Launching a comprehensive review

Territorial Formula Financing is distinctly different

Although the fundamental objective underlying both Equalization and TFF is the same, the programs are vastly different in terms of how they are designed, what they measure and how they operate.

Both programs provide unconditional transfers from the federal government to receiving provinces and to each of the three territories. That means there are no strings attached. The federal government does not require the provinces or territories to spend the money on particular programs or services. The provincial and territorial governments make decisions and are accountable to their citizens for how the money is spent.

Both programs respond to changes in population; more money is provided to less-wealthy provinces and territories if their populations go up and less money is provided if their populations go down. Both programs use a variety of similar methods to calculate the revenue capacity of provinces and territories and their tax effort; however, TFF includes some features that recognize the more limited ability of the territories to raise revenues.

The TFF formula was designed to fill the gap between expenditure needs (how much money a territory needs to cover the costs of providing reasonably comparable public services to its citizens) and revenue capacity (how much money a territory can potentially raise from a combination of taxes, fees, and some other federal transfers).

On the other hand, the differences are significant. Equalization does not explicitly take the different expenditure requirements of provinces into account in determining their eligibility for Equalization funding or how much money they receive. TFF explicitly includes a proxy measure of expenditure need. The TFF formula was designed to fill the gap between expenditure needs (how much money a territory needs to cover the costs of providing reasonably comparable public services to its citizens) and revenue capacity (how much money a territory can potentially raise from a combination of taxes, fees, and some other federal transfers).

TFF also is much more critical to the territories than Equalization is to the provinces since it makes up between 64 and 81 percent of their total budgetary revenues. TFF is critical to future development in the territories and its peoples. The combination of high costs of providing public services and strong economic potential, coupled with the stark reality of serious challenges in housing, health, and education, underscores the need for a separate and deliberate treatment of TFF. Those factors also highlight the need to address the unique and very different perspectives of each of the territories and the purpose of TFF in helping the territories achieve their aspirations for the future.

For those reasons, the Panel has chosen to treat Equalization and TFF separately.

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