Government Politics

Equalization Questions and Misconceptions

(If you are looking for information about federal transfers to a certain province, or federal expenditures vs revenues in the provinces, please go to either this post for information about all federal transfers to all the provinces, and this post for a closer look at federal revenues and expenditures by province. For some reason, Google always directs people to this post only, which doesn’t really address those issues in detail.)

Equalization is the Government of Canada’s transfer program for addressing fiscal disparities among provinces. Equalization payments enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation. Not every province receives equalization transfers. Six provinces will receive equalization payments in 2012-13: Prince Edward Island, Nova Scotia, New Brunswick, Quebec, Ontario and Manitoba. The provinces that don’t receive equalization are frequently referred to as the “have” provinces and those that do receive money under this program as the “have-not” provinces. There are also a number of misconceptions about the equalization program. Here I will address some of the most common.

1. Alberta pays for equalization

One of the common misconceptions is that equalization is entirely paid for by the so-called “have provinces”, notably Alberta. The keyword search activity on this blog regularly shows people searching for things such as “how much does each province pay for equalization”, “how much does province X contribute to equalization”, “province Y receives equalization money from province Z”, etc.  It isn’t uncommon to see comments on blogs or online media stories calling for Alberta to “pull out” the equalization program, or about how other provinces are spending the money they get from Alberta via transfer payments from that province. For example, on the Alberta Wild Rose Party website, we find the following:

Federal equalization and other wealth transfer programs were ostensibly intended to balance the quality of social programs across the country. Instead, what has happened is that the provinces benefiting most from these programs are now able to offer significantly more generous services to their citizens than the two or three provinces who are the actual net contributors (primarily Alberta and Ontario). It is no small irony that the biggest single beneficiary of such transfers, Quebec, provides cheap university tuition and inexpensive provincial day care, while Albertans pay high prices for, and have severe shortages of both in their own province. These annual wealth transfers also create the perverse incentive for ‘have-not’ provinces to retain fiscally irresponsible taxation and spending levels thereby remaining on the transfer dole in perpetuity.

Everything in that passage is simply incorrect (as will be explained in the rest of this post) and it is worrying that the party does not understand how equalization actually works. While some talk about money being transferred from one province to another, in fact, all the money for equalization comes from Canadian taxpayers across the country and is shared among the less wealthy provinces. Equalization is paid by the federal government to provincial governments and does not include any sharing of provincial revenues among provincial governments. Equalization funding is paid out from the federal government’s general revenues. The general revenues are the revenues the federal government collects from a wide variety of sources including: the federal personal income tax paid by all taxpayers in the country, the federal corporate income tax paid by all businesses in the country, GST revenue, revenue from customs and duties, resource revenue from federal sources, the federal portion of gasoline, alcohol and other taxes, etc. Provinces keep all the money they raise from resources and all their other tax bases. No provincial government funds go to support equalization. There is no special “equalization tax” or levy paid to the federal government by richer provinces such as Alberta, and even if the equalization program were cancelled tomorrow, this would not affect how much money the federal government collects from individuals and businesses in the forms of taxes, duties, etc. This can’t be stressed enough: no province “pays into equalization” – all individual taxpayers and businesses pay into the federal government’s general revenue fund, from which equalization is just one of many programs funded. So in answer to questions such as, how much money does Alberta transfer to Quebec or how much money does Alberta pay to equalization, the answer is simply “$0.00″. No province transfers any money to any other province. Individuals and corporations transfer money to the federal government.

In terms of federal government revenue collection by province, it is important to note that the federal government collects tax revenue in the provinces, not from the provinces. This distinction may appear subtle, but it has important implications. To say that the federal government collects taxes from provinces suggests either that the level of federal taxes people pay is related to their province of residence, or that the fiscal capacity of individual provincial governments is affected by how much federal tax is collected in their jurisdiction.

Neither of these statements is true, however. In fact, from the point of view of federal revenue collection, the very notion of “provinces” is irrelevant. Federal taxes do not differ by province; all Canadians pay federal tax at the same set of rates regardless of where they live.

