Annex 3
Review of the Air Travellers Security Charge: 
Supplementary Information and Notice of Ways and Means Motion

Introduction

In response to the events of September 11, 2001, the Government allocated $7.7 billion through 2006–07 for a comprehensive plan to enhance personal and economic security for Canadians. This amount included $2.2 billion to make air travel more secure in accordance with rigorous new national Transport Canada standards, including the creation of a new federal air security authority, the Canadian Air Transport Security Authority (CATSA).

To fund the enhanced air travel security system, the Air Travellers Security Charge (ATSC) was introduced, to be paid by air travellers effective April 1, 2002. The charge was established at a level sufficient to fund the enhanced air travel security system through 2006–07, as set out in Table A3.1.

The enhanced air travel security system benefits principally and directly travellers that use the Canadian air transportation system. In these circumstances, a user charge is fair and fiscally responsible.

Table A3.1
Projected ATSC Revenue and Expenditures (Budget 2001)

Structure and Operation

The charge is payable by the purchaser of an air transportation service and is collected by the air carrier at the time of payment for the air travel. Where applicable, the total cost of the charge includes the goods and services tax (GST) or the federal portion of the harmonized sales tax (HST).

For air travel within Canada the total cost of the charge is $12 per emplanement, to a maximum of $24 per ticket. For transborder air travel to the continental United States the charge is $12. For other international air travel the charge is $24.

For domestic air travel the charge applies only to flights between the 89 airports at which CATSA is responsible for the delivery of the enhanced air travel security system. These 89 airports are listed in a schedule to the Air Travellers Security Charge Act. Travel between smaller airports not listed in the schedule is not subject to the charge. Direct travel between listed and non-listed airports is also not subject to the charge.

Review of the Charge

In Budget 2001, the Government indicated that it would review the charge over time to ensure that revenue remains in line with planned expenditures on the enhanced air travel security system through 2006–07. The Government also indicated that the charge would be reduced if revenue from the charge was projected to be greater than required to fund the enhanced air travel security system.

On November 8, 2002, the Government released an update on the operation of the charge, including an assessment of revenue and expenditures.^[1] In addition, interested parties were invited to submit written representations. The scope of the review encompassed technical issues related to the application of the charge, including its structure, provided that revenue from the charge would remain sufficient to fund the enhanced air travel security system, and that no one would pay more than under the current structure.

Since that time the Government has assessed further updates to revenue and expenditures and has carefully considered the more than 300 submissions received from the air travel industry and interested parties.

Revenue From the Charge

Remittances to Date

ATSC remittances are reported in The Fiscal Monitor, which is published each month by the Department of Finance. As set out in The Fiscal Monitor for December 2002, ATSC remittances for the period from April through December 2002 are $266 million.^[2] In addition, GST/HST amounts are estimated at roughly $1 million per month, bringing total revenue to $274 million.

Based on total revenue to date, and making allowance for seasonal travel patterns, total revenue from the charge on an ongoing, full-year basis is expected to be $425 million per year, compared to the original estimate of $445 million per year. Total revenue from the charge for fiscal year 2002–03 is expected to be lower, at $375 million, compared to the original estimate of $430 million. This reduced level of revenue is due to timing and transitional factors associated with the introduction of the charge not fully reflected in the original estimate.

Outlook for Air Passenger Traffic

At the time the charge was developed in the aftermath of the September 11 terrorist attacks in the United States, there was significant uncertainty about the outlook for air passenger traffic. Given this uncertainty, the Government used prudent assumptions to generate an estimate of air passenger traffic for purposes of determining the appropriate level for the charge. These assumptions included a 10-per-cent decline in air passenger traffic for 2002 relative to 2001 and no growth in future years.

Data is now available on the recovery of air travel in 2002 and the prospects for future growth have been updated. In the fall of 2002 the Aviation Forecast Centre at Transport Canada delivered its updated forecast for annual growth of origin-destination passengers through 2006, as set out in Table A3.2.

