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Annex 5
The Air Travellers Security Charge

Introduction

In the December 2001 budget, 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 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. The enhanced air travel security system benefits principally and directly travellers who use the Canadian air transportation system. In these circumstances, a user charge is fair and fiscally responsible.

At the time the ATSC was announced, the Government indicated that it would review the charge over time to ensure that revenue remains in line with planned expenditures for the enhanced air travel security system through 2006–07.

Following up on this commitment, in Budget 2003 the Government reduced the charge on round-trip domestic air travel to $14 from $24—a reduction of more than 40 per cent.

Based on updated revenue and expenditure projections, this budget proposes, effective for tickets purchased on or after April 1, 2004, the following adjustments to the charge: for air travel within Canada, to $6 from $7 for one-way travel and to $12 from $14 for round-trip travel; to $10 from $12 for transborder air travel; and to $20 from $24 for other international air travel.

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. Currently, for air travel within Canada the total cost of the charge is $7 per emplanement, to a maximum of $14 per ticket. For transborder air travel to the continental United States, the charge is $12, while for other international air travel the charge is $24. 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 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 non listed airports is not subject to the charge. Similarly, direct travel between listed and non-listed airports is not subject to the charge.

Revenue From the Charge

Remittances

ATSC remittances are reported in The Fiscal Monitor, which is published each month by the Department of Finance. The ATSC amounts that are reported each month in The Fiscal Monitor are the cash amounts remitted by air carriers in accordance with the legislative and administrative provisions of the charge.

• ATSC remittances reported in The Fiscal Monitor for the period April 1, 2002 to March 31, 2003 were $379 million. In addition, associated GST/HST amounts for this period are estimated at $9 million.

• For the period April 1, 2003 to January 31, 2004 ATSC remittances reported in The Fiscal Monitor are $335 million. In addition, associated GST/HST amounts are estimated at $7 million for this period.

It should be noted that the ATSC remittances reported in The Fiscal Monitor for any given month will generally pertain to tickets sold during the previous month. For example, where an air carrier sells tickets during the month of April, the air carrier must report and remit the ATSC amounts no later than the end of May—these remittances are then reported in The Fiscal Monitor for May. This means that the reporting of remittances lags by one month the actual sales by air carriers that generate ATSC revenues.

Accrual Accounting

With the Government’s decision to adopt full accrual accounting in Budget 2003, revenue is now accounted for in the period to which it relates, and not necessarily the period when it is remitted by taxpayers. This means that ATSC revenue for fiscal year 2002–03 ending March 31, 2003, should include tickets sold by air carriers up to March 31, 2003, i.e. ATSC amounts remitted by air carriers by April 30, 2003.

It is on this basis that the Public Accounts of Canada tabled in the House of Commons on November 4, 2003, report ATSC revenue of $421 million for fiscal year 2002–03. With the associated GST/HST amounts, total revenue from the charge is $430 million. The implementation of full accrual accounting is explained in greater detail in Annex 6 of The Budget Plan 2003.

Outlook for Air Passenger Traffic

In December 2003 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 A5.1. These figures represent the expected aggregate growth in air passenger traffic for domestic, transborder and other international air travel.

Table A5.1
Air Passenger Traffic Growth in Canada

The key differences between the updated forecast and the projections in Budget 2003 may be summarized as follows.

• Air passenger traffic in 2002 has been revised upward by 1.7 per cent to reflect the stronger-than-anticipated recovery of air passenger traffic in 2002.

• The estimation of air passenger traffic in 2003 has been reduced by 6.4 per cent, reflecting the impact on the demand for air travel of severe acute respiratory syndrome (SARS) and the conflict in Iraq.

• The growth rates for air passenger traffic in 2004 through 2006 are modestly higher than forecast last year, reflecting an anticipated recovery from the events of 2003.

The net effect of the revised forecast from Transport Canada is to modestly reduce the total number of passengers over the period from 2002 through 2006. This reduction is roughly 2 per cent and is based on Transport Canada’s assessment that SARS and the conflict in Iraq will have mainly a short-term effect on the demand for air travel.

Updated Revenue Forecast

As noted on the preceding page, total ATSC revenue for fiscal year 2002–03 is $430 million. Based on recent remittances, total ATSC revenue for fiscal year 2003–04 is forecast to be $400 million. Applying Transport Canada’s updated forecast for growth in air passenger traffic to this base of $400 million results in the updated revenue forecast set out in Table A5.2.

Table A5.2
Revenues From the ATSC

The forecast for total revenue of $2.160 billion through 2006–07 is $140 million higher than the $2.020 billion that was forecast following the reduction of the charge in Budget 2003, indicating a stronger revenue-generating capacity for the charge than was estimated last year.

The revenue forecast in Budget 2003 was based on only eight months of ATSC collections data, including transitional months. Since that time revenue projections have been revised to reflect ATSC collections through October 2003, as well as additional technical refinements with respect to data and methodology.

As shown in Table A5.2, revenues for each of 2002–03 and 2003–04 are $25 million greater than forecast in Budget 2003. This $25-million annual amount has been projected forward for fiscal years 2004–05 through 2006–07, increasing with forecast growth in air passenger traffic. On this basis, a total of $140 million from the revenue forecast is available to reduce the level of the charge.

Expenditures for the Enhanced Air Travel Security System

The Government’s new approach to air travel security provided additional funding to strengthen capacity to set regulations, review standards and monitor and inspect all air security services. On April 1, 2002, CATSA assumed responsibility for 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 reporting to Parliament through the Minister of Transport.

