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Department of Finance
February 1995

Table of Contents

1995 Budget: Key Actions and Impacts

Overview of the 1995 Budget

The Economic and Fiscal Situation

Prudent Economic Assumptions

The Fiscal Outlook

Getting Government Right

Smaller Public Service

Reducing Business Subsidies

Privatizing/Commercializing Government Operations

The Canada Social Transfer

Protecting Elderly Benefits

Tax Assistance for Retirement Savings

Eliminating Deferral of Tax on Business Income


- Key interim deficit target met: 3 per cent of GDP by 1996-97 --
$24.3 billion

- Debt-to-GDP ratio -- size of debt relative to the economy --
begins to decline in 1996-97

- Three-year savings of $29 billion; $25.3 billion from
expenditure cuts

- Almost $7 in expenditure reductions for every $1 in new tax

- No increases in personal income tax rates

- Dramatic cuts in departmental budgets -- some halved in three

- Smaller public service -- 45,000 fewer positions

- Major reform of programs: agriculture, transport

- Business subsidies cut 60 per cent

- Programs merged, consolidated, commercialized

- Increased cost recovery, including $975 immigration fee per
adult immigrant

- New Canada Social Transfer to provinces in 1996-97

- Unemployment insurance reform intended to be in place July 1,

- Course charted for public pension system reform

- Tax fairness improved: tighter rules for tax deferrals, foreign
and family trusts, R&D incentives

- New measures to ensure collection of taxes owed

- RRSP contribution limits reduced; retiring allowance rollovers
phased out; overcontribution allowance cut

- Higher taxes for corporations, large banks

- Federal excise tax on gasoline increased by 1.5 cents per litre
to help reduce the deficit


The Plan for Fiscal Action

The 1995 budget introduces far-reaching action to restore the
fiscal health that is essential for a strong and growing economy.
The budget will fundamentally reform what the government does and
how it does it. It will bring a permanent change in the way
government operates.

The objective is to get government right so that it can fulfill
its social and economic mandates more effectively and
sustainably. This will include deep cuts in the level of federal
program spending -- not simply lower spending growth, but a
substantial reduction in actual dollars spent.

Deficit Targets Will Be Met

The budget actions deliver on the governmentís commitment to
meet its interim deficit targets. The ultimate goal is a balanced

- The interim deficit targets set out in the 1994 budget -- $32.7
billion in 1995-96 and 3 per cent of GDP in 1996-97 -- will be
achieved using prudent economic assumptions and incorporating
credible fiscal action. The deficit could be well below targets
if economic performance is in line with the average of private-
sector forecasts.

- The significant reforms will ensure that spending will be
restrained beyond 1996-97. The deficit will continue to fall.

Major Elements of Expenditure Reform

The budget is the second in a two-stage process that began with
the February 1994 budget. It takes fundamental action in the
following areas:

- It implements the results of Program Review -- a comprehensive
examination of federal department spending. As a result of the
review, government will focus on what is essential and will do it

- It acts on a new vision of the federal governmentís role in the
economy, one that includes substantial reductions in business

- It introduces major changes in transfers to the provinces that
will renew and modernize the federal-provincial fiscal regime,
making it more effective, flexible and affordable.

- It sets the fiscal parameters within which labour market
programs will be redesigned to foster increased employability.

Major Fiscal Actions

Fiscal actions total $29 billion over the next three years -- by
far the biggest set of actions in any Canadian budget since
postwar demobilization.

- There will be about seven dollars in spending reductions for
every dollar of revenue increases.

- Three years from now, federal spending on programs will be
$10.4 billion (8.8 per cent) lower than it is today. The
cumulative expenditure savings in that period will exceed $25

A Fairer Tax System: Sharing the Burden of Deficit Reduction

The budget reflects the governmentís awareness of the heavy tax
burden borne by Canadians and the cost this imposes on the
economy. There are no increases in personal income tax rates.

Tax measures are largely directed at removing preferences and
increasing fairness. To help meet the deficit targets, the budget
announces increases in taxes on business and in the excise tax on

Total direct impact of budget measures


1995-96 1996-97 1997-98 impact

(billions of dollars)
Expenditure reductions

Program review 3.9 5.9 7.2 16.9

Other 0.2 3.5 4.7 8.4


4.1 9.3 11.9 25.3
Tax measures

Increase fairness and

tighten tax system 0.1 0.4 0.6 1.1

Tax increases 0.9 0.9 0.8 2.6


Total 0.9 1.3 1.4 3.7

Total direct impact

of fiscal actions 5.0 10.6 13.3 29.0
Ratio of expenditure reductions/

tax revenue increases 4.4:1 7.3:1 8.3:1 6.9:1
[1] Three-year cumulative impact of deficit reductions shows the
direct reduction in net debt, by the end of the 1997-98 fiscal
year, arising from fiscal actions. Restructuring charges of
$2.6 billion in 1994-95 are not included. These costs will be
offset over the three-year period by lower interest costs
associated with actions announced in this budget.

Numbers may not add due to rounding.


Economic Growth is Strong

The Canadian economy is stronger than it has been for years.

- Real output grew about 41/4 per cent in 1994, the fastest in
the G-7.

- 433,000 jobs have been created in the past year -- all of them
full-time. The unemployment rate has fallen 1.7 percentage points
to 9.7 per cent.

- Manufacturing output is up over 9 per cent in the past year.

- At 1.5 per cent, excluding the effects of last yearís tobacco
tax reduction, inflation equals its lowest rate in three decades.

