A Short History of Equalization, part 1: 1930-2006

The Rowell-Sirois Commission

In the 1930s, after several provinces had gone bankrupt trying to cope with effects of the Great Depression, the federal government established a Royal Commission on Dominion-Provincial relations (the Rowell-Sirois Commission). In its 1940 report, the Commission concluded that the Constitution did not give the provinces sufficient taxing power to meet their constitutional responsibilities across the social policy areas for which they were responsible (outlined in sections 92 and 93 of the Constitution Act, 1867). The Report of the Rowell-Sirois Commission concluded that while the Depression certainly did make matters worse for the provinces fiscally-speaking, the difficulties the provinces and territories faced were inherently systemic in nature. When they established the Canadian federation, the founding fathers could not have anticipated how costs in these areas would skyrocket. For example, between 1874 and 1937, the costs associated with running education and public welfare systems rose from $4 billion to $360 billion (Royal Commission on Dominion-Provincial Relations, pp. 244-245, in Equalization: Its Contribution to Canada’s Economic and Fiscal Progress, p. 180).

In exploring the notion of making fundamental changes that would better position the provinces and territories vis-à-vis their funding commitments as outlined in the Constitution Act, the Rowell-Sirois report considered and rejected any constitutional changes that would alter the division of powers, or give the provinces greater fiscal capacity. Instead, the Commission recommended centralizing taxation powers with the federal government, and the provision of a guaranteed annual income to the provinces and territories by the federal government.

The Commission’s report included three key recommendations:

  • The federal government take over control of unemployment insurance and old age pensions;
  • The federal government take over the collection of all major taxes, including personal income tax and succession duties (taxes placed on property or assets of an individual following their death, generally paid by the heirs to the estate); and,
  • The federal government should compensate the provinces for the lost tax revenue (and the removal of previous subsidies), by paying annual “National Administration Grants.” These Grants would help provinces “provide adequate services (at the average Canadian standard) without excessive taxation (on the average Canadian basis).” Essentially, these were the foundations of what we now know today as equalization.

Tax Rental Agreements

In 1940, the provinces agreed to a constitutional amendment giving the federal government control of unemployment insurance. The federal government did not, however, adopt the other principal recommendations of the Rowell-Sirois Commission. The fact is that provincial governments refused to give up their taxation powers, even with the promise of extra funding from the federal government. This resulted in a new course of action, with the federal government entering into ‘tax rental agreements’ with the provinces. These agreements meant that each province ‘rented out’ its right to collect taxes to the federal government. Under this arrangement:

  • The federal government took over the collection of personal income taxes, corporate income taxes, and succession duties from participating provinces;
  • The federal government paid annual compensation to the provinces to make up for the income each province lost by not collecting these taxes;
  • The terms of the tax rental agreements were renegotiated every five years; and,
  • Federal compensation was unconditional, meaning that provinces could spend the money as they saw fit.

First implemented during World War II, the tax rental agreement arrangement between the two levels of government ran until 1956. Throughout this period, several provinces remained uncomfortable with the idea of ceding taxation powers to the federal government, even as part of a temporary rental agreement. Ontario did not participate until 1952, when the federal government changed the way payments were calculated, and Quebec never participated in the tax rental agreements.

Initially, the principle of equalization was not found in the tax rental agreements. Indeed, the arrangements were designed solely to compensate a province for lost tax revenues, not to increase the revenue of the provinces to a higher level based on a national norm. In 1957, however, poorer provinces whose per capita tax revenues fell below a national standard found themselves eligible for additional federal compensation. This marked the beginnings of ‘equalization’ and its implementation. In 1967, provinces resumed collecting their own taxes.

The Birth of Equalization

In 1957 the equalization program included only three revenue sources: personal income taxes, corporate income taxes, and succession duties. These revenue sources were equalized to a high standard, namely, the weighted average of the per capita revenue of the two richest provinces (at the time Ontario and British Columbia), based on tax rates determined by the federal government.

