In 1952, following the admission of Greece and Turkey to the North Atlantic Treaty Organization, it was agreed that the peacetime costs of all NATO civil and military agencies should be shared in accordance with the following formulae:

2. On May 8, 1952 the Cabinet agreed that Canada should contribute to the costs of the NATO civil and military agencies for the year 1952 in accordance with the above formulae and on October 15, 1952 and July 6, 1953 Cabinet agreed that, for the years 1953 and 1954 respectively, Canada should continue to contribute to the current and capital costs of NATO civil and military agencies in accordance with the formulae agreed to in 1952. These formulae have been used to determine cost-sharing to date.

3. This cost-sharing agreement has been considered unsatisfactory by Canada but it has been agreed to by Cabinet on the conditions that Canada's acceptance was without prejudice to a review of the agreement in the future, and that the Canadian share beyond a percentage representative of current capacity to pay would be paid from the Mutual Aid appropriation without a resultant increase in that appropriation. Under the formula for current costs, Canada's share has been almost half that of the United States'. This lack of balance was offset to some extent by the high United States contribution, relative to Canada's contribution, under the cost-sharing formula for capital expenditures. However, capital expenditures have been decreasing in the last few years.

4. This year, with Germany's admission into NATO, it has been necessary to reach agreement on a new formula. At the outset of these discussions on a new single formula for operational and capital costs, the United States Delegation proposed a formula under which the United States contribution would be 22.5 per cent with a Canadian contribution of 7.75 per cent. The United States Delegation, in support of this proposal, stressed that no one member should pay a preponderant share of the regular running expenses of the NATO headquarters. The U.S. Delegation also took the position that their new percentage contribution must be lower than their contribution to the total 1955 operational and capital budgets under the old formulae (i.e., 25.89 per cent).

5. The Canadian Delegation was instructed to attempt to achieve a cost-sharing formula whereby the total North American contribution would be divided between the United States and Canada on a 5/6-1/6 basis and the balance divided among the European members. However, the European members were not willing to join with the Canadian Delegation in insisting upon a higher percentage contribution for the United States and, while in general sympathy with our position, believed that a contribution from Canada of 4.50 per cent (i.e., one-fifth of 22.50 per cent) would result in too wide a disparity between the Canadian contribution and that of European members. As a compromise, the United States agreed to accept a contribution of 24.2 per cent and submitted a final proposal which envisaged a Canadian contribution of 5.8 per cent. This proposal, which was found to be generally acceptable in the North Atlantic Council, is as follows:

6. While, under the new single formula given above, the relationship between the Canadian and the United States contributions is not quite as favourable as it had been hoped to obtain, it is a definite improvement over the relationship under the present operational cost formula. The relationship of our contribution to the contributions of all other countries under the proposed new formula is quite satisfactory. Further, the Canadian contribution under the revised formula (5.8 per cent of the total or 6.9 per cent of the total excluding the German contribution) will be substantially lower than our average contribution to the total of operational and capital costs during the years 1951 to 1955 (8.32 per cent) or than our contribution in the year 1955 (9.50 per cent).

7. During the discussions on the cost-sharing formula, the United States offered, in order to gain support for its main proposal, to have the construction costs of the new NATO headquarters shared in accordance with the previous formula for capital costs, with Germany contributing on the basis of the same relative relationship to France as that established under the new formula. On this basis, the Canadian contribution to the costs of construction of the new headquarters building is 6.08 per cent compared to 6.70 per cent under the old cost-sharing formula for capital expenditures. On September 22, 1954 Cabinet agreed that Canada share with other NATO countries the cost of constructing the proposed new NATO permanent headquarters.

8. I recommend, with the concurrence of the Minister of National Defence, that the Canadian Representative to the North Atlantic Council be authorized to accept:

(1) a contribution to the costs of the civil and military agencies of NATO in accordance with the permanent single cost-sharing formula as given in paragraph 5 above;

(2) a contribution to the cost of construction of the new NATO permanent headquarters building amounting to 6.08 per cent.²³

L.B. PEARSON