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Quebec's Minister of Finance Raymond Bachand gestures while presenting his budget at the National Assembly in Quebec City March 17, 2011. (Mathieu Belanger/Reuters/Mathieu Belanger/Reuters)
Quebec's Minister of Finance Raymond Bachand gestures while presenting his budget at the National Assembly in Quebec City March 17, 2011. (Mathieu Belanger/Reuters/Mathieu Belanger/Reuters)

Quebec's $2.2-billion beef with Ottawa Add to ...

Tuesday's federal budget is not expected to resolve what has become a $2.2-billion irritant between Quebec and Ottawa.

The dispute involves compensation to Quebec for the 1992 harmonization of the provincial sales tax with the federal GST. Provincial Finance Minister Raymond Bachand said recently he'd be surprised to hear Ottawa commit itself to resolving the issue in the budget.

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"The situation is unfair and must be rectified," Mr. Bachand said. "It has now become a political issue."

In other words, the money may not be unveiled in the federal budget but will likely be high on the Conservatives' Quebec priority list when the federal election campaign is called.

Bloc Québécois Leader Gilles Duceppe said he will vote against the budget if the Conservatives fail to resolve the harmonization dispute with Quebec.

As far as the Quebec government is concerned it doesn't matter how the Conservatives handle the announcement - in a budget or an election campaign - as long as they do it and do it soon. For the province, there is no logical reason why Ottawa should refuse the $2.2-billion compensation package being demanded.

Quebec was the first province to harmonize its sales tax with the GST on July 1, 1992, after signing an agreement in principle with Ottawa almost two years earlier.

"Quebec's administration of the GST within its territory along with the provincial sales tax would avoid duplication, reduce administration costs, facilitate compliance for agents and be beneficial for the economy," then-federal finance minister Michael Wilson and his Quebec counterpart, Gérard D. Lévesque, stated in the August 30, 1990 agreement in principle. However, the deal made no provisions for compensation.

Quebec's attitude changed in 1996 when Newfoundland, Nova Scotia and New Brunswick harmonized their sales taxes and received a total of $961-million in federal compensation. That's when Quebec first demanded similar treatment.

Then in March of 2009, Ontario reached an agreement in principle with Ottawa over the HST on the promise it would receive $4.3-billion in federal compensation. That was followed by a similar agreement with British Columbia later in 2009 for about $1.6-billion.

There's a major difference in how the tax is collected in Quebec. Under harmonization with the other five provinces, the federal government administers and collects the sales tax. Revenu Québec, however, administers and collects the GST for the Canada Revenue Agency. And that has resulted in some controversial practices.

For instance, Quebec charges its sales tax on top of the GST. The practice has become known as the "tax on the tax." The money collected by Quebec, by adding the 8.5-per-cent PST on top of the 5-per-cent GST, has amounted to millions of dollars in additional revenue for the province over the years. The federal government has demanded Quebec put an end to this practice.

Quebec has proposed a draft agreement similar to the ones signed by Ontario and B.C., and it has sent it to Ottawa for approval. But the Harper government doesn't appear to be in any hurry to comply. The province said it has accepted most of Ottawa's demands as long as Quebec continues to exercise fiscal sovereignty over sales taxes and gets compensated for doing it.

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