an important conceptual difference between the local and the other levels of government but the statistical significance of this difference is inconsequential. In addition, local governments normally treat capital outlays which are financed through the issuance of long-term debt as balance sheet transactions and record the payment of interest on the debt and the repayment of its principal as expenditures. In the FMS, however, local government capital outlays are treated in the same way as those of the federal, and provincial and territorial governments, i.e., as expenditures at the time of purchase, regardless of how they are financed. If capital outlays are financed via borrowing, the interest on related debt is classified as expenditures and retirements of principal are treated as balance sheet transactions.

Intragovernment and intergovernment transactions

5.18 Transactions among entities comprising a single government and all transactions among levels of government when combined must be eliminated in order to obtain unduplicated data. The text below describes how transactions occurring within a single government are eliminated and the exception to this elimination convention. The techniques used to eliminate intergovernment transactions are dealt with in Chapter 8 of this manual.

Transactions within an individual government

5.19 In accordance with the unification convention, the financial activities of entities within a government, which are reported by that government through individual statements, must be adjusted to eliminate double or multiple counting of transactions. Such adjustments are made at various stages of the compilation process by consolidating, for example, the accounts of departments and special funds. Similar adjustments are made when consolidation of other sets of accounts within the government component of the public sector takes place.

However, all transactions concerning taxes paid between different levels and components of government are not eliminated on consolidation. For example, payroll or sales taxes paid by one level of government to another are not eliminated from the consolidated revenue and expenditures.

With the 1997 historical revision, not all transactions within an individual government are eliminated. For example, the following groups of transactions, previously eliminated to avoid double counting are now included on a gross basis:

1. Supplementary Labour Income (SLI) paid on behalf of one's own employee and to one's own account , such as a government contributing, as employer, to its own medical care plan or to its own non-autonomous pension plan. As the SLI is a component of Gross Domestic Product (GDP) at factor cost and given the requirement to have the FMS/SNA harmonized, it was agreed to include these payments on a gross basis and not eliminate them as transactions within an individual government.

2. Consumption taxes levied and paid by the same government , such as gasoline and sales taxes paid by one department to another department of the same government. In the interest of harmonization between the SNA and FMS, it was agreed to show all consumption taxes on a gross basis and not eliminate them as inter-fund transactions.

3. Grants in lieu of taxes paid to governments that levy property taxes . Grants in lieu of taxes paid by federal, and provincial and territorial governments to provincial and local governments are classified as taxes. In the interest of harmonization between the SNA and FMS, it was agreed to show all taxes on a gross basis and not eliminate them as intergovernment transactions.

5.20 By eliminating transactions occurring between departments or ministries and all the special funds of a single government, it is possible to produce an "unduplicated" measure of that government's financial activities. To illustrate this process, consider the example of a provincial accommodation and real estate program operated by a government agency and financed in part by rentals. The provincial or territorial government will report its rental payments for office space as a normal expenditure. These rentals, along with those of other customers constitute the rental revenue of the agency. But, for FMS statistics purposes, the agency is not treated as a separate entity. Its operations are, therefore, included with is parent government's overall operations. The government's own rental payments are offset against the corresponding revenue of the agency and the balance is treated as government revenue, while the agency's expenditures are treated as government expenditures. However, as information is not always available on all intragovernmental transactions, elimination of duplication is not fully attained.

5.21 Difficulties of elimination also arise when the financial year-end of subordinate entities is not the same as that of their parent government. Here the general practice is to integrate the data of such entities into the government statistics for the fiscal year ended closest to the year-end of their parent government. However, an exception is made in the case of provincial workers' compensation boards and a few corporations of the province of Quebec where the availability of quarterly data allows for conversion of their financial year-end to that of their parent government.

Accounting methods may also vary between a government and its agencies and institutions. As a result, amounts recorded in the parent government's accounts as flows to, or from, its agencies and institutions differ from the records of that agency or institution. In such cases, government records are substituted for those of the agency or institution. The adjustments resulting from such substitution are outlined in Chapter 8.

5.22 The practice of interdepartmental billing is a fairly common one. Billings not specifically identified in the data source documents, cannot be eliminated and some overstatement of government revenue and expenditures is inevitable. However, the statistical significance of this overstatement is minor.

5.23 At the local government level where fund accounting is used extensively, interfunding involves, first, bringing together the transactions of the various funds on an unduplicated basis. Secondly, in order to show the operations of local government within a province on an aggregate basis, the duplicative effects of inter-local government transfers and of inter-local government purchase-sale transactions, where identifiable, are eliminated. Special rules have to be applied to such cases, since data on only one side of the transactions are known in most instances. These rules are spelled out in Chapter 8.

