Understanding Territorial Formula Financing

Measuring revenue capacity

Under the TFF formula, Eligible Revenues were included as a measure of a territory’s fiscal capacity and reflected each territory’s ability to raise its
own revenues.

Revenues that territories control are included in Eligible Revenues

The measure of each territory’s Eligible Revenues included all tax revenues from income taxes, tobacco, fuel, and property taxes, all fees and licenses, and some other smaller sources of revenue. This measure was then adjusted to take into account a number of factors such as the tax effort (adjusted for the high cost of living) of each of the territories in comparison with average tax rates in the provinces. Other federal transfers to the territories were partially included or excluded in the calculation of Eligible Revenues.

Some sources of revenues were not included in the previous TFF formula, including:

• Natural resource revenues (addressed through separate revenue-sharing agreements currently in place with Yukon)

• Some funding provided by the federal government for health care and social programs

• Some interest revenues

• Any new recoveries or transfer payment programs introduced after March 31, 1985

An Economic Development Incentive is included

The basic concept in the TFF formula was that, as territories developed more capacity to raise money themselves, the amount of money they received from the TFF grant would decrease. To address concerns that the interaction between a territory’s measured tax effort and new revenue growth could act as a disincentive to promoting economic development and raising new revenues in the territories, an Economic Development Incentive (EDI) was introduced in 1995–96. This adjustment allowed territories to exclude 20 percent of the incremental growth in their tax bases from the calculation of their entitlement under TFF. In effect, it allowed territories to keep more of the additional revenues they gained from economic growth without having those gains more than offset by reductions in TFF.

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