(Photo by KMR Photography via Flickr/CC BY 2.0)
In June 2024, Newfoundland and Labrador brought a lawsuit against the Canadian federal government. The topic? Lost equalization payments, to the tune of “billions of dollars” since 2008.
Newfoundland and Labrador’s provincial government asserts that the federal government’s formula for calculating equalization payments is unfair. As a result, it has unjustly left the province off this source of federal funding. The governments of several other provinces, including British Columbia (BC) and Saskatchewan, support this legal case.
But what are equalization payments, and why do they matter?
Equalization Payments: Making Provinces More Financially Equal?
Equalization payments are a function of the federal government that, in the Canadian context, describe an unconditional transfer of funds from the federal government to provincial governments. They are not unique to Canada and are present in many large countries with federal systems of government—countries where the national government delegates many powers to smaller governments at the state or provincial level. For example, Australia’s federal government makes sure all its states have similar revenues and costs through its national sales tax scheme.
Equalization payments have existed in Canada for over 65 years. They are enshrined in the 1982 Canadian Constitution. Through these payments, the federal government intends to ensure that Canadians in all provinces have access to the same level of services with similar levels of taxation, regardless of their province’s financial well-being. Notably, the money that provinces can raise from taxes based on the size of their provincial economy determines equalization amounts, regardless of what provinces’ actual tax rates are. Thus, provinces cannot lower their tax rate to get more equalization payments.
In the 2025-26 fiscal year, equalization payments will equal $26.2 billion, raising the financial capabilities of every province that receives equalization to the national average. Calculating the amount each province gets requires the consideration of multiple factors, such as the personal, business, and natural resources tax revenues it can generate.
Provinces may spend this money however they wish. For less populated provinces especially, equalization payments can make up a significant portion of revenue. In the 2019-20 fiscal year, federal equalization payments provided New Brunswick with 20.5% of its revenue, as well as 18.3% of Nova Scotia’s revenue. Even in Quebec, 11.2% of total provincial government revenue came from equalization.
Financing of Equalization Payments
Equalization transfers are in addition to federal funding for healthcare and social programs via the Canada Health Transfer and Canada Social Transfer. Unlike equalization transfers, funding for healthcare and social programs is determined by population and not by provinces’ financial situations. Therefore, equalization payments are not the only way in which provinces receive money from the federal government.
In the 2025-26 fiscal year, BC will receive nearly $10 billion in health and social spending from the federal government, while Alberta will receive $8.6 billion and Saskatchewan $2.1 billion, in line with the differently-sized populations of the three provinces.
Notably, Alberta, BC, and Saskatchewan will not receive any equalization payments this year. Per capita, Prince Edward Island, New Brunswick, and Nova Scotia receive the most payments. Though it receives less in per capita payments, Quebec will receive more than half of the money ($13.6 billion) due to its large population.
Regardless, federal tax money, paid by all Canadians, ultimately funds these payments.
Why Provinces Are Upset and Their Solutions
In its lawsuit, the government of Newfoundland argues that the federal government should amend the formula to determine equalization payments. The Newfoundland government says that the system should address some of the additional costs that the province faces in developing its economy, as well as delivering services throughout a very large and sparsely-populated province.
The Newfoundland lawsuit is not the first time controversy has arisen surrounding these payments. One frequent talking point is how many provinces currently do not receive any equalization payments. In the 2025-26 fiscal year, these provinces will be Canada’s three westernmost provinces: Alberta, BC, and Saskatchewan, provinces that rarely receive equalization payments all throughout Canadian history due to their strong economies. The federal government has calculated that these three provinces have the financial resources to support their services.
Experts have agreed that Newfoundland’s lawsuit is unlikely to succeed. The Canadian Constitution only states that the federal government needs to have equalization payments but does not dictate how these payments need to be distributed. While this legal suit could pressure the federal government to make political changes to equalization, the changes Newfoundland is asking for may complicate equalization calculations even further. The exact scope of the changes is unclear, but they could be unpopular with other provinces if it impacts their shares of equalization.
