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Annex 3:
Major Transfers

This annex describes the major fiscal transfer programs to provinces and territories and provides a historical overview of the programs.

Current Fiscal Transfer Arrangements

In 2006–07, the Government of Canada will provide support of $61 billion to provincial and territorial governments through its major cash and tax transfers including the Canada Health Transfer (CHT), Canada Social Transfer, (CST), Wait Times Reduction Transfer, Equalization and Territorial Formula Financing.

Equalization

Equalization was established in 1957. In 1982, the purpose of the program was entrenched in the Canadian Constitution:

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"Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation."

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(Subsection 36(2) of the Constitution Act, 1982)

Because all parts of the country are not equally prosperous, all provincial governments cannot generate comparable revenues, at comparable levels of tax effort, with which to finance public services. The purpose of Equalization transfers is to enable less prosperous provinces to provide public services reasonably comparable to those provided by more prosperous provinces at reasonably comparable levels of taxation.

In 2005–06, eight provinces qualified for Equalization payments: Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, Quebec, Manitoba, Saskatchewan and British Columbia. All provinces except Ontario have qualified at some time in the past. Equalization payments are unconditional, and receiving provinces spend these payments according to their own priorities.

Prior to changes introduced in 2004, Equalization payments for all provinces were calculated according to a formula set out in federal legislation.

• Comparisons were made of the relative capacities of provinces to raise revenues from taxes and other revenue sources.
• The revenue-raising capacity of provinces was calculated separately for each of the more than 30 revenue sources available to provincial and local governments. The program was not based on actual revenues, but on measured fiscal capacity, that is the revenues provinces could raise if they applied tax rates corresponding to the average of the provinces.

• Under the formula, less prosperous provinces were brought up to a standard. Between 1982–83 and 2003–04 that standard was the five-province standard—equal to the fiscal capacity of the five "middle-income" provinces. Over the history of the program, the standard has changed several times (see "Equalization Milestones: 1957 to 2004" below).

From 1957 to 2004, Equalization legislation was renewed on a five-year cycle (with the exception of a two-year renewal in 1992). Prior to the expiry of Equalization legislation, and before the introduction of new legislation for the next five-year term, the program underwent an extensive "renewal process," in consultation with all provinces, during which modifications to the program were considered.

The renewal process involved a comprehensive examination to identify possible technical changes and improvements to the program’s design and structure, notably to reflect the evolution of provincial tax practices.

Equalization Milestones: 1957 to 2004 1957 Equalization established with only three equalized tax bases: personal income tax, corporate income tax and succession duties. Natural resource revenues not taken into account. The Equalization standard was equal to the average fiscal capacity of the two provinces with the highest fiscal capacity ("top two" standard). 1962 The 10-province standard (average fiscal capacity of all 10 provinces) was substituted for the "top two" standard. Revenue coverage increased. Natural resource revenues included in the program for first time (with 50 per cent inclusion rate). 1967 Number of tax sources further increased to 16. Virtually all provincial revenues now included, but most local government revenues (including property taxes) not included. Inclusion rate for natural resources increased from 50 per cent to 100 per cent. 1972–77 Major petroleum price shock in 1973; oil and gas inclusion rate reduced to one-third starting in 1974. 1977 Inclusion rate set at 50 per cent for all non-renewable resources (including oil and gas). 1982 Five-province standard adopted. Return to full inclusion of natural resource revenue. Inclusion of all local government revenues for first time. Purpose of Equalization entrenched in Constitution. Establishment of ceiling provision in Equalization to limit cumulative overall growth of entitlements from a base year to growth in gross national product (later gross domestic product). The ceiling limited entitlements in four years: 1988–89, 1989–90, 1990–91 and 2000–01. Floor provision introduced to protect provinces from rapid major declines in entitlements. 1987–92 Technical changes to several major bases, including the personal and corporate income tax bases and resource bases. 1994 Implementation of the "generic solution"—inclusion at a 70-per-cent rate for tax bases concentrated in one province, i.e. where one province accounted for 70 per cent or more of the overall tax base. 1999 50 per cent of revenues from user fees excluded from Equalization. Technical changes to resource and non-resource bases. 2003 Elimination of the ceiling provision effective 2002–03. 2004 New framework and Expert Panel announced.