- Unit labour costs in Canada have fallen 1.3 per cent since mid-

- Improved cost performance has led to record-breaking exports, a
growing trade surplus, and a dramatic improvement in the current

- Highest business confidence since 1979 underpins solid
investment growth.

Chart 1: Canada's trade position: Merchandise trade surplus
(See ch01e.gif)

The International Environment

- Major overseas economies: Increased growth is expected in 1995
and 1996, particularly in Germany and the U.K. The Japanese
recovery has been hesitant, but is expected to gain momentum.
Slight inflation and short-term interest rate increases are

- United States: Vigorous 1994 growth pushed unemployment down
and inflation up. The Federal Reserve Board raised its benchmark
interest rate from 3 to 6 per cent. Recent U.S. economic
performance -- inflation pressures build and monetary conditions
tighten until the economy experiences a sharp slowdown -- could be
repeated. It is assumed that U.S. short-term interest rates will
increase throughout 1995, peaking at 4 per cent in 1996. This
should cause U.S. growth to slow substantially in 1996 and cool
U.S. inflation and interest rate pressures.

Fiscal Impact: 1994-95

Based on expectations of improved economic growth, a moderate
rise in interest rates, and the impact of the 1994 budgetís
restraint measures, the 1994 budget forecast that the deficit
would decline to $39.7 billion in 1994-95 (including a
contingency reserve of $2.4 billion).

However, 1994 short-term interest rates rose 1 percentage point
more than forecast and long-term rates were 2 percentage points
higher. As a result:

- Debt charges in 1994-95 will be $1 billion higher than

- But the impact of higher interest rates has been more than
offset by lower program spending ($1.9 billion below the 1994
budget forecast) and higher budgetary revenues ($1.2 billion
above the forecast).

- The underlying deficit for 1994-95 is expected to be $35.3
billion -- $4.4 billion lower than the target of $39.7 billion set
in the 1994 budget.


Economic assumptions drive fiscal forecasts and determine the
budget action needed to achieve deficit targets. Overly
optimistic assumptions lead to missed fiscal targets and damaged
credibility. Using prudent economic assumptions and taking
sufficient fiscal action will ensure that deficit targets are

Key Variables

Real growth, inflation and interest rates significantly affect
the fiscal forecast. Prudent projections have been developed for
each. While individually they could turn out differently,
together they reduce the likelihood of missed targets.

Economic Assumptions for Canada

These assumptions are deliberately biased toward prudence --
there is a better than even chance that the actual outcome,
overall, will be more favourable.

- Interest Rates: Mid-February short-term rates of about 8 per
cent were more than 400 basis points higher than 20-year lows in
January 1994. This reflects rising U.S. rates and financial
marketsí concern regarding Canadaís financial situation. Short-
term interest rates are assumed to average 8.5 per cent and long-
term rates 9.7 per cent this year. In 1996, short-term interest
rates are assumed to fall 100 basis points.

- Output and Inflation: Strong employment growth and good trade
performance points to continued robust growth in the first half
of 1995, despite relatively high interest rates. Real growth of
about 3 3/4 per cent in 1995 is likely, possibly slipping to 2.5
per cent in 1996 as higher interest rates weaken household
spending and slower U.S. growth hinders export expansion.

The good economic performance in 1994 and 1995 will
substantially reduce, but not eliminate, the amount of spare
capacity in the economy. Underlying inflation will be in the
1 1/2 to 2 per cent range for both 1995 and 1996.

Comparison with Private Sector Projections

A February survey shows that the governmentís economic
assumptions are more cautious than the average private sector

- Views on real growth and inflation are similar for 1995. The

governmentís assumptions are below the private sector average

for 1996.

- Short- and long-term interest rate assumptions are higher than
the private sector outlook -- by 70 basis points in 1995 and 60
basis points in 1996.

Comparison with Previous Economic Assumptions

The major change to the economic assumptions over the past year
relates to interest rates, which have been revised upwards
significantly for both 1995 and 1996. Partly as a result, the
real GDP growth assumption for 1996 has been lowered.


Economic assumptions

Actual Actual[1] Assumption

1993 1994 1995 1996

Real GDP growth (%) 2.2 4.3 3.8 2.5
GDP deflator increase (%) 1.1 0.6 1.6 1.8
Nominal GDP

$ billion 712 746 787 821

Growth (% change) 3.4 4.9 5.5 4.3
CPI inflation rate (%) 1.8 0.2 1.8 1.8
Employment growth (%) 1.3 2.1 3.0 2.0
Unemployment rate (%) 11.2 10.4 9.5 9.4
91-day Treasury bill[2] (%) 4.8 5.5 8.5 7.5
10-year benchmark

government bond rate (%) 7.2 8.4 9.7 9.0
[1] The GDP figures are estimates.

[2] The rate on 90-day commercial paper, which is approximately
20 basis points higher than the 91-day Treasury bill rate, was
used in the February 1994 budget and the October Update. The
change was made since the Treasury bill rate is more relevant for
debt-servicing costs.


Fiscal Year 1994-95

- The expected underlying deficit for 1994-95 of $35.3 billion
will be raised to $37.9 billion by one-time restructuring charges
totalling $2.6 billion related to the elimination of certain
transportation subsidies and public service reductions in the
1995 budget.