Intergovernment transfers

5.24 A transfer is a conveyance of monies for which the transferor receives no direct benefit.

5.25 Financial co-operation among levels of government continued to expand over the last decade. The provincial and territorial governments' desire for increased flexibility, coupled with government concern over deficits has resulted in different intergovernment fiscal arrangements (e.g., Canada Health and Social Transfer (CHST), increased number of transitional payments flowing from higher to lower levels of government and vice versa, etc.) without changing too much the terms relating thereto. Some current federal-provincial transfer arrangements carry terms which, although indicative of intent, do not specify the particular activity to which the transferee must apply the amount concerned. In other cases, terms are inconclusive or subject to differing interpretations. Sometimes the terms seem to be the conditions upon which the transfer is made but it may be that these terms are only the rules to be followed in establishing the amount of the transfer; they do not bind the transferee in any way.

5.26 Allocation of transfer payments is made on the basis of real or apparent intent of the transferor. These transfers are referred to as "specific purpose transfers." Transfers which are not allocable to particular functions are set out under the heading "general purpose transfers" specifying the major program pursuant to which they are made.

5.27 Theoretically, transfers shown in the transferor's records as amounts paid should be the same as those shown in the transferee's records as amounts received. However, as mentioned in Chapter 4, statistics on each level of government are based on related source documents and precise agreement between amounts reported as paid and as received is not always available. Every effort is made to reconcile differences, but the absence of uniform accounting practices and identical year-ends preclude complete reconciliation. The general rules used to consolidate the accounts of the governments concerned are set out in Chapter 8.

Intergovernment purchases and sales

5.28 There are various purchase-sale transactions which occur among levels of government. The most frequent type comprises the purchase of goods or services by one government from another for resale or distribution to the population or territory under its jurisdiction. In this instance, the purchasing government effectively engages the selling government to provide goods or services that it feels it should, but does not or cannot itself provide.

5.29 To obtain unduplicated data within the government universe, all intergovernmental purchase-sale transactions should be eliminated. However, this cannot always be accomplished in practice because of lack of information. Elimination, to the extent possible, is carried out as explained in paragraph 8.05.

Intergovernment interest payments

5.30 Governments borrow on behalf of governments (e.g., a provincial government borrowing on behalf of its municipalities) and/or buy bonds of governments (e.g., Canada Pension Plan Investment Fund buying provincial government bonds). Consequently, interest receipts and payments take place between governments. To obtain unduplicated data within the government universe, all intergovernment interest transactions should be eliminated. However, this cannot be done in practice because of lack of information. Elimination, to the extent possible, is carried out as explained in paragraph 8.05.

Intergovernment fiscal arrangements

5.31 Income taxes - Under the current tax collection agreements, the federal government collects and administers the personal income tax (Quebec excepted), the corporation income tax (Quebec, Ontario and Alberta excepted) and the capital tax (for Nova Scotia and New Brunswick) levied by the provinces and territories and makes monthly remittances to the provinces and territories concerned. However, the federal government will begin collecting corporate income tax on behalf of the Ontario provincial government beginning in 2009. For purposes of the FMS, federal personal and corporation income tax revenue is the total of all collections by the federal government less refunds and amounts remitted to the provinces and territories. Personal income tax revenue of the provinces and territories, other than Quebec, corporation income tax revenue, other than Quebec, Ontario and Alberta, and the Nova Scotia and New Brunswick's capital tax revenue, consist of the total amounts received from the federal government. However, since remittances relating to the current taxation year are made on an estimated basis, adjustment payments (plus or minus) are required. The system takes these adjustments into account in the year in which they are made, (see paragraph 5.07). For provinces collecting their own personal and corporation income taxes and their own capital taxes, the revenue from those sources is accordingly the amount they collect less refunds.

5.32 Federal income tax on preferred share dividends - Under the Federal-Provincial Fiscal Arrangements Act, the federal government transfers (since 1990/1991) to each province and territory a percentage of the net taxes it collects with respect to preferred share dividends paid by corporations operating in the province and territory.