Territorial Formula Financing

Territorial Formula Financing (TFF) is an annual, unconditional federal transfer to territorial governments designed to take into account the higher costs of providing public services in the territories. It is similar to Equalization in that its objective is to enable the territories to provide a range of public services reasonably comparable to those offered by provincial governments at reasonably comparable rates of taxation.

TFF is the principal federal transfer to the territories and represents the largest source of overall territorial revenues. In 2005–06, TFF grants accounted for roughly 81 per cent, 66 per cent and 61 per cent of overall revenues for the governments of Nunavut, the Northwest Territories and Yukon, respectively. Total TFF grants in 2005–06 were $2.0 billion:

• $799 million to Nunavut ($26,738 per capita);
• $714 million to the Northwest Territories ($16,598 per capita); and
• $487 million to Yukon ($15,740 per capita).

Before TFF was introduced in 1985, the territories received funding from the federal government in much the same way as a federal department, based on a detailed, item-by-item review of projects, expenditure levels and expenditure priorities. TFF was introduced with the goal of furthering the evolution of territorial governments. TFF was based on multi-year federal-territorial agreements, which were generally renewed every five years. Starting in 2004–05, TFF levels have been legislated as part of the Federal-Provincial Fiscal Arrangements Act.

Until the introduction of a fixed framework in 2004, TFF was determined through a formula based on a "gap-filling" principle, taking into account the difference between the expenditure needs and the revenue means of territorial governments. This difference was calculated for each territory and determined the level of TFF grants.

Territorial expenditure needs were represented by the formula’s Gross Expenditure Base (GEB), a proxy for a territorial government’s "needs." The initial GEB value in 1985 was based on each territorial government’s revenues in 1982–83. This benchmark GEB was then escalated annually to reflect the growth of provincial-local government expenditures over time. Revenue means, or eligible revenues, consisted of measuring territorial own-source revenues, including some transfers from the federal government.

TFF Milestones: 1985 to 2004 1985 TFF established. 1988 Gross domestic product ceiling was introduced to limit the annual level of the GEB escalator. This ceiling was subsequently eliminated effective 2002–03. 1990 Population adjustment factor was added to the GEB escalator to take into account the change in each territory’s population growth relative to that of Canada as a whole. 1995 Economic Development Incentive was introduced to counter the anomalous outcomes of revenue adjustment in the formula. Territorial grant levels were frozen in 1995–96 at 1994–95 entitlement levels and each territory’s GEB was reduced by 5 per cent in 1996–97. 2003 Elimination of the ceiling provision effective 2002–03. 2004 New framework and Expert Panel announced.

October 2004 Changes to Equalization and TFF

In October 2004, a new framework for Equalization and TFF was announced following two meetings of First Ministers, one on health care funding and one specifically devoted to Equalization and TFF.

1. The 2004 renewal of the program was put on hold. Following the usual five-year renewal process, Budget 2004 announced some major changes to Equalization for the 2004–05 to 2008–09 period, including the implementation of a three-year moving average of entitlements to address payment predictability and stability concerns, significant changes to the personal income tax and property tax bases, and improvements to various other bases. The legislation enacting these changes and the changes to TFF agreements were superseded by new legislation to enact the new framework.

1. Normal formula-based calculations of provincial and territorial entitlements were suspended. Provincial and territorial entitlement shares for 2004–05 were fixed on the basis of historical data. Interim formulas were subsequently used to allocate entitlements for 2005–06, with a similar approach to be used for 2006–07. (Budget 2006 announces the details of the new approach for 2006–07 payments to provinces and territories.)

1. A new financial "framework" for Equalization and TFF was legislated. Overall Equalization entitlements were increased by $2.0 billion to $10.9 billion for 2005–06, while TFF was increased by $0.2 billion to $2.0 billion. These amounts are to grow at 3.5 per cent per year in subsequent years, subject to a re-evaluation of funding levels and the funding growth rate at five-year intervals.