In 1962, 50% of natural resource revenues were added to the list of revenues to be equalized; the same year, the standard was changed to the average of the ten provinces. The inclusion of natural resource revenues disqualified Alberta and British Columbia from receiving equalization payments. After the 1963 federal election, the incoming Liberal government changed the formula and returned to the weighted average of the top two provinces. Resource revenues were no longer included. However, 50% of natural resource revenues were deducted from the equalization payments, once again eliminating Alberta and British Columbia as recipient provinces.

The formula for determining equalization payments was overhauled yet again in 1967 when the fiscal arrangements were renewed for another five years. First, there was a major expansion, from four to sixteen, in the number of revenue sources included in the formula. Second, the revenues to be equalized were the actual revenues collected by each province. Third, the standard was changed once again from the average of Ontario and British Columbia to the average of the ten provinces.

Between 1972 and 1981, a number of ad hoc adjustments to the formula were introduced, largely for the purpose of dealing with volatile oil revenues. For example, soaring energy prices from 1973 put enormous pressure on the cost of equalization and placed Ontario as a recipient province from 1977-82. In 1973 and 1974 some ad hoc measures were taken to dampen the impact of energy on equalization.Then in 1977 only 50 per cent of resource revenues were made eligible.  But still Ontario qualified. Ontario’s economy was extremely hard hit by the recession of the early 1980s brought on in good part in the wake of the energy price boom. Ontario was only retroactively excluded from receiving payments through the “personal income override” whereby no province could be eligible if its per capita income exceeded the national average. With increasing oil prices raising equalization payments, this was creating a fiscal problem for the federal government. It was time to rethink the program, and the time for action came in 1982, when the fiscal arrangements were renegotiated.

The revisions to the equalization formula followed the format already employed in 1967. First, the list of revenues to be equalized was substantially expanded to thirty. Through this broad coverage of provincial revenues, the equalization formula was based on a “representative tax system” (RTS). Second, since it was based strictly on relative revenue capacity, the equalization formula implicitly assumed that the per capita provincial and local government expenditures financed by these federal transfers were equal across the country. Third, the standard was further modified by equalizing the per capita yields of the provincial revenues to the average of five provinces: Ontario, British Columbia, Saskatchewan, Quebec, and Manitoba, what became known as the five-province standard. The exclusion of Alberta from the standard eliminated the problem created by the inclusion of natural resources. The Atlantic provinces, which had no oil revenue at that time, were excluded as a counterbalance to the exclusion of Alberta; a wealthy province was offset by a less affluent region with a – at the time – comparable population. This formula, with some adjustments made over time, served as the foundation for equalization payments from 1982 until the 2005-06 fiscal year.

It should be noted that also in 1982, on March 2, the Government of Canada and the Government of Nova Scotia signed the Agreement on Offshore Oil and Gas Resource Management and Revenue Sharing. While the Agreement as such is not part of the equalization program, it is still important to mention it at this point since it would eventually have implications for the equalization program. The Agreement stemmed from the discovery of a large deposit of natural gas, known as the Venture well, near Sable Island offshore of Nova Scotia. The agreement provided that Nova Scotia’s share of the offshore revenues “shall equal 100 per cent, provided in that year the Nova Scotia government’s per capita fiscal capacity, including its share of off­shore revenues, does not exceed 110 per cent of the national average per capita fis­cal capacity plus 2 percentage points for every percentage point by which Nova Scotia’s average annual unemployment rate exceeds the national average annual unemployment rate.” What this meant was simply that the province would keep all the revenue it received from the development of this offshore resource until such time as its economy exceeded the national provincial average.

Most notably, however, in 1982, Canada enshrined the principle of equalization in the Constitution. The commitment to equalization is found in Section 36 (2) of the Constitution Act, 1982, which states:

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 service at reasonably comparable levels of taxation.

