[3] Payment amounts are decided relative to a province's estimated fiscal capacity, or ability to generate tax revenues.
A mechanism for the Canadian federal government to provide funds through transfer payments to the provinces has existed since Canadian Confederation, and was first enshrined in the Constitution Act, 1867 Section 119 as a mechanism for the new federal government to provide further grants to the province of New Brunswick.
The rise in energy prices and the resulting increase in provincial natural resource royalties in the late 1970s created several problems for the equalization formula.
This result went against the spirit of the system and would have led to substantial costs for the federal government; it was agreed that Ontario should be excluded from receiving payments.
In March 2005, during the brief premiership of Paul Martin, Finance Minister Ralph Goodale established an expert panel, chaired by Al O'Brien—a former Government of Alberta deputy minister—to produce a report to review Canada's Equalization program and Territorial Formula Financing (TFF).
[11][13] Following the 2006 Canadian federal election, the newly elected Conservative Party led by Stephen Harper committed to a "renewed and strengthened Equalization program", as outlined in the 2006 Canadian federal budget entitled, "Restoring Fiscal Balance in Canada".
[13] Based on the Al O'Brien 2006 Expert Panel on Equalization and Territorial Formula Financing report, then Minister of Finance, Jim Flaherty[13] reinstated the formula-driven calculations in the Equalization program and enhanced it by moving to a standard based on the national average.
In 2009, under then-Prime Minister Stephen Harper, Finance Canada created the Total Transfer Protection (TTP).
The TTP was intended to be a temporary policy which would support provinces and territories "in transitioning through current economic challenges".
In 2010–11, the federal government, under then-Prime Minister Stephen Harper, confirmed that every province would be guaranteed that their transfer would not be less than the previous fiscal year in combined CHT, CST, equalization and Territorial Formula Financing (TFF).
Ottawa cancelled the TTP program in 2014, a political decision said to be directed at pressuring Ontario's ruling Liberals by depriving them of $640 million.
[19] The governments of Alberta and Saskatchewan criticized the decision because they believed that there was no real consultation, discussion, or renegotiation on the formula.
[1] Equalization payments are further adjusted to ensure the program aligns with the overall growth of the Canadian economy (based on a three-year moving average of GDP).
As a result of the COVID-19 pandemic, the province took a major hit, specifically in its main resource export, oil and gas.
Canadian total % % % Source: Statistics Canada: GDP (totals),[25] Population,[26] Canada Revenue Agency: Taxation Statistics 2015 taxation year[27] According to economist Trevor Tombe, "[If] a province cannot raise an 'average amount' with 'average tax rates,' then the federal government will – out of its own general revenue – top up that province to the 'average amount.'
So, for example, if a province's economy booms and the provincial government's potential income tax revenues increase, equalization payments decrease.
[32][Notes 5] At the 2001 conference, co-sponsored by AIMS/MEI/FCPP, Buchanan admitted that this idea had flaws, and that it had been criticized for creating a culture of dependence in provinces with relatively low fiscal capacities.
This combined with the "opposition from municipal and provincial governments, or protests, in other parts of the country" that have succeeded in blocking or slowing down the implementation of "major energy infrastructure projects such as the Energy East pipeline and the Trans Mountain expansion", caused added frustrations.
[19] According to a December 21, 2018 Edmonton Journal article, Jason Kenney (United Conservative Party (UCP)) targeted the alleged inequity of the federal equalization program.
"[35] Kenney was previously a member of the Stephen Harper federal government which implemented the current as of 2020 equalization formula.
According to an opinion column article by economist Trevor Tombe, Alberta "pay[s] more and receive[s] less" because of "unequal circumstances".
[45] In 2018, Quebec received $11.7 billion of the total $19-billion federal program funds, which is the largest of all transfers to the provinces and territories.
[47] In 2019, CAQ Finance Minister Eric Girard wrote in a Financial Post op-ed, argued reiterate the party support to "raise Québec's potential GDP growth to two per cent in order to close the wealth gap with the rest of Canada and assume greater economic leadership within the federation".
"[48] Former federal MP and People's Party of Canada leader Maxime Bernier said that the equalization program leads provinces into what he calls a "poverty trap", where they become dependent on government funds.
"[50][51] In May 2019, the People's Party of Canada called for a new equalization formula, that would respect the Constitution, that would give lower income provinces, like Quebec, incentives to develop pro-growth economic policies thereby avoiding the "welfare trap".
[52] Also in the same year, Shawn Graham, Premier of New Brunswick pledged to make the province self-sufficient, that is to no longer depend on federal equalization payments, by 2026.
In 2007, because of amendments made to the equalization formula in terms of measuring property tax revenues, Prince Edward Island's proportion of the total amount increased considerably.
Late January 2012, based on access to the uncensored version of a 2006 censored federal report by Peter Gusen, then director of federal-provincial relations at the finance department, entitled 'An Operational Expenditure Need Equalization Formula for Canada', the Toronto Star alleged that Ontario and BC were shortchanged in the equalization system because wages and cost-of-living expenses were never taken into account by Ottawa.
It would raise their "bottom line, while forcing Ontario's minority Liberal government to find the difference ahead of a budget that [had] the potential of triggering a provincial election.