Revenue Percentage Charge
Who Must Pay?
On November 30 2000 the Canadian Radio-television and Telecommunications Commission announced major changes to the Canadian telecommunications contribution regime, which governs the subsidization of local telephone services.
In a decision entitled Changes to the Contribution Regime, the commission eliminated the 'per-minute' contribution collection charge that has been levied on certain types of long-distance service. Replacing it is a national, revenue-based contribution system that will require telecommunications service providers (TSPs) to make contribution payments to a Central Funds Administrator based on a percentage of their annual telecommunications service revenues.
The new system took effect on January 1 2001 and will apply throughout Canada, with the exception of territories that are serviced by independent telephone companies (which will implement the new system in 2002) and Northwestel (which will implement the new system in 2003).
The national revenue percentage charge is determined by dividing the total annual subsidy requirements for all incumbent local exchange carriers (ILECs) by the total 'contribution-eligible' revenues for all companies that must make a contribution to the Central Funds Administrator.
The commission has established an interim 2001 revenue percentage charge of 4.5% on contribution-eligible revenues. The final revenue percentage charge for 2001 will be based on financial information from 2000 that was filed by all companies that are subject to the new system.
From 2002 the annual subsidy paid to ILECs for providing local residential telephone services in high-cost serving areas will be calculated according to the incremental (or 'Phase 2') costs of providing primary exchange residential service in those areas.
On April 27 2001 the commission issued Decision 2001-238, in which it redefined the service areas that are considered to be high cost in order to segregate them into separate bands, thus ensuring that subsidies are better directed to high-cost areas. In so doing, the commission approved a uniform definition of a 'high-cost area' across each of the ILEC territories.
Furthermore, through this reclassification, the number of lines that are considered to be high cost (and which require the subsidy) has been reduced. In its decision the commission indicated that the restructured bands (as well as the switch to using Phase 2 costs to calculate the subsidy requirement) will result in the revenue percentage charge being reduced to approximately 1.5% for 2002.
All TSPs (including ILECs, alternate providers of long-distance services, competitive local exchange carriers, resellers, wireless service providers, international licensees, satellite service providers, payphone providers, and data and private line service providers) must contribute based upon their total Canadian telecommunications service revenues minus certain deductions.
Canadian telecommunications service revenues are equal to the difference between total operating revenue and non-Canadian revenues, and Canadian non-telecommunications revenues. 'Contribution-eligible revenues' are defined as Canadian telecommunications service revenues less the following deductions:
- revenues from the provision of retail internet and paging services (unless a telecommunications service is provided by the service provider in question);
- revenues generated from the sale or rental of terminal equipment;
- inter-carrier expenses paid to other TSPs: expenses associated with the purchase of services from other TSPs (eg, Centrex, private line, settlement, switching and aggregation, transiting services and the costs of obtaining unbundled local loops) to the extent that the service is used to provide contribution-eligible telecommunications to third parties; and
- contribution revenues received.
In the event that a service provider wishes an additional service not to be contribution eligible, a request can be made to the Revenue Inclusion Working Group, an inter-industry working group of the CCM Implementation Coordination Committee (which is responsible for dealing with such requests and making recommendations to the commission).
With respect to bundled services (defined as any situation in which one rate is applied to a number of products or services that contain both contribution-eligible and non-contribution-eligible services), the commission has determined that the entire bundle should be treated as not being contribution eligible where less than 5% of its revenues are contribution eligible. Where the contribution-eligible revenues in a bundle comprise 5% or more of its revenues, the commission has set out 'unbundling' rules for eliminating those portions of the bundle that are not contribution eligible.
TSPs whose annual total Canadian telecommunications service revenues are below C$10 million (before deductions) for the fiscal year ending in the previous calendar year need not contribute to the fund. For related companies the minimum threshold applies to the combined revenues of all related companies in a company group.
The commission's contribution decision contains detailed yearly and monthly reporting requirements. By March 31 of every year all TSPs (including those below the minimum revenue threshold amount of C$10 million) must report their total operating revenues from the fiscal year ending in the previous calendar year, identifying allowable deductions. This information must be accompanied by financial statements and a compliance statement in the form of an external auditor's report (where applicable) or an affidavit signed by an officer of the company attesting to the accuracy of the information. Also, TSPs must provide a list of their subsidiaries, affiliates and related companies that had Canadian telecommunications service revenues in the previous fiscal year.
TSPs that meet the minimum revenue threshold of C$10 million of Canadian telecommunications service revenues in the previous fiscal year must report their monthly revenues to the Central Funds Administrator for the purposes of calculating the contributions payable for that month.
The commission has determined that contribution amounts will not be shown as a separate visible line item on customer invoices. However, the commission also decided to allow the ILECs to recover the transitional 4.5% revenue charge in 2001 through an adjustment to the service band limit that applies to some of their price-capped services (ie, 'residential local services' and 'other capped services') as well as to the overall price cap index applicable to each ILEC.
For further information on this topic please contact Kirsten R Embree, Lorne H Abugov or Monica Song at Osler, Hoskin & Harcourt LLP by telephone (+1 613 235 7234) or by fax (+1 613 235 2867) or by e-mail ([email protected], [email protected] or [email protected]).
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