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4.4 Own Source Revenue Impact on Federal Transfers

One of the biggest issues facing our Nations and Canada is how to take into account the own source revenues that our governments are raising and using to contribute to the cost of running our governments and providing programs and services.  Our Nations’ government revenues include fees, charges, and local taxes, etc., but not business income or monies derived from settlements for long-outstanding injustices, or the property of our citizens.  Given the significance of own source revenues, it is important to consider how this issue is currently addressed and some of the principles in implementing OSR.  These principles should be separate and apart from the principles that should guide the overall fiscal relationship.

 

Canada has developed its own approach to OSR based loosely on the federal-provincial fiscal relationship.  The governments of Canada and British Columbia want to include OSR in the calculations of the ability of a Nation’s government to pay for programs and services, with the purpose of reducing their contributions to the Nation’s government for those services.  The current mandate is that the federal government will clawback transfer payments when a Nation’s government generates certain levels of OSR.

 

All the comprehensive governance arrangements in BC with the exception of Sechelt provide specific provisions in agreements regarding OSR.  Sechelt has no specific provisions dealing with OSR in the federal legislation (as there is no final agreement), but Canada is looking to consider Sechelt OSR in future transfer arrangements.  The recent treaties under the BC treaty process do provide common principles and exclusions of revenue items to be considered OSR.  They also commit to reviewing and renegotiating the fiscal contributions to the Nations taking into account the contributions of OSR.  The time between renegotiations varies from 5 years to ten years to, in some cases, an indefinite period.

 

When negotiating or renegotiating OSR and contributions towards programs and services, there is typically included in comprehensive governance arrangements as part of treaty making an agreement that the following will be considered:

1. the prevailing fiscal policies on the treatment of the Nation’s OSR in self-government fiscal arrangements; and,
2. that OSR arrangements should not unreasonably reduce incentives for the Nation to generate revenues.

 

The first principle identified above could result in Canada or BC setting their own OSR policies to limit contributions to our Nations without negotiations with the Nation.  The second principle seems to negates the entire exercise, as any reduction in fiscal transfers due to OSR generation must be seen as a disincentive for the Nation to use its usually very limited capacity and resources to generate revenue on the one hand, only to lose it on the another.

 

For Nations with modern treaties the details regarding OSR are included in an Own Source Revenue Agreement that does not form part of the treaty.  These OSR agreements set out common items to be exempted for OSR considerations, which typically include: 

• a) the Capital Transfer set out in the treaty  (the “compensation”) but not the interest on it;
• b) the proceeds from the sale of lands;
• c) any federal or provincial payments under fiscal financing agreements or other agreements for programs and services;
• d) the interest or income on funds received from Canada or British Columbia for a purpose related to implementation and held in a special purpose fund as set out in the agreement in respect of own source revenues, or as agreed by the parties from time to time, provided that the interest or income is used for a purpose or activity that is intended by the parties to be funded from that special purpose fund;
• e) gifts or charitable donations;
• f) the amounts received as compensation for specific losses or damages to property or assets;
• g) any Specific Claim settlement; or
• h) other sources agreed by the parties

 In looking at the impacts of OSR and developing OSR policy, considerable work on these issues has been undertaken by our Nations, including as part of the “Common Table” initiative that has been part of BC treaty negotiations.  Work is also being undertaken by those Nations with comprehensive governance arrangements that are addressing these issues with the Crown as part of the initiatives Canada has under way with respect to fiscal relations with our Nations.  The issues are, of course, also being raised and debated when our Nations are actually negotiating or renegotiating their fiscal arrangements or levels of financial transfers with Canada under existing comprehensive governance arrangements.

 

Some of the principles being raised by our Nations in various forums are set out as follows:

1. Appropriate fiscal financing is required before applying OSR.

 OSR clawback is a direct reduction to the fiscal financing a Nation’s government receives.  Before OSR is applied in any situation, an absolute prerequisite is that an appropriate level of fiscal financing be in place.  The approach favoured by Canada assumes that its fiscal transfer is the starting point for any discussion on OSR clawbacks.  This does not account for the real or actual cost of a Nation’s government or the programs and services delivered by its government. These real costs often already require a Nation to use its OSR to pay for its government.