1982 to present

The Atlantic Accords

As mentioned briefly above, in March 1982, the governments of Canada and Nova Scotia signed the Agreement on Offshore Oil and Gas Resource Management and Revenue Sharing which was drafted to allow Nova Scotia to keep 100% of its revenue from expected offshore natural gas developments following their discovery in 1979. Oil had also been discovered off the coast of Newfoundland in 1979 – the Hibernia field. In 1984, the Supreme Court of Canada declared that the oil and gas resources off the Newfoundland coast belong to the jurisdiction of the federal government. In the wake of the decision, the federal government initiated discussions with Newfoundland and Labrador and Nova Scotia in an effort to develop some guidelines to govern the development of the offshore petroleum industry. Taken together, these guidelines or agreements are loosely referred to as the Atlantic Accords. The purpose of the Accords, as they were developed, was to protect the two provinces from losing any revenues gained from petroleum revenues at the expense of equalization payments, until each of the provinces was sufficiently able to establish its respective offshore petroleum industries.

The reason for this protection was because one of the key issues that arose in the context of factoring revenues from natural resources into the equalization equation. When an equalization-receiving province realized big gains in natural resource revenues, it was then penalized through a reduction of its equalization payments, commonly referred to as equalization clawback. As a province’s revenue from natural resources (or any other source) increased, that province saw a comparable reduction in the amount of equalization it received. The Atlantic Accords provided for time-limited, partial compensation for any reductions in equalization payments to these two provinces as a result of increasing revenues from offshore developments. In effect, the Accords meant that the two provinces would receive separate offsetting payments from the federal government if increasing revenues from offshore developments led to decreases in their equalization payments. However, this was not what occurred, as will be discussed further on.

1992 Charlottetown Accord

Constitutional experts have argued that Section 36 of the Constitution Act, 1982, does not clearly spell out the federal government’s responsibilities regarding equalization; in fact, it has been suggested that the stipulation in the Act would be unlikely to survive a legal challenge.

Interestingly enough the proposed 1992 constitutional amendment (better known as the Charlottetown Accord), would have resulted in an altered Section 36, one that would have clearly committed the federal government to equalization – not only in principle but in practise. Further to this, the Charlottetown Accord committed the federal government to consulting with provincial governments on a meaningful basis before making any alterations to the legislation governing equalization payments. The Charlottetown Accord, however, died after 54 percent of Canadians voted it down in a national referendum that same year.

The Generic Solution

The generic solution, introduced in 1994, has been applied to the provinces of Newfoundland and Labrador (offshore revenues), Nova Scotia (offshore revenues), Quebec (asbestos), and Saskatchewan (potash). Under the generic solution, provinces lose only 70% of a major increase in fiscal capacity resulting from the development of non-renewable natural resources. Previously, for every $1.00 increase in a province’s fiscal capacity, its equalization payments decrease by $1.00. Under the generic solution, in very specific circumstances, for every $1.00 increase in a province’s fiscal capacity, its equalization payments are reduced by only 70 cents. This, of course, completely undermined the intent of the Atlantic Accords.

The Fixed Framework

Before 2004, equalization payments were driven by a complex but consistent formula. The formula determined both the overall amount the equalization program would pay out to receiving provinces and the amount each province would receive.

The formula measured the per capita fiscal capacity of provinces using the Representative Tax System (RTS). The RTS measured the amount of money provinces could raise from 33 different tax bases if they taxed those bases at national average tax rates. A province’s fiscal capacity on each of the 33 bases was then summed up and compared to a five-province average standard. If the formula determined that a province’s overall fiscal capacity across all of the tax bases combined was below the standard, that province received an equalization grant to bring it up to the common standard.

With the formula still in place, equalization payments had started to decline from their highest peak of $10.9 billion in 2000–01 to $8.9 billion in 2004–05. This was due to the combined impact of a slow-down in Ontario’s economy and tax reductions in several provinces. As well, since economic performance data on each province was updated constantly – several times a year, and since Ottawa used population estimates rather than actual population figures when doing its long-range planning, provinces occasionally either received adjustments (more money than previously announced) or had to repay over-payments. This uncertainty sometimes played havoc with a province’s fiscal planning, since money for which  it had budgeted sometimes did not materialise, or it found itself having to repay the federal government for a previous over-payment.

