Not everything is wrong with Canada

Equalization works and benefits most Canadians

Since 1954, Canada has had a policy of providing support to Provinces with less than average “fiscal capacity” from Ottawa’s general revenues. Often subject to criticism, the equalization concept and execution was and is intended to ensure within reasonable bounds that each Province has more or less the same ability to provide services to its citizens on a per capita basis. It is a system that works and is hard to “game”.

The key is the definition of “fiscal capacity” which is the amount of revenue a Province could (but may choose not to) raise if its tax rates were comparable to the national average. Equalization payments are made to those Provinces with below average fiscal capacity to bring their revenue opportunity to a level comparable to the other Provinces. The payments made to each Province are not earmarked but go into the Provinces general revenue and each Province can use the funds any way their respective legislature may decide.

No Province “pays” equalization. The funds come from Ottawa’s general revenue. Often, Canadians complain that money is taken from Ontario and Western Provinces and given to Quebec and the maritime provinces. That is not how equalization works.

Resource rich Provinces do generate more revenues for Ottawa than Provinces with less natural resources. That does not result from higher tax rates but from the fact that they earn taxes and royalties from activities not present to the same extent in other Provinces. Equalization is adjusted to exclude a portion of resource revenue from the calculations. The formula operates with a two year lag. For the past two years payments go to Prince Edward Island, Nova Scotia, New Brunswick, Quebec and Manitoba and bring their “fiscal capacity” close to the national average of $10,000 per capita. Newfoundland, Saskatchewan, Alberta and B.C. have above average fiscal capacity and Ontario has average fiscal capacity with the result that these Provinces receive no equalization payments. Territories are excluded from equalization.

Equalization is a uniquely Canadian concept not paralleled to my knowledge in any other country. It is part of the fabric of Canada and ensures “have not” Provinces can provide education, health care and other programs at comparable levels across Canada.

Despite the sometimes toxic rhetoric, equalization is a piece of the Canadian system that not only works but works well.