Equalization payments in Canada
In Canada, the federal government makes equalization payments to provincial governments to help address fiscal disparities among Canadian provinces based on estimates of provinces' "fiscal capacity"—their ability to generate tax revenues. A province that does not receive equalization payments is often referred to as a "have province", while one that does is called a "have not province". In 2018–19, six provinces will receive $18.958 billion in equalization payments from the federal government.
Equalization payments are one example of what are often collectively referred to in Canada as "transfer payments", a term used in other jurisdictions to refer to cash payments to individuals (see Canadian transfer payments). The purpose of equalization payments is to enable the "have not" provinces to provide public services which are reasonably comparable to those in other provinces, at similar levels of taxation. The money the provinces receive through equalization can be spent in any way the provincial government desires and often help guarantee a standard level of health care, education, and welfare in all the provinces. The definition of "reasonably comparable levels", however, has been the subject of considerable debate.
The basics of equalization payments have been around since Canadian confederation when the federal government had most of the taxation powers. The federal government would make transfer payments to the provinces to cover their needs. There was no obligation that these transfer payments had to reflect the amount collected in each province and thus wealth was always redistributed. Equalization payments happen via the federal treasury.
A formal system of equalization payments was first introduced in 1957. The idea was based on the proposals of American economist James M. Buchanan and they were introduced mainly to help the struggling Atlantic provinces who were seeing low rates of growth and high rate of emigration to central Canada.
The original program had the goal of giving each province the same per capita revenue as the two wealthiest provinces, Ontario and British Columbia, in three tax bases: personal income taxes, corporate income taxes and succession duties (inheritance taxes). Five years later, 50 per cent of natural resource revenues were included as the fourth tax base. At the same time, however, the standard of the two wealthiest provinces was lowered to the national average. In 1967 the system was redesigned to work with every government revenue scheme with the exception of energy; this gave Canada by far the world's most generous system of equalization payments.
The rise in energy prices and the resulting increase in provincial natural resource royalties in the late 1970s created several problems for the equalization formula. The need for amendments to the formula became clear when the traditional "have" province of Ontario qualified for equalization payments in 1978. This result went against the spirit of the system and would have led to substantial costs for the federal government; it was agreed that Ontario should be excluded from receiving payments. In 1982, the equalization standard was shifted from the national average to the average of the five "representative" provinces: British Columbia, Saskatchewan, Manitoba, Ontario, and Quebec.
The Canada Act 1982, which amended the constitution, included the rights of the poorer provinces to equalization payments. Subsection 36(2) of the Constitution Act, 1982 states that "Parliament and the government of Canada are committed to the principle of making Equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation."
In 2004, the federal government and the provinces agreed to suspend the traditional formula that determined payment amounts and move to fixed funding levels, which were scheduled to grow at a fixed rate - regardless of the economic performance of the provinces.
In 2007, based on the recommendations of a federal expert panel, the program was returned to formula-driven calculations and enhanced by moving to a standard based on the national average. A fiscal capacity cap was added to ensure that Equalization-receiving provinces couldn't be raised to a fiscal capacity above that of a non-receiving province (this could potentially arise due to the partial or non-inclusion of resource revenues). This faced criticism from Premier of Newfoundland and Labrador Danny Williams who criticized the Conservative government of breaking their promise of not changing the current formula. This led to the Anything But Conservative movement. Also in the same year, Shawn Graham, Premier of New Brunswick pledged to make the province self-sufficient, that is to no longer depend on federal equalization payments, by 2026. In 2009, the fiscal capacity cap was modified and a ceiling and floor on aggregate payments were added.
On June 21, 2018, The Globe and Mail reported that Government of Canada will keep the current formula, until 2024. The Government of Alberta and Saskatchewan criticized the decision because they believed that there was no real consultation, discussion, or renegotiation on the formula. Under the renewed plan, the federal government will gradually increase the amount of equalization payments to the provinces from $18.3 billion in 2017-2018 to $22.1 billion by 2022-2023.