Granted, Ottawa does collect more money in the form of personal and corporate incomes taxes, GST, etc. in provinces with larger populations and stronger economies than it does in provinces with smaller populations and weaker economies. I strongly encourage you to read this post for a closer look at federal revenues and expenditures by province in order to gain a better sense of what has been explained here, especially if you’re one of the many people who are looking for the answer to “Does Quebec pay more in federal tax than it receives in equalization?”

If you want to try to get a sense of how much tax revenue the federal government collects in each province from various sources (personal income, corporate, etc.), you can look at the various statistics available on the Canada Revenue Agency (CRA) website. Please note that the data is never current (e.g. data is available for tax years 2006-2009, depending on the tax source).

2. How much has a province (e.g. Ontario or Alberta) contributed to equalization?

Again, as explained above, provinces don’t directly contribute to the equalization program. By that I mean, no province sends a specific amount of money to Ottawa to be used ONLY for equalization. The equalization program is paid for out of the federal government’s general revenues, which are collected in (not from) each province, including those that end up receiving equalization. The general revenues are the revenues the federal government collects from a wide variety of sources including: the federal personal income tax paid by all taxpayers in the country, the federal corporate income tax paid by all businesses in the country, GST revenue, revenue from customs and duties, resource revenue from federal sources, the federal portion of gasoline, alcohol and other taxes, etc. The existence of the equalization program has no effect on how much money is transferred from individuals and businesses in any province to the federal government.

3. When did Alberta (or any other province) start contributing to equalization?

As the explained in the previous two answers, provinces do not contribute to equalization. It is a federal program, paid for by the federal government, from its general revenues. All taxpayers in the country contribute to the general revenues of the federal government when they pay their personal income tax, sales tax, duties, corporate income tax, etc. Therefore, taxpayers in every single province have been contributing funds used for equalization from the very day the program started. There aren’t separate start dates for individual provinces, because Ottawa does not collect tax income from provinces, but from individuals.

4. Provinces which receive equalization are simply lazy/spend too much/just need to develop a work ethic and pay off their debts, are mismanaged economically, etc.

Eligibility for equalization is based on a province falling below a national per-capita income standard based on revenue from five different tax sources. It is not based on how much a province spends, if it runs a deficit, or if it has budgetary surpluses. A province can consistently have a balanced budget, and budgetary surpluses, yet simply not be able to generate enough own-source revenue to meet the national standard for a multitude of reasons – smaller population, smaller tax base, lower average incomes, less corporate tax income, a downturn in international commodity prices for mineral resources, etc.

Even if a recipient province paid off its provincial debt, it is quite likely, under the current equalization scheme, that it would still qualify for equalization because it still would not raise enough own-source revenue from the five tax bases to meet the national standard. Prince Edward Island, for example, has a population of only 146,000. It is inconceivable that it will ever be able to generate enough own-source revenue from personal income tax, business income tax, consumption tax, property tax and natural resource revenues to meet a national standard based on provinces that have much larger populations and larger, more diversified economies such as Alberta, Ontario, British Columbia and Quebec. This has nothing to do with Islanders being lazy, not having work ethics, being “moochers” or not managing their provincial finances effectively. It is simply because they are a very small province and are thus limited in how much own-source revenue they can generate.

Similarly, the province of Ontario became eligible for equalization transfers for the first time in the province’s history in 2010-11. While the opposition parties in Ontario were quick to blame this situation on mismanagement by the governing Liberal Party, the real reason why Ontario now qualified for equalization was because the formula had changed to a true national standard, one which included all 10 provinces, and the inclusion of oil-rich Alberta into the calculation raised the national standard significantly. Under the old five-province formula, Ontario was the top-performing province. Other reasons explaining Ontario’s shift from “have” to “have-not” status included: booming commodity prices which benefited the resource-rich Western provinces, soaring energy prices and the soaring Canadian dollar, which both negatively impacted the manufacturing sector. These were all factors beyond the control of the Ontario government.