1. A review of the Equalization program and TFF by an Expert Panel was announced. The Expert Panel on Equalization and Territorial Formula Financing was asked to provide advice on: 1) the allocation of Equalization and TFF payments among provinces/territories from 2006–07 onwards; 2) how Equalization and TFF payments can be made more stable and predictable; 3) the information the federal government should take into account in reviewing the overall level of Equalization and TFF funding; 4) the appropriate treatment of natural resource revenues in Equalization and TFF; and 5) whether or not an independent body should be set up to provide ongoing advice on the allocation of Equalization and TFF entitlements.

Further information on the Panel can be found on its website at: http://www.eqtff-pfft.ca/index.asp.

Health and Social Transfers

The Government of Canada has used transfers to support provincial-territorial governments in providing health care, post-secondary education, social assistance and social services, and child care.

Federal support for health and social programs has evolved over time from cost-sharing arrangements (e.g. medicare and the Canada Assistance Plan), toward block transfers (e.g. the former Canada Health and Social Transfer).

Prior to 1977, the federal government provided support through cost-shared programs. Eligibility criteria were established under federal legislation to determine what expenditures would be included under a specific program—such as university grants. Typically the Government of Canada provided cash transfers equal to 50 per cent of eligible expenditures.

Established Programs Financing and the Canada Assistance Plan

Established Program Financing (EPF) was created in 1977 when the Government of Canada merged the cost-sharing programs for health and post-secondary education into a single block transfer. Federal support through EPF comprised both cash and tax transfers, and provided separate notional allocations for health (68 per cent) and post-secondary education (32 per cent).

What Is a Tax Transfer? A federal tax transfer involves the federal government transferring some of its "tax room" to provincial and territorial governments. Specifically, a tax transfer occurs when, upon agreement, the federal government reduces its tax rates and provincial and territorial governments simultaneously raise their tax rates by an equivalent amount, with no overall change in the taxes paid by Canadians. Since tax points are worth more in some provinces than in others, the federal government agreed to equalize the tax points on an ongoing basis. The result of this equalizing is that provinces receive higher payments, known as Associated Equalization, through the Equalization program. A tax transfer has the same impact on federal and provincial/territorial budgets as a cash transfer. It represents forgone revenue to the federal government each and every year, and additional revenue to provincial and territorial governments. Under EPF, a tax transfer of 13.5 personal income tax points and 1 corporate income tax point, an increase over the tax transfer provided for post-secondary education in the 1960s, was coordinated between the federal government and all provinces and territories.

After 1977, the only remaining major cost-shared program was the Canada Assistance Plan (CAP), which was created in 1966. Under CAP, the Government contributed 50 per cent of the eligible costs to support provincial/territorial social assistance and social services programs.

Canada Health and Social Transfer

In 1996–97, EPF and CAP were replaced by a new block-fund transfer, the Canada Health and Social Transfer (CHST).

As part of this restructuring, federal cash transfers to provinces and territories for health and social programs were reduced by about $6 billion, or 30 per cent, by the second year of the CHST.

The CHST maintained the cash and tax structure of EPF. Although not originally equal per capita, by 2001–02, CHST entitlements had evolved to become equal per capita for each province and territory.

As a block transfer, the CHST also provided provinces and territories with the flexibility to allocate federal support among health care, post-secondary education, and social assistance and social services, according to their respective priorities. There were no notional allocations for health and post-secondary education.

In the years following the creation of the CHST, the fiscal situation of the federal government improved rapidly and the federal government began to reinvest in transfers. CHST transfers were enhanced in the 1996, 1998, 1999 and 2000 budgets, from a floor of $12.5 billion in 1997–98 to $15.5 billion in 2000–01. Overall cash levels were fully restored in 2002–03 to the previous high point of EPF and CAP in 1994–95.

Canada Health Transfer and Canada Social Transfer

Effective April 1, 2004, the Canada Health and Social Transfer was restructured into two new transfers:

• The Canada Health Transfer, a dedicated transfer in support of health.
• The Canada Social Transfer, a block transfer in support of post-secondary education, social assistance and social services, and child care.

The CHST was apportioned between the CHT and CST, with the percentage of cash and tax points allocated to each transfer reflecting provincial and territorial spending patterns among CHST–supported areas (62 per cent for the CHT and 38 per cent for the CST).

