- Canada had a very similar tax history to Australia up to the beginning of World War II. The Canadian Provinces shared the income tax bases with the Federal Government and were able to word their legislation imposing sales taxes in such a way as to survive court challenges. As in Australia, during the War, the Provinces vacated the income taxing field in favour of the Federal Government. However, whereas the Commonwealth has failed to restore access to this base to the States, the Canadian Government allowed the Provinces to resume income and corporate taxes in 1957. Most Provinces currently set their own marginal income and corporate tax rates and have these taxes raised on their behalf by the Federal Government, although a number of Provinces impose their own taxes. The Federal Government has provided tax room by reducing its call on the income tax base.
- The Canadian Provinces do not share the Federal goods and services tax, but continue to raise revenue from their own local retail sales taxes and excises. Quebec has its own value added tax and this is harmonised with that of the Federal Government.
- Assistance aimed at achieving horizontal equalisation is provided by the Canadian Government. Equalisation only takes into account the revenue side of Province budgets and currently the poorer Provinces are equalised up to a standard represented by the average revenues of five ‘representative’ (ie. neither rich nor poor) Provinces.
- It is difficult to posit why these three federations have adopted such different approaches to the question of tax assignment. Factors which might have led to a more decentralised approach in Germany and Canada might include the strong ‘States’ house’ function of the Bundesrat and the old historical, religious and tribal origins of the German Länder. In the case of Canada, the existence of strong, independent Provinces, especially Quebec and more distinctive cultural differences may have ensured that the Federal Government has had to adopt a more flexible approach to Federal-Provincial financial relations.
Economics, Commerce and Industrial Relations Group
3 November 1997