Ottawa, March 29, 2012

Backgrounder: Withdrawing the Penny from Circulation

1. Introduction

The Government of Canada has announced its intention to withdraw the Canadian penny from circulation due to its low purchasing power, its rising cost of production relative to face value, the increased accumulation of pennies by Canadians in their households, environmental considerations, and the significant handling costs the penny imposes on retailers, financial institutions, and the economy more generally. The penny will retain its value indefinitely and can continue to be used in payments. However, as pennies are gradually withdrawn from circulation, price rounding on cash transactions will be required. In removing its lowest-denomination coin, Canada will follow on the successful experiences of many other countries.

2. Why Withdraw the Penny?

Due to inflation, the penny's purchasing power has eroded over the years. Today it retains only about one-twentieth of its original purchasing power. Given its declining purchasing value, some Canadians consider the penny more of a nuisance than a useful coin. We often store them in jars, throw them away in water fountains, or refuse them as change. Retailers often provide a "take a penny, leave a penny" dish or a charitable collection box at the cash register to reduce the handling of pennies. Financial institutions face increasing costs for handling, storing and transporting pennies. Over time, the penny's burden to the economy has grown relative to its value as a means of payment.   

In 2010, the Senate Committee on National Finance undertook a broad consultation on the penny. In its final report, The Costs and Benefits of Canada's One-Cent Coin to Canadian Taxpayers and the Overall Canadian Economy, the Committee recommended the removal of the penny and the introduction of a voluntary rounding regime.

Savings to Taxpayers with the Withdrawal of the Penny

The Government uses taxpayers' money to pay for the costs of producing and distributing circulation coinage. Generally, the Government earns more from the sale of coins at face value than it pays to the Mint for their production. In 2010–11, the Government paid the Mint $120 million for coins and earned $131 million on the subsequent sale of these coins to financial institutions at face value. 

However, in contrast to other coin denominations, the Government loses money on every new penny produced by the Mint. The cost to produce a new penny exceeds its face value by about 0.6 cents, so the estimated cost to the Government of supplying pennies to the economy is about $11 million per year.

Withdrawing pennies from circulation is expected to increase slightly the demand for higher-denomination coins such as the nickel, dime and quarter. While such a shift in demand is difficult to estimate, this would increase net coinage revenues as these coins are worth more than they cost to produce.

Other Economic Impacts

Withdrawing the penny will bring economic and financial savings to financial institutions, retailers and consumers. A private sector study estimated that the economic costs of maintaining the penny, including direct production costs and indirect costs to financial institutions, retailers and consumers, amounted to $150 million in 2006.^[1]

Environmental Benefits

Over the past five years, some 7,000 tonnes of pennies were produced and distributed annually from the Mint's plant in Winnipeg to the rest of the country. 

Ceasing production of the penny and withdrawing existing pennies from circulation will have significant environmental benefits. First, it will reduce the annual use of base metals by the Mint in the production process. Second, metals from existing pennies will be recycled for use in other products. Finally, ceasing the production of pennies will save energy that is currently used in the production, transportation and distribution of pennies.

3. Impact on Canadians

What It Will Mean for Consumers

Canadians will be able to easily adapt to the elimination of the penny.

Pennies that are still in circulation or are held by Canadians will retain their value, and consumers can continue to use them indefinitely to make payments. Canadians can also redeem rolled pennies at their financial institutions. Canadians who have saved a substantial amount of pennies over the years can also consider donating these to charities. 

The cent will remain the basic unit for all payments. Price rounding will only affect cash transactions (i.e., using coins and bank notes). Non-cash payments such as cheques, credit and debit cards will continue to be settled to the cent.

Price rounding will only be used for cash transactions after the calculation of the GST/HST. There should be no net gains or losses for either consumers or retailers. A 2005 Bank of Canada study^[2] concluded that the inflationary effect of eliminating the penny would be small or non-existent.  

What It Will Mean for Businesses

As the penny will continue to remain the basic unit in the Canadian currency system, retailers and other businesses can continue to price goods and services in one-cent increments and there will be no need to reprogram cash registers.

When settling transactions in cash where pennies are not available, businesses are expected to round prices in a fair, consistent, and transparent manner. 

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The calculation of the GST or HST on purchases, whether for cash or non-cash transactions, will continue to be calculated to the penny and added to the price. It is only the total cash payment for the transaction that will be rounded. If businesses round cash transactions to the nearest five-cent increment, any gains or losses relating to cash transactions (a maximum of two cents per transaction) will balance out over time.

[Text Version]

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What It Will Mean for Financial Institutions

Given the large volume and weight of pennies, the handling, storage and transportation of these coins are costly for financial institutions. The Desjardins Group estimated that in 2006 Canadian financial institutions together handled more than nine billion pennies per year, which translated into an annual cost of at least $20 million.^[3] Following the elimination of the penny, they will realize significant cost savings in no longer handling pennies. 

How Charitable Organizations Can Benefit

The redemption of pennies presents a fundraising opportunity for charities. As noted in the Desjardins Group study, Canadians could be hoarding several billion pennies, along with other coins. 

Experience elsewhere has shown that charities can benefit by getting involved in the process of withdrawing low-denomination coins from circulation. In New Zealand, when the five-cent coin was removed from circulation, non-profit organizations ran successful fundraising campaigns. During the changeover to the euro in 2002, charities in many eurozone countries successfully encouraged people to donate their local-currency coins.

The Government of Canada and the Mint will work in collaboration with Imagine Canada to reach out to institutions and charitable organizations who may wish to organize fundraising activities around the elimination of the penny.

4. Experience of Other Countries

Many countries have removed their lowest-denomination coins from circulation as they became less used for transactions and more costly to produce (see Box 4). For example, New Zealand stopped issuing its one-cent and two-cent coins in 1989. After the production ceased, while some retailers chose the symmetric rounding system, some larger retail chains opted to consistently round down the final price on cash transactions. 

Overall, New Zealand's removal of one-cent and two-cent coins was very successful. Consistent with a recent Bank of Canada study,^[4] there was no noticeable effect on inflation and it was widely accepted by the public. Charities benefited from the withdrawal of the coins. 

5. Public Comment

The Government welcomes public comment.

Public comments should be e-mailed to 1cent@fin.gc.ca, or mailed to the address below by May 31, 2012. In your submission, please provide:

• Your full name.
• The name of the organization for which you speak, if applicable.
• Your full mailing address, including postal code.
• Your telephone number, including area code.
• Your e-mail address and fax number, if applicable.

You should indicate by which method you would prefer to be contacted and also state whether any communication with you should be in French or English.

Please address your comments to:

Department of Finance
L'Esplanade Laurier
20th Floor, East Tower
140 O'Connor Street
Ottawa, Ontario
Canada
K1A 0G5

^[1] Id. at 2.

^[2] Id. at 1.

^[3] Aubry, J.-P., F. Dupuis, and H. Vachon 2008. "100th Anniversary of the Canadian Penny," Desjardins Economic Studies, April 9, 2008.

^[4] Lauer, B., K. McPhail, and M. Urwin. 2005. "Would Elimination of the Penny be Inflationary?" Bank of Canada