The CHT and CST maintained the cash and tax structure of the CHST and its equal per capita allocation formula.

How the CHT and CST Work Total CHT/CST support is determined by adding the legislated cash levels to the equalized value of the tax transfer. This total is allocated among provinces and territories on an equal per capita basis to ensure equal support for all Canadians regardless of their province or territory of residence. Individual provincial and territorial cash transfers are determined by subtracting the provincial/territorial value of the equalized tax transfer from the total provincial/territorial entitlement. In this way, provinces/territories with tax points that are worth more, such as Ontario and Alberta, receive less CHT/CST cash than other provinces/territories. It is important to note that Equalization-receiving provinces receive higher Equalization payments because the tax points are equalized. This Associated Equalization is reflected in the determination of the cash transfer. Note that Saskatchewan receives the largest per capita cash transfer due to the fact that in 2006–07 it only receives $13 million in Equalization and its tax points are worth less than in other provinces. The effect of this calculation is that the tax points are "super equalized" to ensure that total entitlements are equal per capita—a feature of the program since 1982.

CHT cash is established in legislation at $20.1 billion in 2006–07, and is set to grow at 6 per cent annually until 2013–14, reflecting recent commitments made in support of the 10-Year Plan to Strengthen Health Care signed by First Ministers in September 2004. By the end of the legislated period, CHT cash transfers will be $30.3 billion. The 10-Year Plan also provided targeted funding for medical equipment and long-term funding to reduce wait times with the creation of the Wait Times Reduction Transfer.

CST cash is set at $8.5 billion in 2006–07 and will be $8.8 billion in 2007–08 when the legislation expires.

In 2006–07, provinces and territories will receive a total of $47.5 billion in CHT and CST. Of this, $18.9 billion will be in tax transfers and $28.6 billion in cash transfers. Tax transfers provide a significant amount of support to the provinces and territories.

The chart below shows changes in health and social cash transfers from 1994–95 to 2007–08.

Table A3.1
Health and Social Transfer Entitlements (1982–83 to 2006–07)