The fiscal capacity of provinces is measured using a representative tax system, a basic model of provincial and municipal tax systems, covering virtually all own source revenues. It is made up of estimates of provincial tax bases, actual provincial revenues and population. By using the same tax base definition across all provinces the representative tax system can be used to compare the ability of individual provinces to raise revenues. "Have provinces" are those able to generate more tax revenue per person then the national average, while have not provinces would have revenue per person below the national average.
The individual revenue sources are grouped into five categories. Those revenue categories are:
- Personal income taxes
- Business income taxes
- Consumption taxes
- Up to 50 percent of natural resource revenue (see below)
- Property taxes and miscellaneous
Each revenue category has a separate tax base. Each province is allocated an "Equalization entitlement" equal to the amount by which its fiscal capacity is below the average fiscal capacity of all provinces. This is known as the "10 province standard". Provinces who have a fiscal capacity above the 10 province standard are known as the "have" provinces while those below are the "have not" provinces. Equalization payments are then determined based on the provinces' relation to this average. The payments are typically adjusted to ensure fairness between the provinces and are designed to provide a net fiscal benefit to receiving provinces from their resources equivalent to half of their per capita resource revenues. Equalization payments are further adjusted to ensure the program aligns with the overall growth of the Canadian economy (based on a three-year moving average of GDP).
Note: According to the Department of Finance, "provinces get the greater of the amount they would receive by fully excluding natural resource revenues, or by excluding 50% of natural resource revenues."
Quebec will receive the most from equalization payments in the 2019-2020 year. However, per capita, Quebec will receive the least and PEI benefits the most.
Below are Equalization Payments from 2015-16 to 2019–20:
|Prince Edward Island||419||419||390||380||361|
Source: Department of Finance
The following "have provinces" will not qualify for equalization payments in 2019–20:
- British Columbia
- Newfoundland and Labrador
Importance of Equalization to Provincial Finances
As shown in Table B, Equalization payments can represent a major source of revenue for "have not" provinces ranging from roughly 20% of revenue in PEI to 1% to 2% in Ontario. As this table includes all provincial revenue, including Equalization and other fiscal transfers from the federal government, it represents the importance of equalization to provinces' fiscal bottom-lines. However, it is important to keep in mind that Equalization is funded by taxpayers in all provinces. The total of roughly 4.5% represents the importance of Equalization relative to all provinces' revenue, i.e., the cost of equalization relative to total provincial revenue. For example, even though Ontario received equalization in the years covered in the Table B, it represented a net cost to the provinces. In effect, the 4.5% total can be interpreted as representing the burden of Equalization relative to total provincial revenue. As such, the net impact of equalization in each provinces is equal to that provinces % less the total % as shown in Table B. Using PEI as an example, on a net basis, in 2017-18 equalization represents 16.2% of total provincial revenue. In Alberta, the burden of equalization was 4.4% of total provincial revenue in 2017-18.
|Prince Edward Island||20.6||20.5||20.7|
Source: Calculated using Statistics Canada, Table 10-10-0017-01 and Equalization payments as reported in provincial public accounts. Total provincial revenue includes Equalization payments and other transfers from the Federal government. Total includes revenue from all provinces, both "have and have not" provinces.
Compared to Table B, Table C shows Equalization payments as a percentage of Provincial Revenue subject to equalization instead of total provincial revenue. As such it does not include Equalization or other federal transfers to provinces. Revenues subject to Equalization are in effect the vast majority of taxes levied by provinces and municipalities, often refereed to as own source revenues. One notable revenue source that is not equalized is user fees. Given the definition of provincial revenue used in Table C, the percentages show in the table take on a specific interpretation. Namely, they can be interpreted as how much additional tax revenue individual provinces would need to replace Equalization transfers. While this is not be probable or realistic for some provinces, Ontario will no longer receive Equalization in 2019-20 and Equalization payments ended in Newfoundland and Labrador in 2007-08. The objective of this exercise is to illustrate the importance of Equalization to provincial finances. For example, in 2019-20 PEI would have to increase its own source revenues by roughly 39.2 percent to offset Equalization transfers. Similar to Table B, the total of 5.7% can be interpreted as the cost of Equalization relative to provincial revenue subject to Equalization.
|Prince Edward Island||39.2||41.4|
Source: Calculation based on administrative data from the Department of Finance. Totals represent Equalization payments as a percentage of total provincial and municipal revenue subject to equalization.