Fiscal Outlook With 1995 Budget Actions

- Without the large fiscal actions in the 1995 budget, increased
debt financing costs would drive the 1995-96 deficit $5.0 billion
above the $32.7 billion target. In 1996-97, the deficit would
decline only to $34.9 billion, $10.6 billion above the level
required to meet the governmentís interim target of 3 per cent of
GDP or $24.3 billion.

- Fiscal actions amount to $5.0 billion in 1995-96, $10.6 billion
in 1996-97 and $13.3 billion in 1997-98.

- The budget actions ensure that the deficit falls to $32.7
billion in 1995-96 and to 3 per cent of GDP by 1996-97 or $24.3
billion -- the interim target. This is the lowest deficit-to-GDP
ratio since 1974-75.

- The operating balance -- the difference between budgetary
revenues and program spending -- will swing from a deficit of $4.0
billion in 1993-94 to a surplus of $29.4 billion in 1996-97, the
largest such surplus relative to GDP since 1951-52. The dramatic
turnaround in the operating balance is due to reductions in
program spending.

- The rate of growth in net public debt will slow significantly.
By 1996-97, it is reduced below the rate of growth in the

- If economic growth and interest rates in 1995 and 1996 are in
line with the average of private sector forecasts and the
contingency reserves are not needed, the deficit in 1996-97 would
fall to about $19 billion, or 2.3 per cent of GDP. The debt-to-
GDP ratio would decline from 73.2 per cent in 1994-95 to 71.8 per
cent in 1996-97.

- Even using the prudent economic assumptions, the fiscal outlook
would continue to improve in 1997-98.

The Fiscal outlook[1]

1994-95 1995-96 1996-97

(billions of dollars)
February 1994 budget deficit targets 39.7 32.7 -
Impact of economic factors -4.4 5.0 -
Status quo deficit 35.3 37.7 35.9
Restructuring charge 2.6 - -
Impact of actions to reduce deficit -5.0 -10.6
February 1995 budget deficit 37.9 32.7 24.3
1. Includes impact of budget measures.


Revenue Outlook

- Tax actions will yield $0.9 billion in 1995-96 and $1.3 billion
in 1996-97.

- In 1995-96, budgetary revenues are forecast to increase by 6.5
per cent, with most of the growth associated with the 5.5 per
cent increase in nominal GDP. The measures announced in this and
last yearís budgets to improve tax fairness, tighten tax
preferences, increase user charges and adjust certain excise tax
rates, also contribute to growth in revenues.

- Revenue growth is expected to slow in 1996-97, advancing by
only 3.1 per cent as higher interest rates affect household
spending and slower growth in the U.S. restrains exports

Expenditure Outlook

- Total budgetary expenditures are expected to peak in 1995-96 at
$163.5 billion, an increase of $600 million from 1994-95.

- Program spending -- all spending except debt charges -- falls
dramatically from $120 billion in 1993-94 to $114.0 billion in
1995-96 and to $107.9 billion in 1996-97.

- By 1996-97, the ratio of program spending to GDP is expected to
fall to 13.1 per cent, the lowest ratio since 1950-51.

Financial Requirements

- The governmentís financial requirements, a measure of the
federal governmentís borrowing on credit markets, will decline
sharply from $26 billion in 1994-95 to $13.7 billion in 1996-97,
due to the decline in the deficit over that period.

- 1996-97 financial requirements are 1.7 per cent of GDP, the
lowest ratio since 1974-75.


Program Review Overview

The Program Review was announced in the 1994 budget "to ensure
that the governmentís diminished resources are directed to the
highest priority requirements and to those areas where the
federal government is best placed to deliver services."

Its main objective was to review all federal programs in order
to bring about the most effective and cost-efficient way of
delivering programs and services that are appropriate to the
federal governmentís role in the Canadian federation.

Ministers were asked to review their own portfolios and provide
their view on the federal governmentís future roles and
responsibilities. Government programs and activities were
reviewed using six tests: serving the public interest; necessity
of government involvement; appropriate federal role; scope for
public sector/private sector partnerships; scope for increased
efficiency; and affordability.

The Program Review encompassed about $52 billion worth of
spending, excluding only major statutory programs.

Structural Change in Government Role

The Program Review will lead to long-lasting structural change in
what the government does. For example:

- No longer will the federal government own, operate and
subsidize large parts of Canadaís transportation system. It will
focus instead on core policy and regulatory responsibilities and
ensure the safety and security of the system.

- The Program Review will help establish an integrated, "whole-
farm" approach to the governmentís farm safety net program which
emphasizes income stabilization rather than income support.

- The business community has often stated that it does not need
or want the level of assistance it receives from the federal
government. In the Program Review, subsidies to business will be
reduced by 60 per cent over the next three years. More
importantly, the remaining assistance will be largely in the form
of loans and other repayable contributions.

In other areas, there will be fundamental change in how the
government delivers programs and services. Many departments will
alter the way they deliver services to increase efficiency and
improve services to Canadians.