In Budget 2001 planned expenditures for the enhanced air travel security system were established at $2.189 billion. In Budget 2003 this amount was revised to reflect two amounts. First, $18 million was deducted in respect of funds not used by Transport Canada and the RCMP in fiscal year 2001–02. Second, $175 million was deducted further to the Government’s decision to adopt full accrual accounting. Under full accrual accounting, capital expenditures are amortized over their useful economic life rather than expensed in the year of acquisition. On this basis, the charge was set at a level to reflect the average annual depreciation amount associated with the steady-state operation of the air travel security system. As a result of these changes, the total amount of expenditures to be recovered by the charge through 2006–07 was reduced to $1.996 billion.

As concerns expenditures for air travel security in fiscal year 2002–03, CATSA has indicated in its annual report for 2002–03 a lapse of operating funds of $39 million, thereby reducing planned expenditures through 2006–07. While some re-profiling of capital expenditures among fiscal years has occured, this does not have a material effect on costs to be recovered over the five-year period. Therefore, an amount of $39 million is available from the expenditure projection to reduce the level of the charge.

Scope for Reducing the Charge

On the basis of the revenue and expenditure adjustments noted above, the total amount available through 2006–07 to reduce the level of the charge is $203 million, as set out in Table A5.3.

Table A5.3
Adjustments Through 2006–07
Recovery of Costs for the Enhanced Air Travel Security System

The $203 million available to reduce the level of the charge is the difference between projected revenue of $2.160 billion and projected expenditures of $1.957 billion—consistent with the commitment in Budget 2001 to balance revenue and expenditures through 2006–07.

Reducing the Air Travellers Security Charge

The $203 million available to reduce the level of the charge allows for a reduction in the range of 15 per cent across the three categories of air travel—domestic, transborder and other international.

The level of the charge for air travel within Canada will be reduced to $12 from $14 for round-trip travel and to $6 from $7 for one-way travel. The level of the charge for transborder air travel will be reduced to $10 from $12 and for other international air travel the rate will be reduced to $20 from $24. The new rates are set out in Table A5.4.

Table A5.4
ATSC Rate Structure

The new rates preserve the simplicity of the charge, facilitating compliance and administration, and allow for the reduction to be implemented quickly and with minimal disruption. The Government proposes that the new rates apply to tickets purchased on or after April1, 2004, as set out in the attached Notice of Ways and Means Motion.

Looking Forward

Budget 2001 presented a five-year framework through 2006–07 for balancing ATSC revenue and expenditures for the enhanced air travel security system.

Since that time the Government has followed up on its commitment to review the charge over time to ensure that revenue remains in line with planned expenditures. Revenue estimates have been updated to incorporate recent ATSC collections data and a revised Transport Canada forecast for air passenger traffic. Planned expenditures have been adjusted to reflect actual expenditures to date as well as the impact of full accrual accounting on the steady-state operation of the mature air travel security system. On this basis, the level of the charge has been established at rates that provide for a balancing of revenue and expenditures through 2006–07.

The new rates also provide for a balancing of revenue and expenditures over the longer term. The charge is expected to generate a level of revenue—some $390 million in 2006–07—roughly equivalent to the expected steady-state cost of the mature air travel security system. Having established this basis for the longer term, it is appropriate that revenue and expenditures be considered on the basis of a rolling five-year timeframe, so as to ensure an appropriate planning horizon for the ATSC and the enhanced air travel security system. Accordingly, future reviews of the ATSC will be conducted on the basis of a rolling five-year period.

Further, as part of its commitment to review the charge over time, the Government has requested that the Auditor General of Canada perform an audit of revenue from the charge and expenditures for the enhanced air travel security system. The presentation of audited financial information will help to ensure transparency and accountability. The report from the Auditor General will be released upon completion of the audit process and, in the first instance, will cover the period to March 31, 2003.

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 if an air transportation service is acquired in Canada, the amount of the Air Travellers Security Charge in respect of the service be reduced to:

(a) $5.61 for each chargeable emplanement included in the service, to a maximum of $11.22, if the service does not include transportation to a destination outside Canada and if tax under subsection 165(1) of the Excise Tax Act is required to be paid in respect of the service;

(b) $6.00 for each chargeable emplanement included in the service, to a maximum of $12.00, if the service does not include transportation to a destination outside Canada and if tax under subsection 165(1) of the Excise Tax Act is not required to be paid in respect of the service;

(c) $9.35 for each chargeable emplanement included in the service, to a maximum of $18.69, if the service includes transportation to a destination outside Canada and does not include transportation to a destination outside the continental zone and if tax under subsection 165(1) of the Excise Tax Act is required to be paid in respect of the service;

(d) $10.00 for each chargeable emplanement included in the service, to a maximum of $20.00, if the service includes transportation to a destination outside Canada and does not include transportation to a destination outside the continental zone and if tax under subsection 165(1) of the Excise Tax Act is not required to be paid in respect of the service;

(e) $20.00, if the service includes transportation to a destination outside the continental zone.

(2) That if an air transportation service is acquired outside Canada, the amount of the Air Travellers Security Charge in respect of the service be reduced to :

(a) $9.35 for each chargeable emplanement by an individual on an aircraft used to transport the individual to a destination outside Canada but within the continental zone, to a maximum of $18.69, if the service does not include transportation to a destination outside the continental zone and if tax under subsection 165(1) of the Excise Tax Act is required to be paid in respect of the service;

(b) $10.00 for each chargeable emplanement by an individual on an aircraft used to transport the individual to a destination outside Canada but within the continental zone, to a maximum of $20.00, if the service does not include transportation to a destination outside the continental zone and if tax under subsection 165(1) of the Excise Tax Act is not required to be paid in respect of the service;

(c) $20.00, if the service includes transportation to a destination outside the continental zone.

(3) That any enactment founded on paragraph (1) or (2) apply to air transportation services that include a chargeable emplanement on or after April 1, 2004 and for which consideration is paid or becomes payable on or after that date.

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