5. The recipient provinces could meet the national standard if they simply raised their taxes.

Again, as touched on above, this isn’t true. A small province such as Prince Edward Island simply doesn’t have the population to compete with a large province such as Ontario, or the resource base to compete with Alberta. And one of the key goals of the equalization program is to  enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation. Also, in a highly competitive global market, provinces can’t raise taxes too much without hurting themselves and driving away investment and jobs. The recipient provinces already do tax their citizens and corporations more in many areas, as the chart below demonstrates (see point 9). Raising these various taxes even more would most likely have a negative effect on their economies, and still not be enough for them to not qualify for equalization.

Similarly, there are some critics of equalization who argue that equalization allows the recipient provinces to have higher taxes, which kills jobs and investments, so if we got rid of equalization, they’d have to lower their taxes to attract more investments and create jobs. This doesn’t even make any sense. Provinces aren’t deliberately overtaxing people and companies – provinces are constitutionally obligated to provide certain services such as education, healthcare, social welfare, etc. These are very expensive programs, in particular healthcare, which accounts for the biggest percentage of spending in every single province. Getting rid of equalization would simply make it more difficult for some provinces to pay for these services. Also, there are realistic limits to how much investment certain provinces will ever be able to attract. People may wish to debate the logic of having a province as small as Prince Edward Island, for example, but PEI is a province and it could declare itself a tax-free haven – it still wouldn’t be able to attract enough jobs and investment to fully fund the programs it needs to provide.

6. Equalization allows the poorer provinces to provide all kinds of social programs they couldn’t otherwise afford – subsidised by the rich provinces.

This argument usually refers to social programs that many consider “luxuries” rather than the social programs that all provinces are constitutionally obligated to provide such as healthcare, education, welfare, etc. and the criticism is normally aimed at the province of Quebec, which offers its citizens subsidised $7/day daycare, and the lowest university tuition rates in the country, for example.

However, as explained above, equalization eligibility is based on a province falling below a national per-capita income standard based on revenue from 5 different tax sources — personal income tax, business income tax, consumption tax, property tax and natural resource revenues. The provinces that receive equalization do so not because of how much they spend (or don’t spend) on social and other programs, but because they don’t raise enough own-source revenue from those five tax bases to reach the national standard. Remember that provinces also raise funds from many other sources of revenue not included in the equalization formula. The current equalization formula only considers 5 sources of revenue (the previous formula included 33 different tax bases). Quebec would still receive the same amount of equalization it currently gets even if it didn’t offer $7/day daycare or raised tuition fees significantly.  The issue isn’t really that Quebec does offer these programs to its citizens, but that richer provinces such as Alberta, which can better afford them, choose not to offer such programs to its citizens.

7. Why does Quebec get so much equalization?

Of the six provinces receiving equalization in 2012-13, Quebec does receive the most in terms of total equalization payment, $7.9-bn. However, on a per capita basis, Quebec actually receives the second least amount of equalization. Quebec, like all recipient provinces, receives equalization based on two factors: its population, and because its fiscal capacity is below the average fiscal capacity of all provinces – known as the “10 province standard”. However, while Quebec’s fiscal capacity is below the 10 province standard, it is not that as far below the standard as some of the other recipient provinces since it has a fairly diversified and large economy, as well as being quite populous. On a per capita basis, Quebec gets only $926 per citizen from equalization. Ontario gets $243 per citizen. Ontario’s fiscal capacity is better than Quebec’s, and so it receives less equalization overall ($3.2-bn) and it has a much larger population – 13,373,000. Prince Edward Island is actually the province which benefits the most from equalization. It receives the smallest overall amount, $337-mn, but with a population of only 146,000, that works out to $2,308 per Islander. This chart shows how much equalization each province receives total, and per capita:

Province Population Total Equalization
2012-2013
(millions of $)
Equalization per capita
Quebec 7,979,700 $7,391 $926
Ontario 13,373,000 $3,261 $243
Manitoba 1,250,600 $1,671 $1,338
New Brunswick 755,000 $1,495 $1,980
Nova Scotia 945,500 $1,268 $1,342
PEI 146,000 $337 $2,308


8. How does each province spend the equalization money it receives?

It isn’t possible to know this. Equalization transfers are unconditional, meaning that there are no conditions attached to the money dictating how a province must allocate the funds. Receiving provinces are free to allocate the money according to their own priorities.