Regional fiscal disparities in Canada
The ongoing gap between the "have" and "have not" provinces is an ongoing economic concern and cause of regional tensions. Much of the gap stems from huge differences in, geography, population, and economic activity among provinces. Any attempt to "equalize" these differences would be a daunting task, to say the least. As shown in the table below, PEI's population is less than 1% of the Canadian total, while Ontario's population is close to 40%. Alberta's GDP per capita is 41% higher than the national average while PEI's is roughly 24% lower, i.e., Alberta's economy is almost twice as rich as PEI's.
However, the stated goal of Equalization in Canada is not to equalize economies or ensure that economic outcomes are equal. As stated above, it is to "ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation". Per capita data is central to measuring if provincial outcomes are comparable.
Table D Economic Activity by Province
2007 CAD$, 2017)
(2007 CAD$, 2017)
|GDP per capita
|Average Total Income,
|Prince Edward Island||151,477||0.4||4,883||42,157||-23.9||33,632||-18.2|
|Newfoundland and Labrador||528,463||1.4||26,773||56,935||+2.8||35,345||-14.1|
Table E shows provincial own source tax revenue per capita, Equalization per capita and the sum of the two. Most notable is, except for Newfoundland, after Equalization is added to own source revenues, the "have not" provinces have higher per capita revenue than "have" provinces, . Before equalization PEI and New Brunswick have the lowest per capita revenue, however, after Equalization payments, Alberta and Saskatchewan have the lowest per capita revenues.
|Prince Edward Island||6,892||2,573||9,465|
|Newfoundland and Labrador||10,752||0||10,752|
Equalization payments have mostly been criticized by leaders and residents of the wealthier provinces. The premiers of the most prosperous provinces have criticized the drain on their finances.
Recent negotiations surrounding the renewal of the program have created considerable tension among provinces. Due to the zero-sum nature of the formula, increases in entitlements for some provinces necessarily lead to decreases for others.
Normally, under the equalization formula, equalization payments normally go down for every dollar increase in a province's ability to raise taxes. So, for example, if a province's economy booms and the provincial government's potential income tax revenues increase, equalization payments decrease. Economist Michael Smart has argued that this gives have-not provinces an incentive to raise taxes, because any harm higher taxes do to the economy is off-set by higher equalization payments.
Former Quebec Premier Bernard Landry was critical when Quebec was receiving an extra $1.5 billion in equalization payments calling it "degrading", and accused Ottawa for short-changing the province for decades by stating: "Receiving equalization payments for more than 40 years in a row is clear evidence that the central government failed in redistributing real wealth,".
The Coalition Avenir Québec has pointed out that since 2003, federal equalization payments to Quebec have tripled to more than $11 billion. The party's leader, François Legault, found it "shameful". Federal MP and People's Party of Canada leader Maxime Bernier has expressed similar statements on the issues during his political career  and that it subsidizes provinces with poor economic performance, leaving them into what he calls a "poverty trap".
Late January 2012, based on access to the uncensored version of a 2006 censored federal report by Peter Gusen, then director of federal-provincial relations at the finance department, entitled 'An Operational Expenditure Need Equalization Formula for Canada', the Toronto Star alleged that Ontario and BC were shortchanged in the equalization system because wages and cost-of-living expenses were never taken into account by Ottawa.
The originator of the idea, American economist James M. Buchanan, admitted that this idea had flaws and it had the long-term effect of creating a culture of dependence on the part of the citizenry, and their political leaders, in provinces with relatively low fiscal capacities.
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