The level of air passenger traffic in 2002 was stronger than originally estimated. Moreover, positive growth in air passenger traffic for 2003 to 2006 may now be factored into ATSC revenue projections with greater confidence than in the fall of 2001. Accordingly, Transport Canada’s forecast for growth in air passenger traffic is used for the purpose of estimating ATSC revenue in future years.

Table A3.2
Air Passenger Traffic Growth in Canada

Updated Revenue Forecast

As noted above, the current forecast for full-year revenue from the charge is $425 million per year. This amount represents total revenue that would be generated from 2002 traffic levels, setting aside any adjustments for timing or transitional factors. Applying Transport Canada’s forecast for growth in air passenger traffic to this base of $425 million results in the updated revenue forecast set out in Table A3.3.

Total revenue through 2006–07 is expected to exceed the original estimate by $80 million. This amount is available to reduce the level of the charge.

Table A3.3
ATSC Revenue

Expenditures for the Enhanced Air Travel Security System

The Government’s new approach to air travel security provided Transport Canada with additional funding to strengthen its capacity to set regulations, review standards, and monitor and inspect all air security services. In addition, CATSA was created to consolidate the delivery of a number of key aviation security services under a single new federal authority. CATSA is a Crown corporation operating on a not-for-profit basis and reports to Parliament through the Minister of Transport.

For fiscal year 2001–02, $115 million was allocated to Transport Canada and the Royal Canadian Mounted Police for expenditures on enhanced air travel security in the aftermath of the events of September 11, 2001. Actual expenditures incurred in fiscal year 2001–02 were slightly lower, at $97 million, and the resulting difference of $18 million may be subtracted from original planned expenditures through 2006–07.

For fiscal years 2002–03 through 2006–07, Transport Canada and CATSA have indicated that expenditures on the enhanced air travel security system are expected to be consistent with the original estimate. While some re-profiling of expenditures among fiscal years may be necessary, this will not have a material effect on total spending over the five-year period.

Adjusting the expenditure track by $18 million to reflect lower-than-estimated expenditures in 2001–02 has the effect of reducing the total amount that must be recovered by the charge through 2006–07. As such, this amount is available to reduce the level of the charge.

Accrual Accounting by the Government of Canada—Implications for ATSC Revenue and Expenditures for the Enhanced Air Travel Security System

The Air Travellers Security Charge was set at a level to recover the costs of the enhanced air travel security system through 2006–07 in a manner consistent with the method of accounting in effect at the time the charge was developed. The Government’s decision to adopt full accrual accounting in this budget has implications for both revenue from the charge and expenditures for the enhanced air travel security system through 2006–07. Further details on the Government’s change to full accrual accounting are provided in Annex 6.

Revenue

Under full accrual accounting, revenue is recognized as it accrues rather than when cash is remitted. This means, for example, that ATSC amounts accrued to the end of March 2003 will be included in the financial results for fiscal year 2002–03, even though they are not due to be remitted by the air carriers until the end of April 2003.

Thus, the change to full accrual accounting has the effect of adding one additional month of revenue—approximately $35 million—that would not otherwise have been recognized over the five-year period through 2006–07. This amount is available to reduce the level of the charge.

Expenditures

The change to full accrual accounting also means that capital assets will be amortized in the Public Accounts of Canada over their useful economic life rather than expensed on a cash basis in the year of acquisition. This change requires an adjustment to the costs that must be recovered from the ATSC through 2006–07 to fund the enhanced air travel security system.

Transport Canada and CATSA have indicated that capital assets are expected to represent about $650 million of the total expenditures for the enhanced air travel security system through 2006–07. They have further indicated that these capital assets will have, on average, a useful economic life of about seven years. As set out in Table A3.4, the amortization of $650 million of capital assets over this seven-year period will result in an average depreciation expense of about $95 million per year, or $475 million over a five-year period.