Year		N.L.	P.E.I.	N.B.	N.S.	Que.	Ont.	Man.	Sask.	Alta.	B.C.	Y.T.	N.W.T.	Nun.	Canada
	(millions of dollars)
1982–83	Cash	238	56	345	320	3,159	3,222	415	437	807	1,242	9	22	–	10,271
		Tax	113	24	169	139	1,289	1,919	206	179	672	635	5	11	–	5,362
		Total	351	80	514	459	4,449	5,141	621	616	1,478	1,877	14	33	–	15,633
1983–84	Cash	267	60	388	354	3,600	3,659	475	501	968	1,466	9	25	–	11,772
		Tax	117	25	175	144	1,324	2,026	213	177	638	624	5	12	–	5,480
		Total	385	85	563	498	4,924	5,684	688	678	1,606	2,089	14	37	–	17,252
1984–85	Cash	278	63	415	380	3,831	3,870	513	546	1,031	1,608	10	26	–	12,570
		Tax	127	28	192	157	1,441	2,269	234	184	671	649	6	14	–	5,971
		Total	405	91	607	537	5,272	6,139	747	729	1,702	2,256	16	40	–	18,541
1985–86	Cash	293	67	443	407	4,059	4,113	548	592	1,160	1,712	11	29	–	13,435
		Tax	139	31	211	172	1,581	2,556	258	190	688	690	6	14	–	6,536
		Total	432	98	654	580	5,640	6,669	806	781	1,848	2,401	18	43	–	19,971
1986–87	Cash	308	71	464	426	4,183	4,327	578	556	1,327	1,734	12	33	–	14,018
		Tax	151	34	232	189	1,741	2,870	285	269	670	750	7	14	–	7,213
		Total	459	104	697	615	5,925	7,197	863	825	1,996	2,483	19	47	–	21,231
1987–88	Cash	313	72	476	434	4,196	4,538	604	556	1,392	1,807	13	37	–	14,437
		Tax	168	38	260	211	1,954	3,286	320	301	707	843	7	16	–	8,111
		Total	481	110	736	645	6,150	7,824	924	857	2,099	2,650	20	52	–	22,548
1988–89	Cash	321	75	505	449	4,337	4,805	628	568	1,470	1,902	14	37	–	15,112
		Tax	180	41	280	227	2,107	3,673	344	322	756	943	8	18	–	8,899
		Total	502	116	785	676	6,444	8,479	972	889	2,225	2,846	22	55	–	24,011
1989–90	Cash	341	80	535	466	4,539	5,187	660	577	1,540	1,913	15	40	–	15,892
		Tax	194	44	302	244	2,281	4,050	370	343	829	1,090	9	20	–	9,777
		Total	535	124	837	710	6,820	9,237	1,030	920	2,369	3,003	24	60	–	25,669
1990–91	Cash	351	82	557	481	4,727	5,409	679	565	1,526	1,951	17	40	–	16,385
		Tax	197	45	311	251	2,360	4,077	377	345	906	1,176	10	24	–	10,078
		Total	549	128	868	732	7,087	9,485	1,057	910	2,432	3,126	26	64	–	26,463
1991–92	Cash	370	85	587	505	5,044	5,846	708	571	1,577	2,053	19	45	–	17,409
		Tax	194	44	307	251	2,370	4,003	373	337	915	1,187	10	24	–	10,014
		Total	564	129	894	756	7,414	9,849	1,080	908	2,492	3,240	29	69	–	27,424
1992–93	Cash	401	89	621	516	5,392	6,158	763	606	1,650	2,131	22	49	–	18,396
		Tax	191	43	302	249	2,339	3,927	366	330	906	1,218	10	23	–	9,904
		Total	591	132	923	766	7,731	10,085	1,128	936	2,556	3,349	32	71	–	28,300
1993–94	Cash	415	91	638	510	5,571	6,300	761	634	1,625	2,190	24	50	–	18,810
		Tax	193	44	308	250	2,396	4,020	372	335	958	1,271	10	24	–	10,181
		Total	608	135	946	760	7,967	10,320	1,133	969	2,583	3,461	34	75	–	28,991
1994–95	Cash	423	89	633	501	5,550	6,338	745	630	1,504	2,235	23	53	–	18,726
		Tax	199	46	320	260	2,498	4,199	387	354	1,015	1,338	10	25	–	10,651
		Total	623	135	953	760	8,048	10,537	1,131	985	2,519	3,574	33	79	–	29,377
1995–96	Cash	414	88	624	493	5,481	6,215	737	632	1,485	2,235	23	55	–	18,483
		Tax	208	49	340	276	2,654	4,525	414	372	1,093	1,438	11	26	–	11,406
		Total	623	138	964	769	8,136	10,740	1,151	1,003	2,577	3,673	34	81	–	29,889
1996–97	Cash	345	71	508	401	4,512	4,787	598	500	1,112	1,843	18	47	–	14,742
		Tax	216	52	358	290	2,800	4,864	436	402	1,202	1,500	12	26	–	12,158
		Total	561	124	866	691	7,311	9,651	1,035	902	2,313	3,343	30	73	–	26,900
1997–98	Cash	283	61	432	338	3,900	3,885	507	430	878	1,724	19	44	–	12,500
		Tax	231	57	388	314	3,037	5,429	473	425	1,379	1,570	11	25	–	13,339
		Total	513	118	820	652	6,936	9,314	979	855	2,257	3,293	30	70	–	25,839
1998–99	Cash	276	61	432	338	3,863	3,810	507	433	894	1,827	19	41	–	12,500
		Tax	241	60	414	333	3,236	5,942	503	453	1,507	1,612	11	30	–	14,341
		Total	517	122	845	671	7,099	9,751	1,010	885	2,401	3,440	30	70	–	26,841
1999–00	Cash	289	71	488	388	3,983	4,715	587	513	1,311	2,105	20	9	22	14,500
		Tax	256	65	446	358	3,483	6,531	541	491	1,545	1,836	11	33	8	15,605
		Total	545	136	934	746	7,467	11,246	1,128	1,004	2,856	3,941	31	42	29	30,105
2000–01	Cash	296	74	512	409	4,179	5,135	623	529	1,323	2,373	20	4	22	15,500
		Tax	264	68	464	373	3,656	6,898	570	514	1,746	1,801	12	43	8	16,418
		Total	560	142	976	782	7,835	12,033	1,193	1,044	3,069	4,175	32	47	31	31,918
2001–02	Cash	323	86	585	479	4,718	6,527	735	640	1,508	2,638	21	19	21	18,300
		Tax	257	66	450	353	3,487	6,650	543	472	1,879	1,888	12	26	10	16,092
		Total	580	152	1,035	832	8,205	13,177	1,277	1,111	3,387	4,526	33	45	31	34,392
2002–03	Cash	331	89	604	485	4,809	6,897	747	633	1,593	2,851	21	20	21	19,100
		Tax	250	65	440	353	3,507	6,602	544	481	1,884	1,746	13	27	11	15,922
		Total	581	153	1,044	838	8,316	13,498	1,291	1,114	3,477	4,597	34	46	32	35,022
2003–04	Cash	376	101	687	551	5,490	8,029	851	748	1,873	3,046	24	24	25	21,825
		Tax	260	68	461	370	3,692	6,980	572	473	1,996	2,046	13	28	11	16,969
		Total	636	168	1,148	921	9,182	15,009	1,423	1,221	3,869	5,092	37	52	36	38,794
2004–05	Cash	431	115	780	626	6,275	9,345	973	828	2,093	3,495	28	32	29	25,050
		Tax	267	71	484	388	3,897	7,367	604	514	2,223	2,168	14	26	11	18,035
		Total	698	186	1,265	1,014	10,172	16,713	1,577	1,342	4,315	5,663	42	58	40	43,085
2005–06	Cash	485	130	882	707	7,135	10,729	1,106	1,001	2,458	3,993	31	35	32	28,725
		Tax	283	76	515	413	4,168	7,918	646	480	2,381	2,332	15	29	12	19,268
		Total	768	206	1,396	1,120	11,304	18,648	1,753	1,481	4,839	6,325	46	64	45	47,993
2006–07	Cash	477	128	870	697	7,072	10,721	1,095	1,046	2,457	3,979	31	35	32	28,640
	Tax	275	74	502	403	4,084	7,782	633	403	2,348	2,298	15	29	12	18,859
	Total	752	202	1,372	1,100	11,157	18,503	1,728	1,449	4,805	6,277	45	64	44	47,499