Departmental savings under Program Review[1]

1995-96 1996-97 1997-98[1]

(millions of dollars)

Natural Resource Sector 328 380 581

Agriculture 215 128 272

Fisheries and Oceans 51 80 110

Natural Resources 26 82 68

Environment 35 90 131

Transport 555 953 1,111

Industrial, Regional and Scientific-

Technological Support Programs 508 476 581

Industry (and specific agencies) 93 148 212

Science and Technology Agencies[2] 71 108 142

Regional Agencies 144 220 227

Infrastructure 200

Justice and Legal Programs 32 59 75

Justice 6 12 17

Solicitor General 25 47 58

Heritage and Cultural Programs 142 274 387

Foreign Affairs and International

Assistance 490 515 711

Foreign Affairs/International Trade 109 134 171

International Assistance Envelope 381 3810 540

Social Programs 877 1,580 1,771

Citizenship and Immigration 100 69 103

Health 49 138 201

Human Resources Development 600 1,100 1,100

Indian Affairs and Nothern Development 5 97 177

Canada Mortgage and Housing 64 115 128

Veterans Affairs 59 61 62

Defence/Emergency Preparedness 350 557 1,033
PUITTA [3] 200 276 280
General Government Services [4] 232 391 523
Parliament/Governor General 3 8 15
Expenditure Management System 150 150 150
Other Program Review (unallocated) 250

Total 3,867 5,869 7,217
[1] Savings include additional cost-recovery revenues that appear
in non-tax revenues.
[2] Includes granting councils, the Canadian Space Agency and the
National Research Council
[3] Public Utilities Income Tax Transfer Act.
[4] Includes Central Agencies, Public Service Commission,
Statistics Canada, National Revenue, Parliament, and Public Works
and Government Services.

Numbers may not add due to rounding.

Departmental Spending Reductions

Departmental spending will be cut by $3.9 billion in 1995-96,
$5.9 billion in 1996-97 and $7.2 billion in 1997-98 relative to
what would have been the case without Program Review. The
expenditure reductions reflect government priorities as well as
the scope for program rationalization and efficiency

- The largest percentage declines in spending will take place in
Transport, Industrial, and Regional support programs, where
spending will fall by about half between 1994-95 and 1997-98.
This principally reflects sharp reductions in business subsidies.
Spending on science and technology by the science agencies of
Industry Canadaís portfolio will be reduced by proportionally
less than the average decline in the departmentís Industrial,
Regional and Scientific-Technological programs, reflecting the
importance of government support for R&D.

- Defence spending will also fall sharply, declining by
$1.6 billion between 1994-95 and 1997-98. The cuts in defence
spending resulting from this budget reflect the 1994 Defence
White Paper and are in addition to large reductions announced in
last yearís budget.

- Spending levels will be halved in some departments. The
smallest percentage reductions will occur in departments
dedicated to social programs, justice and corrections.

- In almost all cases the cuts will be on top of planned spending
levels that were already declining as a result of decisions in
the February 1994 budget. Hence by 1997-98, spending subject to
the Program Review will have declined 18.9 per cent relative to

Federal departmental spending after Program Review[1]

Spending levels Change

1994-95 1997-98 $ millions per cent

(millions of dollars)
Natural Resource Sector 4,847 3,333 -1,514 -31.2

Agriculture 2,073 1,628 -445 -21.5

Fisheries and Oceans 775 565 -211 -27.2

Natural Resources 1,262 638 -624 -49.4

Environment 737 503 -234 -31.8

Transport 2,851 1,404 -1,447 -50.8

Industrial, Regional and


Support Programs 3,798 2,355 -1,443 -38.0

Industry (and specified

agencies) 1,301 742 -560 -43.0

Science and Technology

Agencies[2] 1,359 1,038 -321 -23.6

Regional Agencies 1,138 576 -562 -49.4

Justice and Legal Programs 3,298 3,132 -166 -5.0

Justice 757 693 -64 -8.4

Solicitor General 2,541 2,439 -102 -4.0

Heritage and Cultural

Programs 2,897 2,221 -676 -23.3

Foreign Affairs and

International Assistance 4,082 3,292 -789 -19.3

Foreign Affairs/

International Trade 1,488 1,231 -257 -17.3

International Assistance

Envelope 2,594 2,061 -532 -20.5

Social Programs 13,003 12,013 -990 -7.6

Citizenship and Immigration 663 601 -62 -9.4

Health 1,815 1,746 -70 -3.8

Human Resources

Development 2,544 1,660 -885 -34.8

Indian Affairs and

Northern Development 3,761 4,208 447 11.9

Canada Mortgage

and Housing 2,131 1,942 -189 -8.9

Veterans Affairs 2,088 1,857 -232 -11.1


Preparedness 11,574 9,925 -1,648 -14.2
PUITTA 250 0 -250 -100.0
General Government Services 4,967 4,137 -831 -16.7
Parliament/Governor General 309 277 -32 -10.2

Total 51,875 42,089 -9,785 -18.9
Per cent of GDP 7 5
[1] As noted in Table 4.1, Program Review resulted in additional
deficit reduction through increases in cost recovery and revenue
generation. These savings are not reflected in this Table.

[2] Includes granting councils, the Canadian Space Agency and the
National Research Council.

Numbers may not add due to rounding.


A more focused, effective and frugal government will require
fewer employees to deliver government programs. Accordingly, by
the time that 1995 budget actions are fully implemented, federal
employment is expected to decline by about 45,000 or 14 per cent.
Some of the jobs lost in government will be transferred to the
private sector, including 6,000 positions in Transport Canada.

Fair, Well-Managed and Orderly Reductions

The government understands the value of employment security to
its employees and the quality of the services they deliver to
Canadians. In the face of such extraordinary pressure to
downsize, the government is obliged to consider extraordinary
measures. The President of the Treasury Board has announced the
specific measures the government is prepared to take. These
measures will allow departments to manage their reductions
effectively while treating fairly employees who must go and those
who will stay. These measures include:

- Early Retirement Incentive: Surplus employees aged 50 or over
with 10 or more years of employment will be able to retire with
an immediate pension based on years of service with no penalty
for early retirement. The 15-week separation benefit available
under the Work Force Adjustment Directive (WFAD) to surplus
employees eligible for a continuing pension benefit will
be eliminated for the duration of the early retirement incentive.

