In both the March and June 2011 budgets the government announced that it planned to eliminate the deficit in 2014-15, one year earlier than originally targeted. This would require that the government find  $7 billion in savings over the preceding three-year period. Government departments are currently involved in a Strategic and Operating Review exercise to find ways of “improving the efficiency and effectiveness of government operations and programs” totaling $4 billion annually when fully in place. The results will be contained in the 2012 budget.

Not long after the new cabinet was sworn in, the new President of the Treasury Board began to ruminate about the possibility of raising user fees to secure part of the $4 billion in annual savings. He also stated that user fees are not “taxes”.  But what are user fees and if they are not taxes, and how much could they potentially contribute to the $4 billion target?  Based on an examination of Departmental Performance Reports, we find that half of the $4 billion could be realized through increases in user fees, although this would be resisted strongly by the affected users.

The government has stated categorically it will not raise taxes and it is correct that in the Public Accounts of Canada, user fees are not classified as taxes. It is also true that an increase in a user fee is not an increase in tax provided certain conditions are met. If these conditions are not met, then a user fee increase could be deemed as a tax. Sounds confusing, well it is.

Background

User fees, which are classified as revenue from the “sales of goods and services” in the Public Accounts of Canada, amounted to $8.3 billion in fiscal year 2009-10.  They have increased by 52.2 per cent since 2004-05 and from year-to-year are extremely volatile.

Of this $8.3 billion $1.3 billion are offshore oil and natural resource royalties which are transferred to the Newfoundland Offshore Petroleum Resources Revenues Fund and the Nova Scotia Offshore Revenues Account under federal agreement.  These royalties and equivalent transfers do not affect the federal budgetary balance.  Excluding these royalties still leaves $7 billion in revenue from “sales of goods and services”, accounting for 3.2 per cent of total budgetary revenues in 2009-10.

User fees cover a wide range of government services including the following (figures are for 2009-10):

1. Rights and privileges ($1.8 billion) include fees for licenses, passports, registration of trademarks, patents and copyrights:
2. Lease and use of public property ($0.5 billion) include land leases, rentals of residential and non-residential buildings, parking spaces, machinery and equipment;
3. Services of a regulatory nature ($1.1 billion) include inspection fees, aviation regulation, assessments of financial institutions;
4. Services of a non-regulatory nature ($2.8 billion) include provision of services to the United Nations, police services to provincial, territorial and local governments;
5. Sales of goods and information products ($0.2 billion) include sales of uniforms, government publications; and
6. Other fees and charges ($0.5 billion), which mainly include access to information.

The largest component of user fees is “services of a non-regulatory nature” of which about $1.2 billion relates to RCMP contracting policing services to provinces, territories and local governments.

Potential for Significant Increases

There are specific Treasury Board guidelines[1] with respect to the establishment of user fees.  These arose out of a Private Member’s Bill, introduced by the Honourable Roy Cullen, which was one of the few Private Members’ Bills that received Royal Assent[2].  The measures in this Act require that the Government notify potential clients of proposed fee increases and allow these clients to provide feedback on the proposals.  The department/agency is also required to conduct impact analyses, identify the cost and revenue elements.  In addition, they are required to establish an independent advisory panel to address complaints and to establish standards, comparable to those used in other countries. Ministers must table in Parliament stating the reasons for which these fees are being changed, including why the proposed increase is greater than that comparable rates in other countries.  Every rate change must be submitted to a House of Commons Standing Committee for review and consultation with outside parties. 

The underlying criteria are that the rates charged must relate to the costs of providing the services and meeting certain service provision standards. If the services being provided do not meet the standards established by a prescribed percentage, the user fee must be reduced by a percentage equivalent to the unachieved performance.  Departments/agencies are required to report to Parliament on annual basis on their user fees through their Departmental Performance Reports.  To increase rates requires that departments/agencies follow strict guidelines to justify the rate increase. 

However, these criteria only relate to a portion of the “Sales of Goods and Services” included as budgetary revenue in the Public Accounts of Canada and the Budget.  This is because the Main Estimates and Departmental Performance Reports are on a different basis of accounting and classification. For example, the $1.2 billion in RCMP policing charges is classified as “re-spendable revenues” and are netted against RCMP spending in this area in the Main Estimates and Departmental Performance Report.  Parliament “votes” on the net figure, not the gross.  The Public Accounts and the Budget, however, report the $1.2 billion as budgetary revenues and do not net them against expenses.  According to the RCMP Departmental Performance Report for 2009-10, contract policing, net of the $1.2 billion collected, still cost an additional $679.4 million. 

Based on the Departmental Performance Reports and the definition of i of user fees, the fees currently charged are significantly less than the cost of providing the services.  For example, Health Canada collected $54.6 million in user fees in 2009-10 but estimated that the cost of providing the various services at $247.8 million.  The Canadian Food Inspection Agency collected $53.5 million in fees in 2009-10, but estimated that the cost of providing the related services at $794.1 million. Many of their rates have not been modified since 1998. The potential is there for a major increase in revenues from higher user fees, provided departments/agencies can justify the rate increases as specified in legislation.

For most departments/agencies, the largest difference between the fee collected and the cost of the service relates to Access to Information requests.  For example, Health Canada collected $18,600 in fees in 2009-10, yet they estimated that the cost of providing the service at $1.8 billion.

Is a User Fee a Tax?   

Based on a current examination of selected Departmental Performance Reports, current fees are well below the actual cost of providing the application services.   As such, they are not considered a tax. In fact the buyers of these services are actually being subsidized out of general revenues. However, if the Government were to charge a fee significantly greater than the cost of the service, the amount of the excess would be deemed a tax and   under current legislation, the excess revenues would not be permitted.  However, the Government could pass legislation deeming the excess to be a tax and not a user fee.  This is what happened when unions launched a challenge over the fact that employment insurance premium revenues exceeded the cost of the employment insurance program.  The court ruled that the amount in excess of a reasonable reserve against unforeseen developments constituted a “tax”. The government at the time was forced to table retroactive legislation, deeming the excess insurance revenues as a tax.

[1] Guide to Establishing the Level of a Cost-Based User Fee or Regulatory Charge: Treasury Board Secretariat

[2] User Fees Act S.C. 2004, c.6