9. Equalization allows the recipient provinces to have much lower tax rates at the expense of the non-recipient provinces

If one compares the various income, sales and other tax rates of the provinces, it quickly becomes very clear that this argument simply does not hold up.

Major Provincial Tax Rates, 2013
(Source: Government of Alberta Budget documents and Ernst and Young Provincial Budget Reports)
(Rates as of 27 March 2013)

Type of Tax AB BC SK MB ON QC NB NS PEI NL
Personal Income Tax
Statutory rate range
Lowest rate (%) 10.00 5.06 11.00 10.80 5.05 16.00 9.68 8.79 9.80 7.70
Highest rate (%) 10.00 14.70 15.00 17.40 13.16 25.75 17.840 21.00 16.70 13.30
Surtax (%) 20.0/
36.0
10.0
Personal Amount ($) 17,593 10,276 15,241 8,884 9,574 11,195 9,388 8,481 7,708 8,451
Spousal Amount ($) 17,593 8,860 15,241 8,884 8.129 11,195 7,971 8,481 6,546 6,906
Corporate Income Tax
General rate (%) 10.0 11.0 12.0 12.0 11.5 11.9 11.0 16.0 16.0 14.0
M&P rate (%) 10.0 10.0 10.0 12.0 10.0 11.9 11.0 16.0 16.0 5.0
Small business rate (%) 3.0 2.5 2.0 0 4.5 8.0 4.5 3.5 4.5 4.0
Small Business threshold ($000) 500 500 500 400 500 500 500 400 500 500
Capital Tax
General (max. %)
Financial institutions (max. %) 3.25 4.0 4.0 4.0 5.0 4.0
Other Taxes
Retail Sales Tax (%) 7.0 5.0 7.0 8.0 9.975 8.0 10.0 9.0 8.0
Gasoline Tax (cents/litre) 9.0 21.2 15.0 14.0 14.7 18.2 13.6 15.5 13.1 16.5
Tobacco Tax (dollars/carton) 40.00 44.60 42.00 50.00 24.70 25.80 38.00 43.04 45.00 38.00
Payroll Tax (max. %) 2.15 1.95 4.26 2.00

 

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  • A Person

    Just as an FYI, you miscalculated the amount that PEI receives under equalization. ~330 000 000/~140 000 = ~2300, not ~23 000.  Good post though. Cheers.

  • bilzy2020

    Other than the admission that a heavier tax load is an impediment to jobs,investment ,growth.I still do not see an argument for equalization as it exists. Why not do an analysis on how different the country would look if unbalanced transfers were eliminated?

    • http://thoughtundermined.com Radical Centrist

      I’m not trying to justify the program’s existence, simply to clarify a lot of the misconceptions people have about it. There have been plenty of analyses done advocating its elimination – I’m not an economist, so I’m not going to try to replicate those. Don’t forget, however, that equalization is now enshrined in the Constitution, so getting rid of it wouldn’t be that simple. 

      • bilzy2020

        thanks for your feedback,the wording in the constitution is as fuzzy as most in the document…so supreme court will decide rather than our board of directors AKA parliament

        • http://thoughtundermined.com Radical Centrist

           Not necessarily – Ottawa can change the program – it has several times over the years – sometimes unilaterally, sometimes with agreement of the provinces. To completely eliminate it, however, would probably require getting the provinces onside, which might be rather difficult. I say probably, however, because I’m not certain which amending formula would be required for that sort of change. Unanimous agreement of all the provinces? 7 out of 10 provinces? On the whole, however, equalization represents such an insignificant amount of overall federal spending, I don’t really see why people get so uppity about it.

      • Lets Talk Candidly

        Yes you are trying to justify the program – or at least trying to justify why some provinces “need” equalization to keep up and others don’t.  By repeating that equalization is based upon a provinces “ability” to generate enough income from certain taxed sources you imply that this is beyond their ability to change or effect.  It certainly is NOT.  Quebec is a perfect example of that.  Rather than exploit their own resource potential they would rather attack Alberta’s resource industry while feeding off the proceeds of it.  Equalization is a socialist racket and breeds lazy policymakers who see no need to direct their energy to expanding and improving their economies and more time just playing the begging game.