- Cash-Based Early Departure Incentive: Comparable to private-
sector practice, a cash-based early departure incentive program
will be made available for three years to surplus employees in
departments designated by Treasury Board as ìmost affectedî
because they are unable to meet their reductions through existing
or workforce adjustment mechanisms. The National Defence Civilian
Reduction Program will be folded into this regime and its benefit
structure will be brought in line on March 31, 1996.

- Assistance to Employees: Employee transition services will be
augmented. This includes career counselling and job-search
assistance. Management-labour committees will be established in
all regions to identify employment opportunities inside and
outside the Public Service.

- Pre-retirement Transition Leave: Amendments to the Public
Sector Compensation Act (PSCA) will allow the introduction of
voluntary measures such as pre-retirement transition leave
without pay, and permit employees to take off blocks of time and
average their incomes over the year.

- Non-Salary Terms and Conditions of Employment: Amendments to
the PSCA will permit sensible, neutral-cost changes to non-salary
terms and conditions of employment.

Work Force Adjustment Directive

The WFAD will be changed to facilitate the orderly, cost-
effective management of organizational and structural change. For
example, legislation will modify restrictions on contracting out
and the definition of mobility. As well, certain provisions of
the WFAD will be suspended for three years so that surplus
employees in "most affected" departments who decline the
departure incentive will cease to be paid after six months and
will be laid off one year after that, unless alternative
employment is found.

Incentive Costs

Costs associated with the early departure incentives are
estimated at this time to be about $1 billion. Consistent with
private-sector accounting conventions, these costs will be
included in the 1994-95 fiscal year as a one-time
restructuring charge.

Reducing Business Subsidies

Business subsidies frequently fail to achieve their desired
purpose. As the OECD Jobs Study expressed it: "They tend to slow
rather than stimulate adjustment; they discourage rather than
encourage innovation, and they tend to become permanent."

As a key element of creating a new role for the federal
government in the economy, the actions in the budget will
eliminate or substantially reduce departmentsí business
subsidies. Total business subsidies will decline from
$3.8 billion in 1994-95 to $1.5 billion by 1997-98. By 1997-98,
business subsidies will be 60 per cent lower than 1994-95 levels.

The Western Grain Transportation Act (WGTA): To improve grain
transportation and more effectively meet our international trade
obligations, the annual $560 million subsidy to the railways will
be eliminated as of August 1, 1995. There will be a transition to
market-determined freight rates. Measures will be introduced to
facilitate removal of uneconomic branch lines and to change
pooling points for Canadian Wheat Board export shipments.

A package of transition measures will be provided, including a
payment of $1.6 billion to owners of Prairie farm land. A multi-
year adjustment package of $300 million will facilitate
transition to a more efficient transportation system. Credit
guarantees on up to $1 billion of sales will be provided to non-
sovereign buyers of Canadian Wheat Board agri-food products.

Atlantic Region Freight Assistance Act (ARFAA) and the Maritime
Freight Rates Act (MFRA): These inefficient subsidies cost $99
million per year and will be eliminated July 1, 1995. A $326
million transportation adjustment program will be paid over five
years for regions currently receiving ARFAA/MFRA subsidies.
Transition programs will let provinces target assistance to meet
local shippersí adjustment needs and to provide for improved

Dairy Subsidy: The dairy producer subsidy will be reduced by 30
per cent over the next two years. The programís future will be
reviewed in consultation with the industry and the provinces.

Agricultural Safety Net: Overall funding for safety net
programs, including the Net Income Stabilization Account, Crop
Insurance and the Gross Revenue Insurance Program, will be
reduced by 30 per cent over the next three years. The remaining
funding will pay for a core national whole-farm stabilization
program, crop insurance, and province-specific companion

Feed Freight Assistance: This transportation subsidy will be
terminated. Transitional funding will be provided over the next
ten years. Consultations on how the transitional funds can best
enhance the competitiveness of affected regions will be
undertaken with the provinces and affected industries.

Industry Canada: Industry Canada will further reduce remaining
business subsidies. Remaining spending will focus on joint
private/public-sector initiatives in high-growth sectors.

Cultural Industries: Subsidies provided to cultural industries
under the Department of Canadian Heritage will be reduced,
including an 8 per cent reduction over three years in the postal
subsidy (which subsidizes the mailing rates of certain Canadian
books and magazines). Reductions will also result from a
restructured book publishing program.

Regional Agencies: The agencies will focus on small- and medium-
size enterprises, but will provide loans and repayable
contributions rather than direct subsidies. The agenciesí field
offices, and those of Industry Canada in Ontario, will provide a
single point of contact to federal government programming for
the small business sector. As well, in an effort to facilitate
access to capital for small- and medium-size enterprises in their

- The Federal Office of Regional Development -- Quebec will
investigate the potential of forging new alliances with the
Federal Business Development Bank and other financial
institutions to deliver business assistance more effectively and
on more commercial terms.

- The Department of Western Economic Diversification will move to
eliminate direct financing assistance provided to individual
businesses on a non-commercial basis. Specialized investment
funds will be established, in co-operation with private/public
financial institutions, to improve small businessí access to
capital. These strategic alliances will pay particular attention
to the issue of access to capital for small firms engaged in the
ënew economyí. They will explore new lines of business not
currently served by commercial institutions, and attempt to
increase the supply of ëpatientí capital for these firms.