 

Adequate financing based on an agreed and fair method of costing a Nation’s government is a necessary precursor to considering OSR offsets.  Unfortunately, current funding mandates do not allow INAC officials to negotiate appropriate levels of base funding.  The funds simply have not been appropriated from Parliament and the funding envelope is limited.  Moreover, INAC officials have little flexibility to fund at appropriate levels irrespective of what the stated desire or intention of INAC may be.

 

Frankly, clawing funding back from a Nation’s government whose initial funding level is inadequate will encourage a cycle of continued dependence and poverty, and will defeat the purpose of governance reform and undermine Nation-building.  It would be extremely damaging to apply an OSR calculation to a self-governing Nation whose fiscal financing arrangement is based on an Indian Band programming comparison.

 

2. Delay consideration of OSR for financing a Nation’s government until agreed-upon economic development measures have been reached post “catch-up.”

There should be a period of “catch-up” required before OSR is taken into consideration.  Our Nations are committed to moving towards greater self-sufficiency but any OSR model should not become active until a Nation has reached agreed-upon levels of health, education, employment and quality of life.  Standards such as agreed economic levels or measurements (metrics) similar to gross domestic product, such as a First Nations domestic product (FNDP), may help determine when a Nation has the fiscal capacity to take into account internal revenue raising.  At this point, to the best of our knowledge no such metrics have been developed.  Otherwise, without using some clear measurement to determine when OSR should kick in, transferring the financial burden to our Nations (whose citizens for the most part are still the poorest in Canadian society) will only delay the opportunity to create and sustain financial self-sufficiency in our communities.

 

Implementing OSR in the “start-up” or “catch-up” stages only delays the achievement of self-sufficiency of our Nations, and actually could result in greater fiscal dependence on Canada and BC.  If the goal of all parties to comprehensive governance arrangements is to reduce or even eliminate fiscal transfers, then OSR considerations should only be implemented once the “start-up” and “catch-up” stages are completed.

3. The revenues of a Nation’s government subject to OSR should be limited to a more appropriate definition of “government revenues” based on the fiscal capacity of the Nation’s government.

OSR capacity should refer solely to the revenue capacity of our governments.  It is perhaps more appropriate to limit the categories to those used in the federal-provincial fiscal transfer, models which are primarily based on the fiscal capacity, that is the tax-generating power of the government.  If this were followed, then OSR would only apply to the tax room vacated by Canada and/or BC. 

 

If this is not agreeable, the list of exempted revenue should be expanded.  The list of exempted revenue should specifically include the revenues and profits of commercial and/or investment activities undertaken by the Nation’s government or related development corporations, which should be treated like Crown corporations and universities.  Without this specific exemption, there will be a disincentive for our Nations to create, expand and support commercial activities within our communities where these activities are undertaken collectively on behalf of the Nation.   The direct involvement of a Nation’s governments in building the economic base of the community is an essential tool that our governments are using, particularly with regard to community-owned resources.

 

4. OSR should not be applied to all fiscal transfers to the Nation’s government.

OSR capacity should only be taken into account in the determination of funding set out in the financial transfer agreement for those jurisdictions a Nation’s government has drawn down under its governance arrangements.  Programs and services that our governments deliver on behalf of Canada in areas where the Nation has no jurisdiction or has not drawn down jurisdiction, should be delivered in accordance with the terms and conditions of separate funding agreements negotiated for the delivery of those federal programs and services. 

 

Where a Nation’s government has contracted to provide programs and services on behalf of Canada or where the First Nation is not exercising its jurisdiction, these funding arrangements should not be subject to OSR offsets.  This is because the First Nation is not responsible for using its revenue-raising capacity to provide that service or to pay for it.  There should be different treatment of OSR depending on whether the transfer is in support of First Nation’s government and its exercise of jurisdiction or simple contracting with Canada and not an exercise in  jurisdiction.

 

5. OSR calculation should not be overly complex and energy and efforts of the Nation’s government and the Crown should not be wasted on unnecessary analysis and negotiations.

