Understanding Territorial Formula Financing

The basics of Territorial Formula Financing

Complex formulas do not promote either transparency or accountability to Canadians.

The TFF program has been in place since 1985–86 and it is the main federal transfer to the territories. Its objective is to provide territorial governments with sufficient revenue to allow them to offer reasonably comparable levels of public services to northern Canadians (at reasonably comparable levels of taxation) as those that are available to all other Canadians, taking into account the unique circumstances in the territories.

Table 1 – Territorial Formula Financing (TFF) Entitlements, 1993–94 to 2006–07

* As announced by the federal Minister of Finance in November 2005
Source: Department of Finance Canada

Starting with a formula-driven approach

Prior to 2004–05, TFF was determined and allocated on the basis of a formula. The formula was established in 1985 and it was designed to provide territorial governments with annual, unconditional grants. Each territorial government could allocate and spend TFF grants according to its own priorities. The TFF formula was reflected in Territorial Formula Financing Agreements between the federal government and each of the territories.

The formula worked like this:

TFF grant = Gross Expenditure Base minus Eligible Revenues

The formula was designed to fill the gap between the costs of providing public services in the territories and their ability to pay for those services with their own sources of revenue. The TFF grant each territory received was based on a proxy measure of how much money it needed to provide public services (its Gross Expenditure Base) minus a measure of how much money it had from its own sources of revenue and some other federal transfers (its Eligible Revenues). A TFF grant was determined separately for each territory.

Now for some of the technical terms and details.

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