- The Atlantic Canada Opportunities Agency will continue to work
with the provinces and the private sector to increase access to
investment capital through support for the establishment of a
new, private-sector-operated Atlantic venture capital fund.


The government will privatize and/or commercialize government
operations where feasible and appropriate. Non-essential equity
holdings, assets and services will be considered for
privatization, or placed on a more commercial basis, where it can
be shown to improve service and reduce costs while continuing to
protect the public interest.

Reasons to Privatize or Commercialize

Privatizing/commercializing operations which government no longer
needs to run represents good management and common sense. This
approach will help to reduce financing requirements, debt
servicing costs and the deficit. It will also contribute to
better economic performance through increased efficiency,
competition and new private-sector investment.


- Petro-Canada: The government will dispose of its common shares
of Petro-Canada. The timing and proceeds of sale will be subject
to market conditions.

- CN: The Minister of Transport will take action to sell CN.
Doing so will provide the company with the freedom to make
strategic operating and investment decisions quickly. It will
also enable CN to seek new sources of private-sector capital in
order to fund those decisions. The timing and proceeds of sale
will be subject to market conditions.

- Transport Canadaís Air Navigation System (ANS): The government
will commercialize ANS, which comprises the air traffic control
system, flight information system and electronic navigation aids.
Terms and conditions of transfer and operating framework will be
finalized in late 1995. Transport Canada will also commercialize
other current operations, including airports, which will be
transferred to local authorities.

- Canada Communication Group (CCG): The Minister of Public Works
and Government Services will oversee the full or partial
divestiture of CCG. Formerly the Queenís Printer, CCG provides
printing, publishing and communications services to federal
departments on a fee-for-service basis.

Other Opportunities

The government will seek and undertake other opportunities for
privatization and commercialization. Initiatives which may be
pursued include:

- The National Capital Commission will operate on a more
commercial basis.

- Natural Resources Canada will reorganize its geomatics
activities and move towards Special Operating Agency status.

- Environment Canada will explore alternatives for more efficient
delivery of weather services, including commercialization.

- The Department of Agriculture and Agri-Food will share
responsibilities and streamline arrangements with industry for
inspection and regulation activities.

- The Department of Fisheries and Oceans (DFO) will seek to enter
into partnerships with the fishing industry and others in the
management of capacity, licensing and compliance. DFO will also
divest recreational harbours to municipalities or other
interested parties and rationalize commercial fishing harbours.

- The Canadian Space Agency will focus increasingly on private-
sector partnerships and joint ventures for earth observation,
space science and technology.

- The Department of National Defence will look at enhancing its
private-sector partnerships.

- The Departments of Health, Agriculture, Fisheries and Oceans
and Industry will co-operate, in consultation with the food
industry and the provinces, to improve the effectiveness and cost-
efficiency of the federal component of the Canadian food
inspection system.


A New Transfer System

Improving the effectiveness of the Canadian federation requires
changes to the fiscal relationship between Ottawa and the
provinces. The budget announces a significant reform to the
system of federal transfers to the provinces and territories --
the Canada Social Transfer (CST).

Currently, the federal government transfers funds to the
provinces and territories to help them provide social programs to
Canadians. Funding for health and post-secondary education is
provided under Established Programs Financing (EPF) while funding
for social assistance and social services is provided under the
Canada Assistance Plan (CAP).

How it Works

Beginning in 1996-97, these transfers will be replaced by a
single transfer -- CST. Unlike the current system which is based
partly on cost-sharing arrangements, CST will be a block fund,
like EPF. This means that the amounts transferred will not be
determined by provincial spending decisions (as under cost
sharing). The new transfer will be provided through cash payments
and tax points. The Equalization program, which benefits the
lower-income provinces, is untouched and payments will continue
to grow, ensuring that all provinces can provide comparable
levels of service at comparable rates of taxation. Equalization,
together with the CST, will total over $35 billion in 1996-97
(Table 1).

Amount of CST Transfers

The provinces will receive $29.7 billion in transfers under the
existing programs for 1995-96, about the same as in 1994-95, to
allow for a period of stability before change. Under the CST,
funding to provinces will be reduced from what it would otherwise
have been in 1996-97 by $2.5 billion to $26.9 billion. It will be
further reduced from what it would otherwise have been in 1997-98
by $4.5 billion to $25.1 billion. While these reductions are
significant, they are less than cuts to other federal government
program spending.

For the first year, 1996-97, CST will be allocated among
provinces in the same proportion as the 1995-96 total of EPF and
CAP transfers which are being replaced (Table 2). This gives
provinces certainty about their allocation for the year so they
can do their fiscal planning.

The Minister of Finance will consult with provinces and
territories in developing a permanent method of allocating
payments among provinces under CST for 1997-98 onward.

Giving Governments More Flexibility

The new transfer will end the intrusiveness of previous cost-
sharing arrangements and will reduce long-time irritants:

- Provinces will no longer be subject to rules stipulating which
expenditures are eligible for cost sharing or not.

- Provinces will be free to pursue their own innovative
approaches to social security reform.

- The expense of administering cost sharing will be eliminated.

- Federal expenditures will no longer be driven by provincial
decisions on how, and to whom, to provide social assistance and
social services.

Safeguarding Standards for Canadians

The transfer of federal funds to the provinces will safeguard

- The federal government will continue to enforce the principles
of the Canada Health Act.

- Provinces must continue to provide social assistance without
minimum residency requirements.