Setting the charge at a level to reflect the average depreciation expense of $475 million over a five-year period ensures that the charge is sufficient to fund the enhanced air travel security system on a sustainable basis. Because the charge was established on the basis of recovering capital expenditures through 2006–07 on a cash basis rather than a full accrual basis, the difference between the $650-million cash expenditure and the $475-million depreciation estimate represents a reduction in the costs to be recovered. This difference of $175 million through 2006–07 is available to reduce the level of the charge.

Table A3.4
Treatment of Capital Assets Through 2006–07¹

Scope for Reducing the Charge

The total amount available through 2006–07 to reduce the level of the charge is $329 million, as set out in Table A3.5.

Table A3.5
Adjustments Through 2006–07
Recovery of Costs for the Enhanced Air Travel Security System

Assessment of Options for Adjusting the Air Travellers Security Charge

The Government has indicated that where revenue from the charge is projected to be greater than required to fund the enhanced air travel security system, the charge would be lowered.

In this regard, the review process, including representations from interested parties and studies from independent consultants,^[3] has played an important role in determining how to allocate the $329 million that is available to reduce the level of the charge.

Common to the vast majority of representations was a concern about the effect of the charge on air travel in Canada. At the same time, a range of opinion was expressed about how the charge should apply.

For example, some submissions called for the charge to be based on ticket price or distance travelled, so as to reduce the level of the charge for low-cost or short-haul air travel. Others noted that these types of approaches would favour certain routes and passengers at the expense of others. In particular, northern and regional customers, who often do not have access to low-cost fares or who do not fly on short-haul routes, would be disadvantaged.

On the basis of these considerations, the $329 million available will be applied to reduce the level of the charge for air travel within Canada.

Reducing the Air Travellers Security Charge

The level of the charge for air travel within Canada will be reduced from $12 to $7 for one-way travel and from $24 to $14 for round-trip travel^[4]— a reduction of more than 40 per cent that will benefit all domestic travellers in Canada.

Focusing the reduction on domestic air travel responds to concerns that were raised as part of the review process, while fulfilling the goals of maintaining revenue in line with expenditures for the enhanced air travel security system, and ensuring that no one pays more than under the original structure for the charge. Maintaining the flat-rate structure preserves the simplicity of the charge for ease of compliance and administration, and allows for the reduction to be implemented quickly and with minimal administrative disruption. The new level of the charge for air travel within Canada will apply to tickets purchased on or after March 1, 2003, as set out in the Notice of Ways and Means Motion.

The Government will continue to work with industry and travellers to ensure that the operation and administration of the charge is carried out in the most efficient manner possible.

Notice of Ways and Means Motion to Amend the Air Travellers Security Charge Act

That it is expedient to amend the Air Travellers Security Charge Act to provide among other things:

(1) That the Air Travellers Security Charge payable in respect of an air transportation service acquired in Canada that does not include transportation to a destination outside of Canada be reduced to:

(a) $6.54 for each chargeable emplanement included in the service, to a maximum of $13.08, if tax under subsection 165(1) of the Excise Tax Act is required to be paid in respect of the service; or

(b) $7.00 for each chargeable emplanement included in the service, to a maximum of $14.00, if tax under subsection 165(1) of the Excise Tax Act is not required to be paid in respect of the service.

(2) That any enactment founded on paragraph (1) apply to air transportation services that include a chargeable emplanement on or after March 1, 2003 and for which consideration is paid or becomes payable on or after that day.

¹ The November 8 news release is available on the Department of Finance Web site at www.fin.gc.ca.[Return]

² The period April through December represents eight months of ATSC remittances. Air carriers are required to remit ATSC amounts at the end of the month following the month when the charge is collected.[Return]

³ On January 22, 2003, the Department of Finance released two reports undertaken by independent consultants. Sypher:Mueller International Inc. reported on low-cost and regional air carriers while Dr. David Gillen of Wilfrid Laurier University reported on air travel demand elasticities. The two studies are available on the Department of Finance Web site at www.fin.gc.ca.[Return]

⁴ The new level of $7/$14 represents the total cost of the charge for air travel within Canada and includes, where applicable, the GST or the federal portion of the HST.[Return]

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