Equalization Payments - Canada

Canada

In Canada, the federal government makes payments to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity"—their ability to generate tax revenues. In 2009-2010, six provinces received $14.2 billion in equalization payments from the federal government. Until the 2009-2010 fiscal year, Ontario was the only province to have never received equalization payments; in 2009-2010 Ontario will receive $347 million, while Newfoundland, which has received payments since the program's creation, is now a so-called "have" province, and is now a net contributor that does not receive Equalization payments.

Canada's territories are not included in the equalization program - the federal government addresses territorial fiscal needs through the Territorial Formula Financing (TFF) program.

Equalization payments are based on a formula that calculates the difference between the per capita revenue yield that a particular province would obtain using average tax rates and the national average per capita revenue yield at average tax rates. The current formula considers five major revenue sources (see below). The objective of the program is to ensure that all provinces have access to per capita revenues equal to the potential average of all ten provinces. The formula is based solely on revenues and does not consider the cost of providing services or the expenditure need of the provinces.

Equalization payments do not, technically, involve wealthy provinces making payments to poor provinces, although in practice this is what happens, via the federal treasury. As an example, a wealthy citizen in New Brunswick, a so-called "have not" province, pays more into equalization than a poorer citizen in Alberta, a so-called "have" province. However, because of Alberta's greater population and wealth, the citizens of Alberta as a whole are net contributors to Equalization, while the citizens of New Brunswick are net receivers of Equalization payments.

Equalization payments are one example of what are often collectively referred to in Canada as "transfer payments", a term used in other jurisdictions to refer to cash payments to individuals (see Canadian Transfer Payments). In fact, there are four types of federal transfers to provinces and territories: the Canada Health Transfer (CHT), the Canada Social Transfer (CST), Equalization, and Territorial Formula Financing (TFF). Moreover, the federal government has entered into particular arrangements with certain provinces – Nova Scotia and Newfoundland and Labrador, in particular – under which offset payments are made to the governments of these provinces for the development of offshore oil and gas reserves.

The money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee "reasonably comparable levels" of health care, education, and welfare in all the provinces. The definition of "reasonably comparable levels", however, has been the subject of considerable debate.

In 2009-2010, the total amount of the program was roughly 14.2 billion Canadian dollars.

Recent negotiations surrounding the renewal of the program have created considerable tension among provinces. Due to the zero-sum nature of the formula, increases in entitlements for some provinces necessarily lead to decreases for others.