The federal government, under the leadership of the Minister of
Human Resources Development, will invite all provincial
governments to work together on developing, through mutual
consent, a set of shared principles and objectives that could
underlie the new transfer. In this way, all governments could
reaffirm their commitment to the social well-being of Canadians.
The Minister of Health will continue to work with provincial and
territorial health ministers to renew Canadaís health system.

A New Approach to Federal-Provincial Fiscal Relations

The Canada Social Transfer represents a new approach to federal-
provincial fiscal relations marked by greater flexibility and
accountability for provincial governments, and more sustainable
financing arrangements for the federal government. It continues
the evolution towards more mature fiscal relations.
Table 1
Major Transfers to Provinces and Territories
(Estimated entitlements)

1994-95 1996-97 Change

(millions of dollars)

Newfoundland 1,484 1,512 +28
Prince Edward Island 316 323 +7
Nova Scotia 1,932 1,949 +17
New Brunswick 1,610 1,632 +22
Quebec 11,446 11,096 -350
Ontario 10,530 9,653 -
Manitoba 2,039 2,032 -7
Saskatchewan 1,411 1,450 +39
Alberta 2,525 2,313 -212
British Columbia 3,573 3,291 -282
Northwest Territories 74 68 -6
Yukon 34 32 -2

Total 36,9741 35,3512 -1,623
[1] Comprised of Equalization, EPF and CAP.

[2] Canada Social Transfer and Equalization.

Table 2
The Canada Social Transfer: CST
(Estimated Entitlements)


1994-95 1995-96 1996-97

(millions of dollars)

Newfoundland 608 608 551
Prince Edward Island 137 137 124
Nova Scotia 964 966 875
New Brunswick 763 764 692
Quebec 8,098 8,141 7,376
Ontario 10,530 10,653 9,653
Manitoba 1,141 1,143 1,036
Saskatchewan 982 981 888
Alberta 2,525 2,552 2,313
British Columbia 3,573 3,632 3,291
Northwest Territories 74 75 68
Yukon 34 35 32

Total 29,429 29,686 26,900


Canadaís retirement income system has three main components:

- employment-related pension income under the Canada and Quebec
Pension Plans;

- Old Age Security (OAS) and Guaranteed Income Supplement (GIS);

- tax assisted retirement savings: Registered Pension Plans and
Registered Retirement Savings Plans.

The 1995 budget begins action to put Canadaís retirement income
system on a fairer and sustainable basis.

Canada Pension Plan (CPP)

CPP pensions are paid entirely by contributions made by
employers and employees, and are based on past earnings. This
fall, the finance ministers of Canada and the provinces will meet
for their regular five-year review of the financing of the CPP as
mandated by law. Their review will be based on the actuarial
report of the CPP recently tabled in Parliament.

The report concludes that CPP contribution rates will have to
rise from 5.4 per cent in 1995 to some 14 per cent in 2030, 1
percentage point higher than previously expected. Costs have
risen in the short- and long-term because disability benefits
have been higher than anticipated and contributions have
been lower as a result of the recent recession.

Old Age Security and Guaranteed Income Supplement

These benefits today cost over $20 billion, a cost that is
estimated to grow by 60 per cent over the next 15 years as the
population ages. The government will release a paper later this
year on the changes required in the public pension system to
ensure its affordability. The goal is to bring in legislated
changes to take effect in 1997. The basic principles for
reforming OAS and GIS shall be:

- undiminished protection for all seniors who are less well off,
including those receiving GIS;

- a continuation of full indexation of benefits to protect
seniors from inflation;

- the provision of OAS benefits on the basis of family income, as
is currently the case with GIS;

- greater progressivity of benefits by income level; and

- control of program costs.

Consultations with seniors, and Canadians generally, on the
precise nature of the needed changes will occur when the paper is
released later this year. In the interim, two measures will be
implemented effective July 1996:

- OAS payments will be calculated and paid out net of the high-
income recovery amounts, based on income reported on the previous
yearís tax return. This measure will not affect the amount of
benefits provided to seniors. The only change is that the OAS
benefit will be reduced before it is sent out rather than being
taxed back after individuals have received their cheques. The
high-income recovery affects only those individuals with incomes
above $53,215.

- OAS recipients who are no longer resident in Canada will have
to file a statement of their world-wide income in order to
continue to receive OAS benefits. Currently, non-residents with
incomes above $53,215 escape the high-income recovery. They are
treated more favourably than residents of Canada.

Tax-Assisted Retirement Savings

The budget proposes actions on the third part of the retirement
income system ñ tax-assisted retirement savings. Details of these
actions can be found in the fact sheet, Tax-Assisted Retirement
Savings, elsewhere in this booklet.


The government provides tax assistance for retirement savings
by allowing contributions to pension plans to be deducted from
income in computing tax. The return on savings in the plans is
not taxed each year. Tax is paid when income is received from the

Registered Pension Plans (RPPs) are pension plans for employees
sponsored by employers or unions and funded through contributions
by employees and employers. Defined-benefit RPPs provide a
pension that is generally calculated on the basis of earnings and
years of service. Money-purchase plans provide whatever pension
income the accumulated contributions and return on investment in
the RPP will buy at retirement.

Registered Retirement Savings Plans (RRSPs) are savings plans
for individuals and the self-employed that provide retirement
income based on what the accumulated contributions and return on
investment in the plan will buy at retirement. RRSP contributors
may also belong to an RPP.