  • bilzy2020

    Rad,you are probably right that it would take 7 of 10 to deconstruct . However the issue is up for negotiation in 14.I am curious what particulars are negotiable. Any thoughts?

    • http://thoughtundermined.com Radical Centrist

      I think it will depend on what Ottawa feels it can afford to pay out (changing the formula to include AB has hurt), and whether the provinces can agree to anything. If not, Ottawa will act unilaterally. The obvious thing that might be targetted is how resource revenue is calculated – maybe revisit that bit that allows a province to exclude 50% of its resource revenue. 

  • Susan Cue

    Quebec has oil and gas but won’t use them as long as they can live off Alberta’s resource money.  Equalization destroys productivity and frugality.  When someone else is footing the bills, it’s easy to overspend.  Despite constantly being a recipient of equalization, Quebec is the 5th largest indebted place in the world.  Analysts put Quebec’s debt to GDP ratio at 54% which means the money Alberta pays is going into a bottomless pit.  The reason for this, as described by a student rioting for free tuition, is Quebec’s “social democratic model” (a.k.a. Socialism) which he said precludes Quebec from any comparison to the other provinces in Canada whose students are mature enough to understand that they must pay for their educations.  At the same time as Quebec belittles Alberta for its “dirty oil”, it is one of the largest recipients of revenue from that oil.  I can only surmise that the belittling is meant to make Albertans feel ashamed enough to continue giving away our money for the foreseeable future, but I wouldn’t count on that.  Albertans have been polite and co-operative but the end is nearer than anyone thinks, including Alberta’s Socialist Premier, Alison the Red.  One commenter says that the Supreme Court will decide the outcome of the unfairness in Canada.  Again, I wouldn’t count on that.  Albertans will decide the outcome and it won’t be well received.  We are giving our money away so rich Quebecers can have cheap babysitting!  Given that Alberta has been abused financially and verbally for the past 5 decades or more, Canadians are stupid beyond belief if they think we won’t soon put an end to the free ride that is costing us our future.

    • http://thoughtundermined.com Radical Centrist

      Quebec receives no money directly from Alberta. That is a simple fact. The equalization program is only $15bn total, and the federal government collects far more from that in revenues from Quebec alone. I know nothing I say will change your views on that, but individuals and businesses/organizations in AB pay money to OTTAWA only. If equalization was cancelled tomorrow, that would not change – Ottawa would collect the same amount of cash in the province as it currently does. You’d have to abolish federal taxes and other fees before AB would see any reduction in the amount of money Ottawa collects in the province. 

  • KimLian

    The author of this blog says that provinces do not pay into an “Equalization Fund” but that the money comes from the various sources of taxation and is then distributed to the “have-not” provinces on their ability/non-ability to generate income.  This Socialist philosophy of wealth distribution is wrong because, provinces like people, always take the easy way out.  Instead of working hard to generate income from their own resources, these provinces just wait for the Federal government to give them the “hand-out”.  Welfarism does not encourage productivity, it just encourages dependency on “big brother”.

    When decentralization does happen and it has to happen because we have seen how a centralized government gives too much power to the Federal government which uses its vast taxation powers to create “favoured” provinces.  Instead of social services provided at comparable cost for ALL Canadians, we have provinces like Quebec giving cheaper social services ($7/daycare and lowest University fees) while deciding not to exploit their natural resources on the excuse that those activities would cause pollution.  However, it does not stop them from accepting money from provinces like Alberta, even while criticizing that province for its source of wealth.

    When the Equalization Payments policy is renegotiated in 2014, I hope that more people will be persuaded that wealth redistribution is a Socialist policy (invented and perpetrated by the Liberal government for too many years) is akin to wealth destruction as it discourages productivity, both on the part of the “have” and the “have-not”.

    • http://thoughtundermined.com Radical Centrist

      What resources has Quebec opted to not exploit? They are looking at frakking for natural gas, they are developing a plan to exploit resources in the northern parts of the province, etc. I am not aware of any development projects that have been rejected/cancelled because the province doesn’t want to lose out on any equalization. And you can’t blame everything on previous Liberal governments. The current equalization formula was set up by the Harper government, and there have been other Conservative governments in power previously as well.