5.33 Federal income tax on public utilities - Since 1947 the federal government has transferred to each province and territory amounts equivalent to a certain percentage of the federal income tax collected from non-government utilities operating in the provinces and territories. The federal-provincial agreement on sharing the public utilities income tax proceeds was discontinued in 1995/1996 but transition payments to provinces and territories will continue until 1999/2000. Payments are made under the Public Utilities Income Tax Transfer Act. In the FMS, the full amount collected is shown as federal revenue from corporation income tax and the subsequent flow to the provinces is shown as a transfer on the expenditures side of the federal government and under revenue from general purpose transfers in the provincial and territorial governments' statistics.

5.34 Statutory subsidies - Under the Constitution Acts, 1867 to 1982, and other constitutional documents together with the following statutes: the Maritime Provinces Additional Subsidies Act; the Provincial Subsidies Act; and the Newfoundland Additional Financial Assistance Act, the federal government provides a source of revenue to the provinces, compensates provinces for revenues lost on joining Confederation; and supports provincial governments and legislatures. In the FMS, the federal payments to the provinces are classified as an expenditure and the provincial receipts therefrom, as an equivalent revenue, both under general purpose transfers.

5.35 Provincial personal income tax revenue guarantee payments - Under the Federal-Provincial Fiscal Arrangements Act the federal government provides a guarantee that the provinces would not suffer a loss of personal income tax revenue if they adopt income tax acts modeled on the federal income tax acts. Losses would be determined on the basis of specified rates deemed to be equivalent to those levied under their previous acts. The FMS treatment here parallels the statutory subsidies (see paragraph 5.34). The Provincial Personal Income Tax Revenue Guarantee Act was repealed in 2007 and since that time the federal government no longer provides a guarantee to the provinces.

5.36 Fiscal stabilization payments - Under the Federal-Provincial Fiscal Arrangements Act, the federal government financially assists any provincial government faced with a year-over-year decline in its revenues due to a downturn in its economy. The FMS treatment here parallels the statutory subsidies (see paragraph 5.34).

5.37 Fiscal equalization program entitlements - Under the Federal-Provincial Fiscal Arrangements Act, the federal government makes equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation. The FMS treatment here parallels the statutory subsidies (see paragraph 5.34).

5.38 Canada Health and Social Transfer (CHST) - The CHST program was introduced in fiscal year 1996/1997. It replaced federal transfers to provinces and territories for health and post-secondary education, previously provided under the established programs financing, and federal transfers to provinces and territories for social assistance, previously made under the Canada Assistance Plan (CAP). The new block fund (established under the Federal-Provincial Fiscal Arrangements Act) gives provinces and territories enhanced flexibility to design and administer health and social programs in the most efficient way, and to allocate funds according to their own priorities. Again, the FMS treatment here, parallels the statutory subsidies (see paragraph 5.34). The CHST was replaced by the Canada Social Transfer and the Canada Health Transfer beginning April 1, 2004.

5.39 Territorial Formula Financing (TFF) agreements - TFF is an annual unconditional transfer from the federal government to territorial governments. This transfer enables territorial governments to provide a range of public services to their residents that is similar to those offered by provincial governments elsewhere, recognizing the higher cost of providing public services in the North. The FMS treatment here, also parallels the statutory subsidies (see paragraph 5.34).

5.40 Collections for other governments - In some provinces arrangements exist between the provincial government and its municipalities for the collection of property taxes levied by the latter government. In the FMS statistics, the government making the initial collection is regarded as an agent of the other and the amount paid to the second government is included in its revenue. In other words, the treatment here parallels the Federal-Provincial-Territorial Tax Collection Agreements.

Transactions between government and GBEs

5.41 Some Government Business Enterprises (GBEs) do not cover their costs, let alone realize a profit. Thus, one of the common transactions between a government and its business enterprises is the payment by the former of an amount required to write off the deficit of the latter. This is classified as a straight-forward government expenditure under the function to which it relates.

5.42 Where a profit is realized by a GBE, the amount included in government revenue is the actual remittance to that government by the enterprise. In the case of liquor boards which perform regulatory functions in addition to commercial activities, proceeds from the discharge of the former are treated as an integral part of government revenue.

5.43 Where in a given year a GBE receives from its parent government payments on account of deficits and makes a remittance of profit in that year, the government payments are included in government expenditures and the remitted profits are included in government revenue.

5.44 It is a general practice for governments to make loans to their business enterprises and to receive interest payments in respect thereof. Such interest revenue is recorded in the FMS series covering general government revenue under the caption "return on investment."

5.45 Similarly, when a government provides financial assistance to a class of industry in which one of its own business enterprises operates and the enterprise qualifies for such assistance, the amount involved is regarded as normal government expenditures.