You are here

Equalization

22 December, 2015 - 14:23

“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”.

This statement, from Section 36(2) of the Constitution Act of 1982, defines the purpose of Equalization. Equalization payments are unconditional – receiving provinces are free to spend the funds on public services according to their own priorities, or even use the revenue to reduce their provincial taxes. Payments are calculated according to a formula that ensures those provinces with revenue-raising ability, or fiscal capacity, below a threshold or ‘standard’ receive payments from the federal government to bring their capacity up to that standard.

Equalization has gone through very many changes in the several decades of its existence. Its current status reflects the 2006 recommendations of an Expert Panel set up by the federal government. The fiscal capacity of a province is measured by its ability to raise revenues from five major sources: personal and business income taxes, sales taxes, property taxes, and natural resources. This ability is then compared to the ability of all of the provinces combined to raise revenue; if a difference or shortfall exists, the federal government transfers revenue accordingly, with the amount determined by both the population of the province and the magnitude of its per-person shortfall.

The program currently transfers about $14b per annum. The recipiency status of some provinces varies from year to year. Variation in energy prices and energy-based government revenues are the principal cause of this. British Columbia, Alberta, Saskatchewan and Ontario tend to receive little or zero. Manitoba, Quebec and the Atlantic Provinces have been the major recipient provinces. Quebec receives the largest single amount – more than half the total allocation, on account of its population size. Details are available at the Federal government’s department of Finance web site.