Politics

Bringing clarity to the sometimes murky world of equalization payments

It seems like every time a federal election rolls around, there are complaints about equalization payments. But there is confusion about what equalization payments actually are, who pays them, and why.

Federal government transfers funds to provinces so every Canadian receives comparable services

There is confusion around Canada's equalization payment program. But it is designed so that every Canadian, no matter where he or she lives, would receive comparable services at comparable rates of taxation. (Graeme Roy/The Canadian Press)

It seems like every time a federal election rolls around, there are complaints about equalization payments. Sometimes, it doesn't even take a federal election. Some premiers try to use it as leverage in their fights with Ottawa. 

But there is confusion about what equalization payments actually are, who pays them, and why.

A brief history

Canada's equalization program has existed since 1957. It was brought in as a way for the federal government to transfer funds to provinces so that every Canadian, no matter where he or she lived, would receive comparable services at comparable rates of taxation. 

So a Canadian living in a smaller province with a weaker economy would have access to the same public services as one living in a fiscally stronger province, without their tax rates having to go through the roof. 

Equalization was enshrined in the Constitution in 1982. 

There is a separate program for the territories. 

Who actually pays? 

Not the provinces. Not provincial governments. According to the Library of Parliament, "Equalization is financed entirely from government of Canada general revenues" raised through federal taxes on all Canadians.

In plainer terms: equalization is funded by the federal government from its general revenue, raised through federal taxes, paid for by all Canadians. 

Here is how economist Trevor Tombe, of the University of Calgary's School of Public Policy,  describes it in an article he wrote in 2018:

Equalization is a federal program that transfers federal funds to provinces with below-average capacities to raise revenues. Provinces with stronger economies, and with high income households and businesses, raise more revenue for any given tax rate than provinces with lower incomes.

What is the 'equalization formula'?

As Tombe alludes to, a province's fiscal capacity is determined by how much revenue a province could generate if all provinces had identical tax rates — not how much it does raise.

"This captures a province's "ability" to raise revenue, and is almost entirely due to a province's underlying economic strength," Tombe explained in an email to CBC News. "Provinces with strong economies (like Alberta, B.C. and Ontario) can more easily raise revenues than provinces with weaker economies (like [the] Maritimes or Quebec)."

According to Tombe, almost all provincial revenue sources are included in the calculation.

But again, no provincial government is paying equalization to another province. 

Have some provinces always received payments? 

Every province has received a payment under equalization since the program started in 1957, says Tombe. "Alberta last received a payment in 1964. Ontario never received any payment until the financial crisis… [and] it received payments from 2009 to 2018."

Tombe notes that the 1957-1966 version of equalization bears little resemblance to what we consider equalization today. So, in that sense, Alberta has never received a payment in the history of equalization as we know it today.

Who receives equalization today? 

For 2019-2020, the following provinces will receive equalization: 

  • Prince Edward Island
  • Nova Scotia
  • New Brunswick
  • Quebec
  • Manitoba 

These provinces will not: 

  • Newfoundland and Labrador
  • Ontario
  • Saskatchewan
  • Alberta
  • British Columbia

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