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The update from the Globe <www.globeandmail.com>

"Provinces may be asked to reimburse Ottawa, PM hints

By HEATHER SCOFFIELD, RICHARD MACKIE and KRISTA FOSS
From Thursday's Globe and Mail

Prime Minister Jean Chrétien hinted Wednesday that four provinces may be asked to pay back the $3.3-billion that the federal government mistakenly handed out to them during the 1990s.

Any demand for repayment is bound to start a vicious fight with the provinces, especially Ontario, which would have to repay $2.8-billion of the total and has already vowed not to do so.

But if Ottawa forgives and forgets about the overpayments, provinces that did not receive any extra money, notably Quebec, would no doubt be equally outraged over what amounts to a $2.8-billion subsidy to Ontario.

The Prime Minister pointed out Wednesday that accounting errors are usually corrected at year-end, with the recipient of the extra money paying it back.

"Usually adjustments are needed in circumstances like that every year. For many years, because of the reports we have been receiving on income tax levels and so on, we have to make further payments to the provinces. In other circumstances they have to make payments to the Canadian government," Mr. Chrétien said in Question Period.

However, Liberal ministers said the government was still studying the problem and had not come to a final conclusion.

"When we have (the) facts, we will make the decisions that are required. We will do so in conjunction with discussions with the provinces," Finance Minister Paul Martin told opposition critics, who called the error a "boondoggle" that shows the government to be "incompetent."

Revenue Minister Elinor Caplan owned up on Tuesday to the $3.3-billion mistake, which was discovered by officials in her department after a seven-month investigation. The final amount will likely be much more than that because the accounting error goes back 30 years, and the $3.3-billion figure accounts for only the mistakes made from 1993 to 1999. It does not include at least $300-million made in extra equalization payments to the poorer provinces as a result of the accounting error.

The federal Auditor General will be working with her provincial counterparts and government accountants for at least the next couple of months to determine the full cost of the error. Only then will Ottawa decide whether to demand repayment, and how.

More is at stake than just maintaining Ottawa's relationship with Ontario and Quebec. Ontario is also threatening to pull out of the Tax Collection Agreement with the federal government, and Ontario Finance Minister Jim Flaherty said Wednesday he is in discussions with other provinces to pull out too.

"If they continue to insist on (repayment), yes, I would conduct a separate tax collection process on behalf of the province of Ontario. We might join with Quebec. We might join with other provinces. And we've had discussions about that already," Mr. Flaherty told reporters after a speech in Ottawa.

Ottawa wants to continue collecting provincial tax on behalf of the provinces to make sure that all have the same definition of taxable income. (Quebec collects its own taxes, but abides by the federal definition of taxable income.) Otherwise, Ottawa fears some provinces would market themselves as tax-free zones to the detriment of other provinces.

Surprisingly, Nova Scotia does not want Ottawa to demand repayment for the error. That's because the provincial government there benefited from slightly higher equalization payments stemming from the error, and can't afford to have that money clawed back, said Rob Batherson, spokesman for Premier John Hamm."

Lionel