Negotiations between the Province and the Federal Government regarding the possibility of converting to the HST began in 1994. These negotiations culminated with the signing of a Comprehensive Integrated Tax Co-ordination Agreement (CITCA) dated October 18th, 1996.
During the negotiations, the Province expressed great concern that the transition to a new system would cause their revenues to decline. To alleviate these concerns, the Federal Government agreed to provide assistance to the Province as outlined in an October 17, 1996 letter from the Federal Minister of Finance:
(b) maintaining the provincial element of the harmonized sales tax rate at 8% during the transitional period of four years commencing with the implementation of the harmonized agreement; and,
(c) remaining a party to, and in full compliance with the CITCA during the four year transitional period."
"If at any time the foregoing conditions are not met, it is understood and agreed that the adjustment assistance or any portion therefore, that related to that part of the adjustment assistance period during which the Province is not a party to, or is not in compliance with the CITCA, will become immediately due and repayable by the Province as a debt due Canada with interest".
The last clause in the letter from the Federal Minister of Finance in conjunction with the above allocation can be used to determine the amount potentially repayable to the Federal Government in the event the Province fails to continue to comply with the CITCA. For example, if a default occurred at the end of Year 3, $34 million would be repayable, plus interest.
The entire amount of the funding ($364 million) was received in advance.
The Province treated the entire $364 million received in its 1997 fiscal year as deferred revenue. In the 1998 fiscal year, the Province recognized $11 million as revenue leaving deferred revenue of $353 million to be recognized as revenue over the following three years.
The Auditor General disagreed with the Province's accounting treatment in 1998. He concluded that the Province should have recognized $132 million as revenue in 1998 and deferred the remainder.
PST revenue was traditionally included in the general revenue fund of the Province. Accordingly, these HTF funds should also be included in the general revenue fund. The Province has adopted this presentation.
The other issue regarding usage of HTF relates to the timing of the recognition of these funds in the revenue of the Province.
The PSAB Handbook sets out at 1500.83 general provisions for revenue recognition. "Revenues should be accounted for in the period in which the transactions or events occurred that gave rise to the revenues".
Further guidance is found in Section 3410 which sets out criteria to be considered in deciding when to recognize government transfers as revenue. The section states that a government transfer should be recognized as revenue:
(a) the transfer is authorized
The basis for determining the amount recognized for any particular transfer should be applied consistently from year to year. Judgement will be required to account for transfers in a manner that best reflects the substance of the underlying events rather than the form or the funding pattern".
The transfer of HTF funds became authorized when, on April 1, 1997, the Province implemented the harmonized sales tax.
The second criterion (satisfying eligibility criteria) is satisfied if the Province (1) maintains the "provincial element" of the HST rate at 8% during the four-year transition period and (2) remains a party to and in full compliance with the terms of the agreement during the four-year transition period. The satisfaction of this second criterion is accomplished with the passage of time.
The final criterion (reasonable estimate of the amount) is the most difficult to apply. Section 3410 requires the exercise of judgement to account for transfers in a manner that best reflects the substance of the underlying events rather than the form or the funding patterns. HTF funds were designed to alleviate concerns there would be a reduction in (PST) revenue for the Province. Accordingly, the optimal basis for recognizing the HTF funds as revenue would be the potential reduction in PST revenue in each of the four years of the agreement. Other possible methods include historical patterns, equal allocation to each of the four years and others.
Department of Finance representatives did not determine an allocation of potential revenue loss for each year that would have provided an adequate basis for revenue recognition. Accordingly, it is difficult to establish a basis that accurately reflects the substance of the underlying event.
In the absence of a reasonably defensible calculation of PST revenue lost, we support the conclusion of the Auditor General which is basically that HTF funds should be recognized as revenue when the Province has fully satisfied the conditions attached to the funding and there is no possibility that revenue being recognized can become repayable to the Federal Government.
The Canada - NB Highway Improvement Program was begun in 1987 to assist New Brunswick with the development of its highway system. Over time there have been amendments to this program. Currently the program directs $300 million to highway construction over a 3 year period ending March 31st, 2001. This program is a matching program in that $150 million comes from the Federal Government after spending by the Province of the same amount. To date the Province's spending has not kept pace with the original plan and the result is that less Federal monies than were planned have been received. An extension to the original 3 year period for eligibility has been requested by the Province.
