Annex 7: Resource Revenues

No issue in the entire Equalization program is more contentious than how to deal with resource revenues. Through its consultations, the Panel heard strongly held and diametrically opposing views from the provinces and academics. The issue is more than just one of principle. Natural resource revenues are a very significant source of disparities in fiscal capacity among the provinces. There also are very different impacts on provinces depending on whether, and to what extent, natural resources are included in the Equalization formula.

The Panel has reviewed the various ideas and options and attempted to strike the right balance with its recommendations. This annex provides an overview of the issues and sets out the Panel’s recommendations.

Background: the importance of natural resource revenues in Canada

Natural resource revenues are a very significant source of disparities in provincial fiscal capacity in Canada. For instance, in 2004–05, per capita revenues from resources ranged from a low of $6 in Prince Edward Island to a high of $3,150 in Alberta. The national per capita average was around $520. No other major provincial revenue source is distributed as unequally. As a result, the Equalization entitlements of receiving provinces are heavily influenced by natural resource revenues.

While the exact distribution of resource capacity varies over time, it is fair to say that resource capacity is heavily concentrated in Western Canada. This is especially true of Alberta, which has by far the largest endowment of oil and gas, and consequently a fiscal capacity that is much higher than that of any other province. The above-average natural resource revenue capacities of British Columbia and Saskatchewan provide significant offsets to their below-average capacities in other own-source revenue bases. This explains their relatively modest and irregular Equalization entitlements, and their tendency to enter and leave the program. This is also becoming increasingly true for Newfoundland and Labrador, whose growing offshore oil revenues increasingly offset its significantly below-average capacity in other tax bases. Ontario has above-average fiscal capacity in other own-source revenue bases, more than fully offsetting its below-average fiscal capacity in natural resources.

The remaining five provinces all have below-average capacities in both natural resource and other own-source revenues. Natural resource revenues were responsible for 15 percent of their overall Equalization entitlements in 2004–05.

Three major issues of resource revenues and Equalization

The Panel’s consultations and examination of the formula revolved around three major issues stemming from the unique features of resource revenues:

1. What is the appropriate inclusion rate for natural resource revenues?
2. How should Equalization measure the capacity to raise resource revenues?
3. How should Equalization deal with the volatility of resource revenues?

The difficulty of finding the right answer to these questions, particularly to the first two, is illustrated in Table 1. As shown, the inclusion rate and measurement of fiscal capacity have changed frequently for natural resource revenues since the program’s inception.

Table 1 – Major Changes in the Treatment of Resource Revenues in the Equalization Program, 1957 to 2004

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