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First made in 1957, equalization payments are monetary transfers from the federal government to provincial governments.[1] Equalization payments are encapsulated in the Constitution to ensure that provinces with a lower capacity to generate revenue “have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”[2] Their inclusion in the Constitution received bi-partisan support from the likes of Conservative premiers William Davis and Peter Lougheed, and Liberal Jean Chretien.[3]

The money for payments comes entirely from federal funds; provinces do not transfer money to each other or the federal government as a result of this program.[4] There are no conditions attached to the receipt of an equalization payment; provinces can use the money as they see fit.[5]

How provincial governments spend their money is closely linked to the misconception that whether a province is running a surplus or a deficit affects equalization payments. Because provinces choose how they spend their money, they determine whether they are in a surplus or deficit. “Deficit is a choice, not something caused by equalization.”[6] Eligibility for a payment is determined by a province’s ability to generate tax revenue, not how much they actually generate.[7]

Eligibility is determined, on a per capita basis, by how a province’s fiscal capacity (ability to raise tax revenue) compares to the average fiscal capacity of all ten provinces.[8] If a province’s capacity is below the average, it receives an equalization payment. The payment only brings the province up to the average.[9]

There are five revenue sources used to determine fiscal capacity:

  1. Personal income;
  2. Business income;
  3. Consumption;
  4. Property taxes and miscellaneous revenues; and
  5. Natural resources.[10]

There are two differences when calculating natural resources. First, actual revenues are used rather than a calculated fiscal capacity.[11] This is because resources and royalty structures are so different from province to province that it would be impossible to determine an average (ex. comparing oil to lumber).[12] Second, only 50% of natural resource revenue is included in the final calculation.[13] Provinces can opt out of having natural resources included in the calculation if doing so increases the amount of their equalization payment.[14]

The federal government typically renews or amends equalization payments and the formula every five years after consultation with the provinces.[15] The current formula was set in 2007.[16] It has been renewed until 2024 and can be found in the Federal-Provincial Fiscal Arrangements Act.[17]

Example Illustrating the Principle of Equalization Payments

Suppose a country has two provinces, A and B. Now imagine that province A and B have the same population, 1,000 people, and (for simplicity) that the only taxable revenue source is personal income.

In province A, the average personal income is $10,000, the tax rate is 10%, and so the province collects $1,000,000 in personal income taxes. Province A’s fiscal capacity is $1,000,000.

But in Province B the average personal income is $7,500, and with a tax rate of 10% collects only $750,000 in personal income taxes. Province B’s fiscal capacity is $750,000.

Even though they have the same number of people and the same tax rates, through the fault of no one, the provinces’ revenues are different. Province B has a weaker fiscal capacity than province A. Equalization payments step in to ensure that province B has a similar amount of money as province A to provide government services to its citizens.

The federal government determines the average fiscal capacity across the provinces:

($1,000,000 + $750,000) / 2 = $875,000.

Next, they determine how a province’s fiscal capacity compares to the national average:

Province A = $875,000 – $1,000,000 = – $125,000

Province B = $875,000 – $750,000 = $125,000

If the amount is less than $0, then the province does not receive an equalization payment. If it is above $0, the province will receive that amount.

$125,000 is the amount that the federal government will give in equalization payments to province B, to bring it up to the average. Province A still has a larger total revenue than province B, even after equalization payments.

 

 

[1]Jim Feehan, “Canada’s equalization formula: peering inside the black box, and beyond” (2014) 7:24 School of Public Policy 1 at 2.

[2]Feehan, supra note 1 at 1;ConstitutionAct, 1982, s 36(2), being Schedule B to the Canada Act 1982 (UK), 1982, c11.

[3]Mirja Trilsch & Jessica Leblanc, “Well-being Matters Under the Constitution – Why Section 36 is About More Than Money and What It Should Mean for Canadians” (2019) 39:2 NJCL 159 at 180-181.

[4]Economics, Resources and International Affairs Division & Parliamentary Information and Research Service, Canada’s Equalization Formula, by Edison Roy-Cesar, (In Brief), Publication No. 2008-20-E (Ottawa: Library of Parliament, 10 November 2008, revised 4 September 2013) at 1.

[5]Ibid.

[6]“Q&A: The wonky world of equalization payments”, CBC News(22 November 2016) <cbc.ca>

[7]Ibid.

[8]Economics, Resources and International Affairs Division, supranote 4 at 2.

[9]Ibid at 4.

[10]Federal-Provincial Fiscal Arrangements Act, RSC 1985, c F-8, ss 3.2(1), 3.5(1) [Fiscal Arrangements Act].

[11]Economics, Resources and International Affairs Division, supra note 4 at 2.

[12]Ibid.

[13]Fiscal Arrangements Act, supra note 10, s 3.2(1)(a).

[14]Fiscal Arrangements Act, supra note 10, s 3.2(1)(b).

[15]Feehan, supra note 1 at 1.

[16]Ibid.

[17]Fiscal Arrangements Act, supra note 10, s 3 (for the 2019 renewal see Budget Implementation Act, 2018, No. 1., SC 2018, c 12, s 215; but the budget is not where the Fiscal Arrangements Actis always renewed, for the 2014 renewal see Economic Action Plan 2013 Act, No1., SC 2013, c 33, s 110).