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. Provincial governments make no contributions.
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".
In 2023–24, all provinces and territories will receive $94.6 billion in major federal transfers, including $23.96 billion in equalization payments in 6 provinces.
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 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 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. 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 revenues 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.