The second program, known as the Atlantic Freight Transition Program, has terminated after $242 million was spent on the National Highway System. Again, the funds were supplied based upon a 50/50 matching program ($121 million Federal and $121 million Provincial) This funding was originally provided from the Federal Government to offset the removal of freight subsidy programs.
Federal funding for highway construction is currently declining with only one program currently in effect.
Federal funding to be received in the future will likely be directed towards the National Highway System with possible related threats to required funding for other highway systems in the Province.
The funds available for highway maintenance will likely have to be increased due to the increase in the kilometers of highway system in the Province.
Present levels of maintenance spending are significantly below suggested standards.
The LMDA was initiated in 1997/1998, with an indefinite term, to provide funding to the Province for the administration and implementation of certain labour market development programs previously administered by the Federal Government. Included in the funding are amounts to cover salaries and related costs of a number of individuals transferred from the Federal to the Provincial payroll.
The program is to continue for a minimum of five years and can be cancelled, thereafter, with two years notice. It is directed at EI claimants and incorporates specific targets.
LMDA administration
Section II(k)
Terms of Reference
"To review the usage of federal transition funds that were earmarked for specific usage, such as highway funds, labour funds, freight rate removal funds and HST transition funds, to ensure the funds were properly used".HST Transition Funds (HTF)
Background
The Province of New Brunswick (the Province) agreed with the Government of Canada in 1996 to convert from its provincial sales tax (PST) system to a new sales tax system called the Harmonized Sales Tax or HST. This new system combined PST and Federal Goods and Services Tax (GST) into one sales tax known as the HST. The implementation of the HST occurred on April 1, 1997.
"By letter of March 29, 1996, Canada committed to provide adjustment assistance to the Province in the amount of $364 million over a four year period, commencing with the implementation of the harmonized sales tax system in order to facilitate the participation of the Province in the harmonized system. I confirm our current understanding that Canada agrees to make available adjustment assistance in the amount of $364 million to be paid upon the signing of the detailed agreement, now referred to as the CITCA. As you know, this assistance is conditional on the Province:
The Federal Government allocated the $364 million over the 4 year contract as follows:
(a) taking such steps as are necessary to implement the harmonized sales tax system, as of the effective date agreed upon;
Scope of Review Procedures
We met with representatives of the Department of Finance and the Auditor General and his staff. We reviewed relevant correspondence and agreements related to the HTF. We referred to the Public Sector Accounting Handbook (PSAB Handbook) of the Canadian Institute of Chartered Accountants which we adopted as the primary authoritative guidance on Public Sector accounting matters. Analysis and Conclusion
The purpose of the HTF is to assist the Province with implementation of the harmonized sales tax system by compensating for potential shortfalls in PST revenue in each of the four years commencing April 1, 1997.
"in the period that the events giving raise to the transfer occurred as long as:
To determine the appropriate timing of HTF revenue recognition, it is necessary to apply the foregoing criteria to the particular situation.
(b) eligibility criteria, if any, have been met by the recipient and
(c) a reasonable estimate of the amount can be madeRecommendation
Accordingly, $132 million of HTF funding should have been recognized as revenue by the Province in its 1998 fiscal year, a further $132 million should be recognized in the 1999 fiscal year and, assuming the conditions continue to be met, $66 million should be recognized in fiscal 2000 and the remaining $34 million in fiscal 2001.Highway Transition Funds
Background
We have been asked to review two transition funds ((1) Canada - NB Highway Improvement Program and (2) Atlantic Freight Transition Program) as part of our review of Transition funds.Observations
Based on our discussions with senior representatives of the Department of Transportation, we have the following observations:Labour Funds
Background
In accordance with our terms of reference, we reviewed, the Labour Market Development Agreement (LMDA) with senior representatives of the Department of Labour.Observation
Based on our discussions with senior Department of Labour personnel, we have the following observation:
The funding to the Province does not include provision for any management functions. Similarly, funding of approximately $6 million for related information technology development is less than the requirement by an amount estimated at between $2 million to $4 million. There is a question as to whether these costs can be properly charged against approved Federal program delivery funding. The Department of Labour has an opinion from the Department of Justice that a charge for management would be appropriate.