In 2007, in a similar move to Newfoundland and Labrador, Saskatchewan’s government launched a lawsuit to push for changes to equalization. This lawsuit was later withdrawn after the conservative Saskatchewan came to power in 2008. In 2021, Alberta’s Conservative government ran a purely symbolic referendum on abolishing equalization, which passed by 62% – 38%. Though the Albertan government doesn’t actually have the power to unilaterally revoke this federal program, this result showed that there was considerable dissatisfaction among a significant portion of the province’s population, who perceived that they were “sending their tax dollars” to Eastern provinces.
In 2018, Saskatchewan also proposed an alternate model for equalization. Under this model, the size of each province’s population would determine how 50% of payments are distributed, while the remainder would be distributed under the current formula. As all provinces would be guaranteed to receive some money under this formula, it would benefit provinces that currently do not receive any equalization payments. This plan has also failed to gain traction in Ottawa as it would divert funding from provinces that currently benefit from equalization, in particular Quebec. Overall, both proposed solutions would give more equalization money to the provinces that proposed them in the first place.
“Have” vs. “Have-Not” Provinces—the Perception of Equalization
With equalization payments, there is an interesting phenomenon: even provinces that benefit from these payments are often dissatisfied with them. In 2008, Newfoundland and Labrador stopped receiving these payments because their provincial income had risen enough to sustain provincial services without needing additional money. At the time, the province had celebrated the fact that “Newfoundland and Labrador is now a ‘have’ province,” with a sentiment that the province was now financially independent and no longer reliant on federal subsidies.
Now, however, the province is decrying not receiving these payments. In fact, there has been cynicism in Newfoundland and Labrador regarding the equalization lawsuit. A member of the province’s House of Assembly—its provincial legislature—criticized the government for “pick[ing] a fight with Ottawa” in an attempt to boost polling numbers.
Similarly, every province of Canada has received equalization payments at some point, though the Maritime provinces (New Brunswick, Nova Scotia, and Prince Edward Island), Quebec, and Manitoba have been most consistent in receiving these transfers. Nonetheless, this means every province, even those that are currently dissatisfied with how the federal government distributes them, has historically benefitted from equalization payments.
Quebec receiving such a large share of equalization has also led to significant dissatisfaction from Western provinces. This is especially true with Alberta, which accuses Quebec of blocking Alberta’s oil projects while simultaneously receiving large sums of money from federal tax dollars paid by Alberta’s oil profits. In fact, Alberta’s government has claimed that Albertan oil “funds the schools, the hospitals, the roads, and (…) infrastructure in Quebec,” even though equalization payments are not direct transfers of money between provinces. Instead, federal taxes collected throughout Canada fund equalization.
What Can the Federal Government Do?
To address the politicization of equalization payments, some experts have proposed delegating the responsibility of setting equalization payments to an independent commission, similar to what Australia does. Other financial institutions in Canada, such as the Canada Pension Plan (CPP) Investment Board, also operate under this model. However, this system is unlikely to be implemented, as both federal and provincial governments like to game the current system to extract concessions from their counterparts—something that would not be possible with an independent commission.
In addition, the federal government should amend the equalization formula with input from all provinces rather than the federal government taking the path of least resistance and simply leaving the formula largely unchanged when it comes up for review every five years. Provincial governments have said that there wasn’t sufficient consultation from the federal government during previous reviews of the equalization formula. Consulting provinces may alleviate some of their misgivings about equalization.
Ultimately, the federal government cannot abolish equalization payments without changing the Canadian Constitution. Since such a change would involve all provinces, this would require a lot of political will that is unlikely to materialize in the near future. Equalization payments also have a genuine role in helping less economically developed provinces, ensuring that these provinces can continue to provide programs to their residents.
Edited by Ashley Renz