The 1995 Budget:

- reduces the contribution limits for RRSPs and money-purchase
RPPs which will produce fiscal savings while affecting only
individuals earning over $75,000;

- lowers the $8,000 allowance for overcontributions to RRSPs
which will substantially eliminate an opportunity for unintended
tax deferrals; and

- phases out the tax-free rollover of retiring allowances to
RRSPs, a measure which is no longer needed under the reformed
system of pension and RRSP limits.

Reduction in Pension and RRSP Contribution Limits

The reductions in pension and RRSP limits will not compromise
the integrity and effectiveness of the private retirement saving
system. The measures will adjust the limits to a level where full
tax assistance is provided on earnings up to about 2.5 times the
average wage, the target set under pension reform. The specific
changes are:

- The dollar limit on deductible RRSP contributions will be
reduced to $13,500 for 1996 and 1997 and then increased by $1,000
a year to reach $15,500 in 1999.

- The dollar limit on contributions to money-purchase pension
plans will also be reduced to $13,500 in 1996. It will then be
increased by $1,000 a year to $15,500 in 1998.

- The dollar limit on Deferred Profit Sharing Plan (DPSP)
contributions will continue to be one-half the limit for RPPs.

- The current maximum pension limit for defined-benefit RPPs will
be frozen through 1998. The pension and DPSP limits will be
indexed beginning in 1999, and the RRSP limit in 2000.

- The government will consider modifying the RRSP limits, without
incurring additional revenue costs, to restore lost RRSP room to
employees who leave pension plans before retirement.

RRSP Overcontribution Allowance

- A penalty tax of 1 per cent applies to excess RRSP
contributions above a margin of $8,000. Beginning in 1996, this
overcontribution allowance will be reduced from $8,000 to $2,000.
This will be phased-in to allow existing excess contributions to
be retained until they can be deducted against new RRSP room,
rather than forcing them to be withdrawn.

Retiring Allowance Rollovers

- The tax provisions that allow individuals to transfer to an
RRSP up to $2,000 per year of service out of a retiring allowance
will be phased out by reducing the limit to zero for years of
service after 1995.

- Individuals may continue to transfer up to $2,000 per year of
service before 1996, plus $1,500 for each year before 1989 in
which they earned no pension or DPSP benefits.

Pay Out of Locked-In RRSPs

- Holders of RRSPs that are locked in under a provision of the
Pension Benefits Standards Act will be allowed to purchase Life
Income Funds, a more flexible way of managing retirement income
funds. They can now only purchase life annuities with these


Among a number of measures proposed in the budget to improve the
fairness of the tax system is an important change affecting
individuals who report business income (including professional
income). To eliminate the deferral of taxes, these taxpayers will
be required to report their business income on a calendar year
basis, effective for taxation years starting after 1994.

The measure affects all sole proprietorships, professional
corporations and partnerships (where at least one member of the
partnership is an individual, professional corporation, or
another affected partnership).

How Taxes Are Currently Deferred

Currently, business income is reported by an individual on the
basis of a businessí fiscal period. That fiscal period may or
may not coincide with the end of the calendar year (December 31),
which is the end of the annual reporting period for employment
and other types of income.

In calculating income for a calendar year, an individual must
include income from any business with a fiscal period ending in
that year. Therefore, if the businessí fiscal period ends prior
to December 31, the reporting of business income earned between
the end of that fiscal period and December 31 can be delayed. As
a result of the delay in reporting the business income, the
payment of taxes on that income can be deferred.

Transitional Relief

Given that most affected taxpayers would otherwise be required to
report more than 12 months of business income in their 1995 tax
returns, the measure includes provisions to bring the additional
amounts into income over a 10-year transitional period, subject
to some restrictions. The measure allows for 5 per cent of the
additional income to be included in 1995, 10 per cent to be
included in each of the subsequent eight years and 15 per cent to
be included in the last year.

Extended Reporting Period

Since some individuals will now have less time to prepare their
financial statements and income tax returns, individuals (other
than trusts) with business income (other than only from limited
partnerships) will be given until June 15 of each year to
complete and file their income tax returns. However, any tax
owing will continue to be payable on April 30 and interest on
unpaid taxes will be charged from that date.

Changed Year-End for GST

Persons required to have a December 31 fiscal year-end and who
are GST registrants will have the same year-end for GST purposes.
For individuals who file annually for GST purposes, the GST
filing period will also be extended to June 15 but, as with
income taxes, any GST owing will continue to be due on April 30.
Revenue Canada will provide further details regarding changes to
reporting periods for GST purposes.

Illustration of Transitional Provision

Consider an individual with the following characteristics:

- the individualís unincorporated business earns $120,000 in each
fiscal period; and

- the business has a January 31 year-end (i.e. the reporting of
11 months of income is deferred one year).

Income of $110,000, earned between February 1, 1995 and
December 31, 1995 is currently deferred for tax purposes.

Calculation of Business Income for Tax Purposes

1995 1996

Business income
- fiscal period ended Jan. 31/95 $120,000
- fiscal period ended Dec. 31/96 $120,000

Inclusion of income that otherwise would

have been deferred for tax purposes:
- income earned

Feb. 1/95 - Dec. 31/95 - $110,000 (A)
- annual inclusion percentage (B) 5% 10%
- additional income to be taxed (A x B) $5,500 $11,000

Income from business to be reported $125,500 $131,000


Further details on this measure can be found in Annex 6 of the
Budget Plan.

© 1995 Her Majesty the Queen in Right of Canada



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