Compromise and Complaints Shape Canada’s Equalization Conundrum
Whether one thinks the number should be higher or lower, the conclusion that the Canadian government spends a great deal of money is unavoidable. In 2025-26, $103.8 billion will be sent directly to the provinces and territories in the form of four major transfers: the Canada Health Transfer ($54.7 billion), the Canada Social Transfer ($17.4 billion), Territorial Formula Financing ($5.5 billion), and Equalization ($26.2 billion). The Canada Health Transfer and the Canada Social Transfer are set on a per capita basis; equalization payments vary widely, with some Maritime provinces receiving upwards of $3,000 per person and the province of Quebec receiving over half of all equalization payments at $13.6 billion. In contrast, Saskatchewan, Alberta, and BC receive no equalization payments.
Established in 1957, the equalization program was created by the federal government to alleviate disparities in provincial revenue-generating capacity. It aims to ensure that all Canadians have access to comparable public services, regardless of whether they live in a “have” or “have-not” province. By design, this program has not benefited all provinces equally. Although all provinces have at some point been recipients, Alberta last received equalization in 1965, while PEI, New Brunswick, Nova Scotia, Quebec, and Manitoba have received equalization every year since the program began.
The uneven distribution of equalization funds has led the program to draw criticism, especially from provinces that perceive themselves as being mistreated. While it is understandable that premiers from non-recipient provinces have criticized the equalization formula, even Newfoundland and Labrador has gone so far as to sue the federal government. To understand why even Newfoundland—a province that will receive $113 million in the 2025-26 fiscal year—wants equalization changed, it is essential to understand how equalization transfers are calculated in the first place.
To determine equalization payments, the federal government estimates how much revenue each province could raise per capita if it applied the national average tax rates to income, consumption, and property, as well as 50 per cent of the theoretical revenue from natural resources. Provinces with per capita fiscal capacity below the average across all provinces receive equalization transfers, funded by general federal revenues, to bring their per capita fiscal capacity up to that average. In 2005, the Harper government set equalization transfers at a fixed amount pegged to Canada’s GDP. Any excess funds remaining in the equalization budget after all recipient provinces are brought to the average fiscal capacity can then be distributed among recipient provinces. These adjustment payments are received so long as total fiscal capacity does not exceed that of a non-recipient province; if it does, the poorest non-recipient province will also begin receiving adjustments, explaining why Ontario receives equalization payments despite a higher-than-average fiscal capacity.
One of the most significant sources of criticism of the Equalization formula is its treatment of subsidized utilities. To calculate natural resource fiscal capacity, the government considers the revenue generated from the development of natural resources such as oil and gas in Alberta and timber in British Columbia. Similarly, revenue from Quebec’s hydropower is included in the province’s fiscal capacity; however, unlike other provinces that sell their natural resources at global market rates, Quebec heavily subsidizes its electricity, with an average price of ¢7.8/kWh compared to ¢15.1/kWh in neighbouring Ontario. If Quebec were to sell the 212.9 terawatt hours it consumes per year at Ontario’s rate, Hydro-Québec would generate an extra $13.4 billion a year, or $1,500 per capita. At the 50 per cent inclusion rate for natural resource capacity, this would cut Quebec’s equalization transfer in half, to $6.9 billion. In essence, because Quebec is compensated for its lost hydro revenue through the Equalization program, the rest of Canada is effectively footing $6.7 billion a year to subsidize Quebec’s low-cost energy. This creates a perception of unfairness, as it penalizes resource-producing provinces for selling their commodities at market rates while rewarding Quebec’s below-market electricity pricing — undermining the principle that equalization should reflect a province’s true fiscal capacity, not the policy choices it makes.
Quebec’s subsidized hydropower provides a specific example of a broader problem the equalization system can create: the economic incentives it generates may encourage provincial policies that are harmful to the Canadian economy as a whole. On the other hand, equalization does allow provinces to pass laws that prioritize the health and well-being of their residents without facing an undue economic burden. Quebec’s ban on oil and gas exploration illustrates both sides of the argument: the law reduces pollution and prevents harm from resource extraction, but the theoretical loss in potential revenue costs the province relatively little, since the rest of Canada compensates it for the lost fiscal capacity.
These tensions are what lead many provincial premiers to call for changes to the Equalization program as it stands today. None are currently calling for the program’s elimination. Instead, Danielle Smith, David Eby, and Scott Moe — of Alberta, B.C., and Saskatchewan, respectively — are asking for reforms that would see some money distributed on a per capita basis to all provinces, directing less to large provinces like Ontario and Quebec while continuing to support smaller provinces like Manitoba and the Maritimes, which have less appreciable tax bases.
As it stands, unless driven by a legal challenge, it is doubtful that the Equalization program will be meaningfully altered in the near future. Despite playing a prominent role in provincial politics, there is very little political will at the federal level to push for change. This may be due, in part, to the fact that federal politics in recipient provinces — especially Quebec — tend to be highly dynamic, while provinces like Saskatchewan and Alberta are relatively static at the federal level. The tendency for the equalization system to be poorly understood by Canadians also likely gives federal politicians ample reason to focus their attention on other economic issues instead.
These tensions are what lead many provincial premiers to call for changes to the equalization program as it stands today. None are currently calling for the program’s elimination. Instead, Premiers Danielle Smith, David Eby, and Scott Moe—of Alberta, BC, and Saskatchewan, respectively—are asking for reforms that would see some money distributed on a per capita basis to all provinces, directing less to large provinces like Ontario and Quebec while continuing to support smaller provinces like Manitoba and the Maritimes, which have less appreciable tax bases.
As it stands, unless driven by a legal challenge, it is doubtful that the equalization program will be meaningfully altered in the near future. Despite playing a prominent role in provincial politics, there is very little political will at the federal level to push for change. This may be due, in part, to the fact that federal politics in recipient provinces—especially Quebec—tend to be highly dynamic, while provinces like Saskatchewan and Alberta are relatively static at the federal level. The tendency for the equalization system to be poorly understood by Canadians also likely gives federal politicians ample reason to focus their attention on other economic issues instead.
Edited by Shumyle Eman Shahid
Featured Image: Photo by Nathan Guan is licensed under the Unsplash License.