At the same time, the financial position of the federal government had improved dramatically and resulted not only in balanced budgets but also significant surpluses. A number of federal transfer programs had been reduced by a substantial amount in the mid 1990s and the provinces were demanding that Ottawa increase equalization as well as other transfers, particularly in the case of health care.

In response to that pressure, a new framework for both equalization and territorial funding was announced at a First Ministers’ Meeting in October 2004. Called the Fixed Framework, it featured the following elements:

  • The formula was no longer used to determine the overall amount of funding to be allocated for equalization and territorial funding. Instead, a fixed pool of funds was set in legislation.
  • The pool of funds to be available for equalization was set at a minimum of $10 billion for 2004–05, effectively stopping the decline in equalization payments.
  • Each province was guaranteed that its equalization entitlements would not be lower than the amount announced for 2004–05 and included in the 2004 federal budget.
  • A guaranteed growth rate of 3.5 percent per year was set in legislation, ensuring that the overall pool of funds available for equalization would continue to increase over 10 years.
  • Fixed shares for receiving provinces were set out in advance for the first two years of the Fixed Framework, replacing the normal operation of the equalization formula with a negotiated allocation.
  • The allocation in the Fixed Framework was legislated on an interim basis pending the outcomes of the work of a special Panel set up to review the equalization program and the development of a new allocation method.
  • On November 8, 2005, the federal government announced that the same approach would be extended to determine equalization entitlements for 2006–07.

There were some important implications of this new framework.

The interim allocation did not have a common standard to which all provinces were compared and raised. Instead, the standard varied for individual provinces depending on their former shares (over the last three years) of total equalization funding, regardless of changes in their relative fiscal capacity. As a result, some receiving provinces received more and others less than they would have if the previous equalization formula had been applied.

  • For example, in 2005–06, with the exception of Quebec, the per capita fiscal capacities of the receiving provinces were higher under the Fixed Framework than they would have been under the former five-province standard.
  • The Fixed Framework resulted in Newfoundland and Labrador having a higher fiscal capacity after equalization than Ontario (even without the Offshore Accords being taken into account).
  • Because the total equalization pool was fixed in advance, changes in one province’s fiscal capacity, up or down, would have a direct impact on the amounts other provinces received.
  • The Fixed Framework guaranteed a known and growing amount of funds for equalization. In this way, it improved stability and predictability, particularly for the federal government. On the other hand, the shares each province received under the Fixed Framework were not necessarily any more stable or predictable than they were in the past.

The 2005 Atlantic Accords

In February 2005, new Offshore Accords (Arrangement between the Government of Canada and the Government of Newfoundland and Labrador on Offshore Revenues, 2005 and Arrangement between the Government of Canada and the Government of Nova Scotia on Offshore Revenues, 2005) were signed with the two provinces. Those Accords extended protection to 2012 and provided full compensation for any reductions in equalization payments as a result of increased revenues from offshore developments. Generally speaking, in order to qualify for the full offset payments (made outside of the equalization program) and a potential extension to 2020, the two provinces would have to continue to qualify for equalization and continue to have a higher-than-average per capita net debt burden. Both provinces received guaranteed advance payments of a part of the benefits they were expected to receive over the first eight-year term of the 2005 Accords.

The impact of these Accords on the equalization program was controversial. Both Newfoundland and Labrador and Nova Scotia contend that the Accords have nothing to do with equalization and are intended to support economic development and debt reduction in the two provinces. On the other hand, others have argued that these so-called “side deals” have broken the fundamental, underlying nature of the equalization program and opened the door to calls for similar deals with other provinces.

It was against this backdrop that the federal government set out to reorganize the federal equalization program, as will be discussed in Part 2.

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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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