Note: Total may not add due to rounding. Includes cash and tax transfers provided under Established Programs Financing and the Canada Assistance Plan up to 1995–96; the Canada Health and Social Transfer (CHST) up to 2003–04; the Health Reform Transfer (2003–04 and 2004–05); the 2003 CHST cash supplement and 2004 CHST cash supplement for health based on notional drawdown schedules; and the Canada Health Transfer and the Canada Social Transfer for 2004–05 and beyond.

Source: Department of Finance Canada, May 2006.

Table A3.2
Equalization Entitlements (1982–83 to 2006–07)

Source: Department of Finance Canada, May 2006.

Table A3.3
Territorial Formula Financing Entitlements (1982–83 to 2006–07)

Year	Y.T.	N.W.T.	Nun.	Canada
	(millions of dollars)
1982–83	72	290	–	362
1983–84	103	350	–	452
1984–85	106	371	–	477
1985–86	151	454	–	606
1986–87	161	508	–	669
1987–88	170	560	–	730
1988–89	182	645	–	827
1989–90	193	704	–	897
1990–91	214	748	–	962
1991–92	223	782	–	1,005
1992–93	255	821	–	1,076
1993–94	289	861	–	1,150
1994–95	289	892	–	1,181
1995–96	291	906	–	1,197
1996–97	289	908	–	1,197
1997–98	307	921	–	1,229
1998–99	310	935	–	1,246
1999–00	319	493	520	1,333
2000–01	336	310	566	1,212
2001–02	359	546	613	1,518
2002–03	372	588	656	1,616
2003–04	435	626	692	1,754
2004–05	466	678	756	1,900
2005–06	487	714	799	2,000
2006–071	506	739	827	2,072
1 Figures for 2006–07 are as proposed in Budget 2006 and include one-time adjustments. Source: Department of Finance Canada, May 2006.

 

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