  • bubbagum

    Things need to be cut, slashed and eliminated everywhere. Government is the problem; you have created this fiscal mess by overspending for decades now. You should all be ashamed of yourselves but you really don’t care. That’s been obvious. 
    So I’m just curious. Would anyone in opposition, any union leader, any bureaucrat please tell the public what can be cut in government, please tell us. All you do is complain when anything gets cut. So can anyone, any leader, any party cut anything in government? Please tell us what can be cut because governments cannot continue to borrow and ad to the debt year after year. You do realize that this has to be paid, right?
    “We don’t want the party to end,the “free” trips, expense accounts…perks, gold plated pensions, free this, free that…Yes indeed,we in government are all entitled to our entitlements folks and we can’t stop that,at least not until we retire.Our unions say so,it’s ours and we want it now! $””We don’t want the party to end,the “free” trips, expense accounts…perks, gold plated pensions, free this, free that…Yes indeed,we in government are all entitled to our entitlements folks and we can’t stop that,at least not until we retire.Our unions say so,it’s ours and we want it now! $”
     Scum bag parasitic unions,police,crown corporations,all government…all the same, bankrupting future generations…and they don’t give a damn.All you hear from government is high priced expensive spin, lies…BS.
     We now have over 3.6 million people working for government across the country. Average salary in government is 70 thousand (including benefits, pension, bonuses…) yearly and rising. Average salary in the private sector is 45 thousand yearly and dropping. Over 10% of government employees now make over 100 thousand yearly.In the private sector the number is under 2%. Look to Greece,Ireland,Quebec (all technically bankrupt), this is where Ontario, and Canada is headed if we don’t stop equalization and get spending and government growth under control.
    This tax and spend, pro union scum –  socialist, big government, social engineering that has been destroying this country has got to stop. Yes, it has left Quebec and has been spreading throughout the rest of the country since the 1960”s, that’s right over 5 decades of massive government growth, massive government hiring, higher taxes, skyrocketing government salaries, more debt, social engineering ( the expensive forced phony charter, bilingualism, multiculturalism…while destroying, and revising our real BNA, UEL history).Thanks Trudeau, Tanks kebec.Go check the stats for yourself.
     Remember-The liberals, NDP brought in a lot of this expensive nonsense, bilingualism (forced french, only outside Quebec), multiculturalism, the charter, rights this, rights that…but the Conservatives have done nothing to repeal any of this crap federally or provincially. “Conservatives” have allowed all of these expensive, divisive liberal polices, and departments to remain. How come?
     Try to digest this you over paid scum bag politicians, unions, government bureaucrats, executives, CEOS….Who do you think is going to pay off all this debt you are leaving your children, your grandchildren? That’s what I thought, you don’t care! You greedy scum bags.They are all becoming wealthy off of the private sectors dime folks.
     We need a new party,a new leader willing to deal with the truth for a change.We need a real fiscally conservative, common sense leader/party…Things need to be cut,reduced and eliminated in all government.Government is too big,intrusive,and they are accumulating too much debt, year after year. That’s right lets get cutting non essential services, waste…government BS.The future is at stake here and no one is willing to deal with this, how pathetic, all of you clowns in office and most of the mainstream media..
     “If a law is unjust, a man is not only right to disobey it; he is obligated to do so.”-Thomas Jefferson  
    “If a law is unjust, a man is not only right to disobey it; he is obligated to do so.”-Thomas Jefferson

    • http://thoughtundermined.com Radical Centrist

      And this has what to do with equalization?

  • westerling

    It is time for Alberta to stop paying the hard earned money of Albertans so that the Kebecois can enjoy an easy life-style without ever working for it.  Well that has got to stop right away. If the Kebecois want their so-called culture and Joual-language then let them pay for it, and not the taxpayers of any English-speaking province in CANADA.  Let us now wish the Kebecois ADIEU and Bonne Chance.   “Je mes souviens!”

    • http://thoughtundermined.com Radical Centrist

      You’re not paying anything to Quebec. Even if Quebec separated tomorrow, or the equalization program disappeared tomorrow, OTTAWA would still collect exactly the same amount of money it currently does in the province of Alberta. 

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