In Canada, the federal government makes equalization payments to provincial governments of lesser fiscal capacity so that "reasonably comparable" levels of public services can be provided at similar levels of taxation. Equalization payments are entrenched in the Constitution Act of 1982, subsection 36(2).
The program is financed through the federal government's general revenues, which are largely sourced from federal taxes. In strict terms, provincial governments make no contributions. However, the provinces have ceded their legal exclusive right under the Constitution to certain fields of direct taxation (e.g. income tax), in whole or in part, to the federal government which provides the funding for equalization.
Payment amounts are decided relative to a province's estimated fiscal capacity, or 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".
The equalization program is one significant example of transfer payments from the federal to the provincial governments. The Canada Health Transfer (CHT) and the Canada Social Transfer (CST) are also notably large transfer programs. The federal government spends hundreds of billions of dollars across Canada to deliver programs and services; of the $480.5 budgeted for federal expenditures (exclusive of public debt charges) in 2024–25, major federal transfers to all provinces and territories totalled $99.4 billion, including $25.3 billion in equalization payments to seven provinces.
The territories are not included in the equalization program. Federal funding for them is instead provided through the Territorial Formula Financing (TFF) program.
History Predecessors A mechanism for the Canadian federal government to provide funds through transfer payments to the provinces has existed since Canadian Confederation, and was first enshrined in the Constitution Act, 1867 Section 119 as a mechanism for the new federal government to provide further grants to the province of New Brunswick. The Constitution itself enshrines the federal government with significantly greater taxation authorities in Section 91, which is "The raising of Money by any Mode or System of Taxation", while the legislatures of the provinces are limited to "Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes".
Current system (1957) 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).
Extension of the tax base (1962–1967) In 1962, 50% of natural resource revenues were included as a 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 the world's most generous system of equalization payments.
Growing imbalances caused by energy prices (1970s) 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.This was achieved by specifying that any province with income per capita above national average was to be disqualified to receive equalization payments. Multiple changes were made to the Equalization program in the late 1970s and early 1980s: In 1974, the revenues levied by local governments for school taxes were brought into the fiscal capacity calculation; In 1975, of the windfall revenuesThis was defined as all revenues related to oil and gas in excess of 1973-74 levels. caused by the 1973 oil crisis were excluded from the calculation; In 1977 local taxes were fully included in the tax base calculation; The concept of windfall revenues was dropped in 1978 and replaced by a inclusion factor for all revenues of non-renewable resources; In 1982, the equalization standard was shifted from the national average to the average of five representative provinces (British Columbia, Saskatchewan, Manitoba, Ontario, and Quebec).
Inclusion of the program in the Constitution (1982) The Canada Act 1982, which amended the constitution, included the rights of the poorer provinces to equalization payments by including the following provision:
With this level of protection, equalization payments cannot "suddenly be axed".
From 1983–84 to 2014, about 22 per cent of the federal government's spending went towards transfers to provincial and territorial governments.
Tentatives of reforms (2000s) 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 March 2005, during the brief premiership of Paul Martin, Finance Minister Ralph Goodale established an expert panel, chaired by Al O'Brien—a former Government of Alberta deputy minister—to produce a report to review Canada's Equalization program and Territorial Formula Financing (TFF). The comprehensive report by the Expert Panel on Equalization and Territorial Formula Financing, was tabled in 2006.
Following the 2006 Canadian federal election, the newly elected Conservative Party led by Stephen Harper committed to a "renewed and strengthened Equalization program", as outlined in the 2006 Canadian federal budget entitled, "Restoring Fiscal Balance in Canada". Based on the Al O'Brien 2006 Expert Panel on Equalization and Territorial Formula Financing report, then Minister of Finance, Jim Flaherty reinstated the formula-driven calculations in the Equalization program and moved it 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. In 2009, the fiscal capacity cap was modified and a ceiling and floor on aggregate payments were added.
Institution and cancellation of the TTP guarantee (2009–2014) In 2009, under then-Prime Minister Stephen Harper, Finance Canada created the Total Transfer Protection (TTP). The TTP was intended to be a temporary policy which would support provinces and territories "in transitioning through current economic challenges". The TTP ensured that if a province experienced a total reduction in federal transfers from equalization payments, combined with Canada Health Transfer (CHT), the Canada Social Transfer (CST), the federal government would cover the loss. In 2010–11, the federal government, under then-Prime Minister Stephen Harper, confirmed that every province would be guaranteed that their transfer would not be less than the previous fiscal year in combined CHT, CST, equalization and Territorial Formula Financing (TFF).The June 19, 2014 Parliamentary Budget Officer (PBO) report was produced at" the request of a parliamentarian" with a mandate to analyze "provincial and territorial entitlements with respect to the Canada Health Transfer, the Canada Social Transfer, Equalization and Territorial Formula Financing and Total Transfer Protection for the fiscal year 2014–15, comparing them with 2013–14 levels" with a specific focus on the Equalization program. Under Harper's TTP plan, from 2010 through 2013, seven provinces, including the four Atlantic provinces, Manitoba, Saskatchewan, and Quebec received a combined total of over $2.2-billion through the TTP program.
Ottawa cancelled the TTP program in 2014, a decision said to be directed at pressuring Ontario's then-incumbent Liberals by depriving them of $640 million.
In 2017–2018, the total amount of the Equalization program was roughly 18.3 billion Canadian dollars.
2019–2024 Arrangements In the February 27, 2018, budget, the federal finance department proposed a five-year renewal of the previous equalization and Territorial Formula Financing (TFF)—with changes related to the territories—beginning April 1, 2019, until 2024. The Budget Implementation Act received royal assent on June 20, 2018. The governments 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.
According to the Parliamentary Budget Officer (PBO) September 3, 2020, report, in 2018–2019 total federal transfers—which included $38.6 billion through the Canada Health Transfer (CHT), $14.2 billion through the Canada Social Transfer (CST), and $19.0 billion through the Equalization transfer—had increased over the ten-year period from $47.1 billion in 2008–2009 to $71.7 billion, which represents an average annual increase of 4.3 per cent with an inflation adjustment of 2.7 per cent a year.
Equalization formula 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 that generate more tax revenue per person than the national average, while have-not provinces have revenue per person below the national average.
The individual revenue sources are grouped into five categories: personal income taxes, business income taxes, consumption taxes, up to 50 percent of natural resource revenue, and 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).