Executive Summary

Putting Equalization back on track

The Panel’s goal was to put Equalization back on track – to develop a sound and effective program and establish a firm and sustainable foundation for the future.

There is no perfect solution for Equalization in Canada. Given the dynamics and diversity of Canada’s federation, perfection will undoubtedly continue to elude all of us.

Nonetheless, the Panel’s goal was to put Equalization back on track—to develop a sound and effective program and establish a firm and sustainable foundation for the future.

The starting point is a clear set of principles, and the result is a balanced package of recommendations addressing a wide range of options and ideas. The key question for the Panel was: Will this result in a better Equalization program for all Canadians? In the Panel’s view, the answer is yes.

The Panel’s Recommendations

Starting with principles

1. A clear set of principles should be adopted to guide future development of the Equalization program in Canada.

Returning to a rules-based, formula-driven approach

2. A renewed Equalization formula should be developed and used to determine both the size of the Equalization pool and the allocation to individual provinces.
3. A 10-province standard should be adopted.
4. Equalization should continue to focus on fiscal capacity rather than assessing expenditure needs in individual provinces.
5. Equalization should be the primary vehicle for equalizing fiscal capacity among provinces.

Improving the Equalization formula

6. The Representative Tax System (RTS) approach for assessing fiscal capacity of provinces should be retained.
7. Steps should be taken to simplify the Representative Tax System (RTS).
8. A new measure for residential property taxes should be implemented based on market value assessment for residential property.
9. User fees should not be included in Equalization.

Striking a balance on the treatment of resource revenues

10. In principle, natural resource revenues should provide a net fiscal benefit to provinces that own them.
11. Fifty percent of provincial resource revenues should be included in determining the overall size of the Equalization pool.
12. Actual resource revenues should be used as the measure of fiscal capacity in the Equalization formula.
13. All resource revenues should be treated in the same way.
14. A cap should be implemented to ensure that, as a result of Equalization, no receiving province ends up with a fiscal capacity higher than that of the lowest non-receiving province.

Improving predictability and stability

15. The current approach for determining Equalization entitlements and payments should be replaced with a one estimate, one entitlement, one payment approach.
16. Three-year moving averages combined with the use of two-year lagged data should be used to smooth out the impact of year-over-year changes.

Assessing Equalization

17. The federal government should track and report publicly on measures of fiscal disparities across provinces.

Improving governance and transparency

18. A more rigorous process should be put in place to improve transparency, communications, and governance. This is preferable to setting up a permanent independent commission to oversee Equalization.

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