OSR will be a significant burden on our Nations.  The current maximum clawback level – 50% – introduces significant decision-making distortions that will impact many Nation’s attempts to build strong local economies.  OSR in some ways acts as a “tax” and in many cases will effectively tax revenue that is already taxed.  Depending on the business structure, economic development revenues are also taxable, through the normal tax laws.  

 

The interaction between the application of OSR and the Canadian tax system generally creates a complex web of outcomes that are very costly and inefficient.  While the Canadian tax system is itself complex, with many different measures and interactions, it is constantly challenged and clarified by CRA rulings and court judgments.  OSR has no such clarifications.  It will be our Nations that will test and define the applicability of the evolving OSR regime.  Our Nations will quickly become the “experts” in OSR, given that millions of dollars may be at stake in OSR calculations and discussions.   Already, our Nations moving into comprehensive governance arrangements are spending significant resources to analyze agreements and determine the most efficient ways of proceeding.  INAC really needs to take OSR determination more seriously and its impact on our collective efforts to improve the lives of our people.

 

6. OSR should not operate as a disincentive to Nations to move beyond the Indian Act 

The maximum OSR inclusion rate that is currently being used in comprehensive governance arrangements should be revisited.  A 50% clawback level is extremely challenging for our Nations to contemplate.  Given the issue with OSR, some communities may even choose to stay under the status quo.  The policy rationale for OSR should be re-evaluated.  It acts as a “tax” on our Nations’ revenue, which is both costly and inefficient.  If indeed it does become a disincentive for our Nations to move beyond governance under the Indian Act, this is certainly not in the long-term interest of our Nations, nor, in fact, of Canada.  Federal OSR policy, it can be argued, is contrary to the broader policy objectives of the government of Canada in support of our Nations moving beyond federal regulatory control and becoming stronger and valuable contributors to the overall economy of the country. The increase in GDP and reduction in the cost of providing programs and services to our people that will result from governance reform, would certainly outweigh any savings Canada might make through OSR offsets.  Moving beyond the Indian Act can and should be financially better for us and for the country generally.

 

7. A number of options for OSR should be considered, including the following:

• a) Graduated OSR levels: Similar to personal income tax rates, there could be OSR “brackets.”  The current OSR structure effectively has one graduated level already; the OSR “floor” or the amount of federal funding the Nation will continue to receive.  Consideration could be given to several more brackets at different levels.  For example, the first “$xxx” of OSR could be clawed back at a 0% rate until some defined level of self-sufficiency is realized; the next at 15% rate until average incomes meet the regional average for the general population.  After that, the next “$xxx” of OSR could be clawed back at a 25% rate.  And the highest bracket could be anything above “$xxx” of OSR, which would be clawed back at 35%.  This would introduce smaller disincentives to earning income at lower revenue levels and fewer incentives to avoid clawbacks, and would encourage investment, employment and economic activity generally.

• b) Revenue targets before OSR is applied: Consideration could be given to setting minimum revenue targets that a Nation’s government must achieve before the OSR regime begins to operate.  The current provision is for an OSR “floor.”  However, this floor is extremely low, and does not represent what may be a legitimate target approaching self-sufficiency.  A trigger point for beginning OSR should be some revenue point at which there is a reasonable expectation that the Nation’s government might be able to govern with a reduced federal transfer.

8. Exemptions for OSR included in calculation could be provided and/or provide credits for “good” investments that meet mutually-agreeable policy objectives

The same principle that applies to tax could also apply to OSR. Tax is a key instrument in changing individual or organizational behaviour.  Like assigning certain tax advantages to expenditure activities the government sees as desirable, OSR could be used as a tool to encourage the types of investments our Nations and Canada wish to see transfers being used for. 

 

Using OSR in this manner would be far more acceptable than strict regulation or reporting requirements, both of which are tools INAC uses in respect of Indian Act “bands.”  The concept has two distinct options: it could be that OSR spent on social or physical infrastructure (e.g., investments in health and education on the social side, or water treatment, roads, etc. on the physical side) that fit into mutually agreeable priorities would not be included in any OSR calculations.

 

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